As filed with the Securities and Exchange Commission on September 27, 2007
1933 Act File No. 33-1657
1940 Act File No. 811-4492
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 64
AND
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 63
MFS(R) SERIES TRUST X
(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 Susan S. Newton Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 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 SEPTEMBER 28, 2007 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
Class A Class 529A Class R Class R3 Class B Class 529B Class R1 Class R4 Class C Class 529C Class R2 Class R5 Class I |
MFS ASSET ALLOCATION FUNDS
PROSPECTUS OCTOBER 1, 2007
This Prospectus describes the MFS Conservative Allocation Fund, MFS Moderate Allocation Fund, MFS Growth Allocation Fund, and MFS Aggressive Growth Allocation Fund.
The investment objective of the MFS Conservative Allocation Fund is to seek a high level of total return consistent with a conservative level of risk relative to the other MFS Asset Allocation Funds.
The investment objective of the MFS Moderate Allocation Fund is to seek a high level of total return consistent with a moderate level of risk relative to the other MFS Asset Allocation Funds.
The investment objective of the MFS Growth Allocation Fund is to seek a high level of total return consistent with a greater than moderate level of risk relative to other MFS Asset Allocation Funds.
The investment objective of the MFS Aggressive Growth Allocation Fund is to seek a high level of total return consistent with an aggressive level of risk relative to the other MFS Asset Allocation Funds.
RISK RETURN SUMMARY 1 EXPENSE SUMMARY 19 CERTAIN INVESTMENT POLICIES AND RISKS 28 MANAGEMENT OF THE FUND 29 DESCRIPTION OF SHARE CLASSES 34 HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES 44 OTHER INFORMATION 55 FINANCIAL HIGHLIGHTS 59 The Securities and Exchange Commission has not approved or disapproved the funds' shares or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. |
RISK RETURN SUMMARY
INVESTMENT OBJECTIVES
The investment objective of the MFS Conservative Allocation Fund is to seek a high level of total return consistent with a conservative level of risk relative to the other MFS Asset Allocation Funds.
The investment objective of the MFS Moderate Allocation Fund is to seek a high level of total return consistent with a moderate level of risk relative to the other MFS Asset Allocation Funds.
The investment objective of the MFS Growth Allocation Fund is to seek a high level of total return consistent with a greater than moderate level of risk relative to other MFS Asset Allocation Funds.
The investment objective of the MFS Aggressive Growth Allocation Fund is to seek a high level of total return consistent with an aggressive level of risk relative to the other MFS Asset Allocation Funds.
A fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
Each fund is designed to provide diversification among different asset classes by investing the majority of its assets in other MFS mutual funds, referred to as underlying funds. The underlying funds are selected by the quantitative group of the funds' investment adviser, Massachusetts Financial Services Company (referred to as MFS or the adviser), following a two stage asset allocation process. The first stage is a strategic asset allocation to determine the percentage of each fund's assets to be invested in the general asset classes of U.S. Stock Funds, International Stock Funds, Bond Funds, and Money Market Funds. The asset class allocations provide an initial layer of diversification for each fund. The following table illustrates each fund's target allocation among asset classes as of October 1, 2007:
MFS AGGRESSIVE
MFS CONSERVATIVE MFS MODERATE MFS GROWTH GROWTH
ASSET CLASS ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND
-----------------------------------------------------------------------------------------
U.S. Stock Funds 35% 50% 60% 80%
International
Stock Funds 5% 10% 20% 20%
Bond Funds 50% 35% 20% 0%
Money Market 10% 5% 0% 0%
Funds
|
The second stage involves the actual selection of underlying funds to represent the asset classes based on underlying fund classifications, historical risk, performance,
and other factors. This selection process provides a second layer of diversification within both stock and bond fund allocations. Within the stock fund allocations, MFS seeks to diversify globally (by including domestic and international underlying funds), in terms of market capitalization (by including large, mid, and small cap underlying funds), and by style (by including both growth and value underlying funds). Within the bond fund allocation, MFS includes underlying funds with varying degrees of interest rate and credit exposure. Underlying funds are selected such that the weight toward more aggressive underlying funds increases as the risk tolerance of a fund increases.
Following is the list of underlying funds and their associated target weightings as of October 1, 2007:
MFS MFS MFS MFS
CONSERVATIVE MODERATE GROWTH AGGRESSIVE
ALLOCATION ALLOCATION ALLOCATION GROWTH
FUNDS FUND FUND FUND ALLOCATION FUND
-------------------------------------------------------------------------------------
U.S. STOCK FUNDS: 35% 50% 60% 80%
MFS New Discovery Fund 0% 0% 0% 5%
MFS Mid Cap Growth Fund 0% 5% 10% 15%
MFS Mid Cap Value Fund 0% 5% 10% 15%
MFS Core Growth Fund 5% 10% 15% 20%
MFS Research Fund 15% 15% 10% 10%
MFS Value Fund 15% 15% 15% 15%
INTERNATIONAL STOCK FUNDS: 5% 10% 20% 20%
MFS International New
Discovery Fund 0% 0% 5% 10%
MFS Research
International Fund 5% 10% 15% 10%
BOND FUNDS: 50% 35% 20% 0%
MFS High Income Fund 0% 5% 5% 0%
MFS Research Bond Fund 20% 20% 10% 0%
MFS Government
Securities Fund 10% 10% 5% 0%
MFS Limited 20% 0% 0% 0%
Maturity Fund
MONEY MARKET FUNDS: 10% 5% 0% 0%
MFS Money Market Fund 10% 5% 0% 0%
|
Although the underlying funds are categorized generally as stock funds (U.S. or international), bond funds, or money market funds, many of the underlying funds can invest in a mix of securities (e.g., a U.S. stock fund can invest in international stocks).
The asset class allocations and the underlying funds and their target weightings have been selected for investment over longer time periods, but may be changed without shareholder approval or notice. The target weightings can deviate over the short term due to market movements and cash flows. MFS periodically rebalances
a fund's investments in the underlying funds. The target weightings do not reflect a fund's working cash balance; some portion of the fund's portfolio will be held in cash due to purchase and redemption activity and other short term cash needs.
A description of the underlying funds is included in Appendix A of this prospectus.
MFS uses a bottom-up investment approach in buying and selling investments for each underlying fund. Investments are selected primarily based on fundamental analysis of issuers or instruments in light of market, economic, political, and regulatory conditions. Factors considered for equity securities may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered. Factors considered for debt instruments may include the instrument's credit quality, collateral characteristics and indenture provisions and the issuer's management ability, capital structure, leverage, and ability to meet its current obligations. Quantitative analysis of the structure of a debt instrument and its features may also be considered.
PRINCIPAL INVESTMENT TYPES OF THE UNDERLYING FUNDS
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, and depository receipts for those securities.
DEBT INSTRUMENTS: Debt instruments represent obligations of corporations, governments, and other entities to repay money borrowed. The issuer or borrower usually pays a fixed, variable, or floating rate of interest, and must repay the amount borrowed, usually at the maturity of the instrument. Some debt instruments, such as zero coupon bonds, do not pay current interest but are sold at a discount from their face values. Other debt instruments, such as certain mortgage-backed and other asset-backed securities, make periodic payments of interest and/or principal. Some debt instruments are partially or fully secured by collateral supporting the payment of interest and principal.
LOWER QUALITY DEBT INSTRUMENTS: Lower quality debt instruments, commonly referred to as "high yield securities" or "junk bonds" are debt instruments of less than investment grade quality.
CORPORATE BONDS: Corporate bonds are debt instruments issued by domestic or foreign corporations or similar entities.
U.S. GOVERNMENT SECURITIES: U.S. Government securities are securities issued or guaranteed by the U.S. Treasury, by an agency or instrumentality of the U.S. Government, or by a U.S. Government-sponsored entity. Certain U.S. Government securities may not be supported as to the payment of principal and interest by the
full faith and credit of the U.S. Treasury or the ability to borrow from the U.S. Treasury. Some U.S. Government securities may be supported as to the payment of principal and interest only by the credit of the entity issuing or guaranteeing the security.
FOREIGN GOVERNMENT SECURITIES: Foreign government securities are debt instruments issued, guaranteed, or supported, as to the payment of principal and interest, by foreign governments, foreign government agencies, foreign semi-governmental entities or supranational entities, or debt instruments issued by entities organized and operated for the purpose of restructuring the outstanding foreign government securities. Foreign government securities may not be supported as to the payment of principal and interest by the full faith and credit of the foreign government.
COLLATERALIZED INSTRUMENTS: Collateralized instruments include mortgage-backed securities and other interests in pools of assets, such as loans or receivables. Payment of principal and interest generally depends on the cash flows generated by the underlying assets and the terms of the instrument. Certain collateralized instruments offer multiple classes that differ in terms of their priority to receive principal and/or interest payments under the terms of the instrument. Collateralized instruments typically involve a third party responsible for servicing the instrument and performing operational functions such as collecting and aggregating principal, interest and escrow payments, accounting and loan analysis.
INFLATION-ADJUSTED DEBT INSTRUMENTS: Inflation-adjusted debt instruments are debt instruments whose principal and/or interest are adjusted for inflation. Inflation-adjusted debt instruments issued by the U.S. Treasury pay a fixed rate of interest that is applied to an inflation-adjusted principal amount. The principal amount is adjusted based on changes in the Consumer Price Index. The principal due at maturity is typically equal to the inflation-adjusted principal amount, or to the instrument's original par value, whichever is greater. Other types of inflation-adjusted debt instruments may use other methods of adjusting for inflation, and other measures of inflation. Other issuers of inflation-adjusted debt instruments include U.S. Government agencies, instrumentalities and sponsored entities, corporations, and foreign governments.
FLOATING RATE LOANS: Floating rate loans are debt instruments issued by companies or other entities, with interest rates that reset periodically (typically daily, monthly, quarterly, or semiannually, based on a base lending rate such as the London Interbank Bank Offered Rate (LIBOR), plus a premium). Floating rate loans are typically structured and administered by a third party that acts as agent for the lenders participating in the floating rate loan. Floating rate loans can be acquired directly through the agent, by assignment from a third party holder of the loan, or as a participation interest in a third party holder's portion of the loan. Senior floating rate loans are secured by specific collateral of the borrower, and are senior to most other securities of the borrower (e.g., common stocks or other
debt instruments) in the event of bankruptcy. Floating rate loans can be subject to restrictions on resale and can be less liquid than other types of securities.
MUNICIPAL INSTRUMENTS: Municipal instruments are issued to raise money for a variety of public and private purposes, including general financing for state and local governments, or financing for a specific project or public facility. Municipal instruments include general obligation bonds of municipalities, local or state governments, project or revenue-specific bonds, municipal lease obligations, and prerefunded or escrowed bonds. Municipal instruments may be fully or partially supported by the local government, by the credit of a private issuer, by the current or anticipated revenues from a specific project or assets, by the issuer's pledge to make annual appropriations for lease payments, or by domestic or foreign entities providing credit support, such as letters of credit, guarantees, or insurance.
REPURCHASE AGREEMENTS: Repurchase agreements are agreements to buy a security from a third party at one price, with simultaneous agreements to sell it back to the third party at an agreed-upon price.
MONEY MARKET INSTRUMENTS: Money market instruments are high-quality, short-term instruments that pay a fixed, variable, or floating interest rate. Money market instruments include bank certificates of deposit and other bank obligations, notes, commercial paper, asset-backed securities, U.S. and foreign government securities, and municipal instruments.
MORTGAGE DOLLAR ROLLS: Mortgage dollar rolls are simultaneous agreements with a third party both to sell a mortgage-backed security and to purchase a similar security from the third party on a later date, for an agreed-upon price.
DERIVATIVES: Derivatives are financial instruments whose value is based on the value of one or more indicators, such as a security, asset, currency, interest rate, credit rating or index. Derivatives often involve a counterparty to the transaction. Derivatives include futures, forward contracts, options, structured notes, inverse floating rate instruments, swaps, caps, floors, and collars.
PRINCIPAL RISKS
As with any mutual fund, you could lose money on your investment in a fund. An investment in a fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The principal risks of investing in each fund are:
STOCK MARKET RISK: The price of an equity security fluctuates in response to issuer, market, economic, industry, political, and regulatory developments. Prices can decrease significantly in response to these developments, and these developments can affect a single issuer, issuers within a broad market sector, industry or geographic region, or the market in general. Different parts of the market and different types of securities can react differently to these developments. For example, the stocks of growth companies can react differently from the stocks of value companies, and the stocks of large cap companies can
react differently from the stocks of small cap companies. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events, can have a dramatic adverse effect on stock markets.
COMPANY RISK: Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of an investment. The price of securities of smaller, less well-known companies can be more volatile than the price of securities of larger companies or the market in general.
FOREIGN RISK: Investments in securities of foreign companies, securities of companies with significant foreign exposure, and foreign currencies can involve additional risks relating to market, economic, political, or regulatory conditions and developments. Political, social, and economic instability, the imposition of currency or capital controls, or the expropriation or nationalization of assets in a particular country can cause dramatic declines in that country's economy. Less stringent regulatory, accounting, and disclosure requirements for issuers and markets are more common in certain foreign countries. Enforcing legal rights can be difficult, costly, and slow in certain foreign countries, and can be particularly difficult against foreign governments. Additional risks of foreign investments include trading, settlement, custodial, and other operational risks, and withholding and other taxes. These factors can make foreign investments, especially those in emerging markets, more volatile and less liquid than U.S. investments. In addition, foreign markets can react differently to market, economic, political, or regulatory developments than the U.S. market.
EMERGING MARKETS RISK: Emerging markets investments can involve additional and greater risks than the risks associated with investments in developed foreign markets securities. Emerging markets typically have less economic development, market structure and depth and regulatory oversight than developed countries. Emerging markets can also be subject to greater political, social, and economic instability. These factors can make emerging market investments more volatile and less liquid than investments in developed markets.
CURRENCY RISK: A decline in the value of a foreign currency relative to the U.S. dollar reduces the value of the foreign currency and investments denominated in that currency. In addition, the use of foreign exchange contracts to reduce foreign currency exposure can eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. The value of foreign currencies relative to the U.S. dollar fluctuates in response to, among other factors, interest rate changes, intervention (or failure to intervene) by U.S. or foreign governments, central banks, or supranational entities such as the International Monetary Fund, the imposition of currency controls, and other political or regulatory developments in the U.S. or abroad. Foreign currency values can decrease significantly both in the short term and over the long term in response to these and other developments.
INTEREST RATE RISK: The price of a debt instrument changes in response to interest rate changes. In general, the price of a debt instrument falls when interest rates rise and rises when interest rates fall. Instruments with longer maturities, or that do not pay current interest, are more sensitive to interest rate changes. In addition, short-term and long-term interest rates do not necessarily move in the same direction or by the same amount. An instrument's reaction to interest rate changes depends on the timing of its interest and principal payments and the current interest rate for each of those time periods. Instruments with floating interest rates can be less sensitive to interest rate changes. In response to an interest rate decline, instruments that provide the issuer with the right to call or redeem the instrument prior to maturity may be called or redeemed, resulting in the reinvestment of proceeds in other investments at a lower interest rate.
Inflation-adjusted debt instruments tend to react to changes in "real" interest rates. "Real" interest rates represent nominal interest rates reduced by the inflation rate.
CREDIT RISK: The value of a debt instrument depends, in part, on the issuer's or borrower's credit quality or ability to pay principal and interest when due. The value of a debt instrument is likely to fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument's credit rating is downgraded by a credit rating agency. The value of a debt instrument can also decline in response to changes in the financial condition of the issuer or borrower, changes in specific market, economic, industry, political, and regulatory conditions that affect a particular type of instrument, issuer, or borrower, and changes in general market, economic, political, and regulatory conditions. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events can have a dramatic effect on the value of a debt instrument. For certain types of instruments, including derivatives, the value of the instrument depends in part on the credit quality of the counterparty to the transaction. For other types of debt instruments, including collateralized instruments, the price of the debt instrument also depends on the credit quality and adequacy of the underlying assets or collateral. Enforcing rights against the underlying assets or collateral may be difficult, or the underlying assets or collateral may be insufficient, if the issuer defaults.
Lower quality debt instruments and certain unrated debt instruments can involve a substantially greater risk of default, and their values can decline significantly over short periods of time. Lower quality debt instruments are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and principal. Lower quality debt instruments tend to be more sensitive to adverse news about the issuer, or the market or economy in general, than higher quality debt instruments. The market for lower quality debt instruments and certain unrated debt instruments can be less liquid, especially during periods of recession or general market decline.
PREPAYMENT RISK: Many types of debt instruments, including mortgage-backed, asset-backed securities and municipal housing bonds, are subject to the risk of prepayment. Prepayment occurs when unscheduled payments of principal are
made prior to an instrument's maturity. Instruments subject to prepayment can offer less potential for gains during a declining interest rate environment and greater potential for loss in a rising interest rate environment. In addition, prepayment rates are difficult to predict and the potential impact of prepayment on the price of a debt instrument depends on the terms of the instrument and can result in significant volatility.
INFLATION-ADJUSTING RISK: Interest payments on inflation-adjusted debt instruments can be unpredictable and vary based on the level of inflation. If inflation is negative, principal and income both can decline. In addition, the measure of inflation used may not correspond to the actual rate of inflation experienced by a particular individual.
MUNICIPAL MARKET RISK: The price of municipal instruments can be volatile, and significantly affected by adverse tax or court rulings, legislative or political changes, and by the financial developments of municipal issuers. Loss of the state income tax advantage of municipal instruments issued by a state through an adverse court ruling could have a significant negative impact on the value of such municipal instruments and the overall municipal market. Because many municipal instruments are issued to finance similar projects, especially those relating to education, health care, housing, utilities, and water and sewer, conditions in these industries can affect the overall municipal market. In addition, changes in the financial condition of an individual municipal insurer can affect the overall municipal market.
DERIVATIVES RISK: Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicator(s). Gains or losses from derivatives can be substantially greater than the derivatives' original cost, and therefore, can involve leverage. Derivatives can be complex instruments and can involve analysis that differs from that required for other investment types used by each fund. If the value of a derivative does not correlate well with the particular market or other asset class the derivative is intended to provide exposure to, the derivative may not have the effect anticipated. Derivatives can also reduce the opportunity for gain or result in losses by offsetting positive returns in other investments. Derivatives can be less liquid than other types of investments.
ALLOCATION RISK: MFS' assessment of the mix of general risk and return characteristics of asset classes and underlying funds, and the resulting allocation among asset classes and underlying funds, can be incorrect or can lead to an investment focus that results in a fund underperforming other funds with similar investment strategies and/or asset classes.
AFFILIATED FUND RISK: MFS may be subject to potential conflicts of interest in selecting and substituting underlying funds because it is also the adviser to the underlying funds (e.g., the management fees paid by some underlying funds are higher than the management fees paid by other underlying funds). However, MFS is legally obligated to act in the best interests of the funds when selecting and substituting underlying funds.
INVESTMENT SELECTION RISK: The MFS analysis of an investment can be incorrect and its selection of investments can lead to an investment focus that results in each fund underperforming other funds with similar investment strategies and/or underperforming the markets in which each fund invests.
COUNTERPARTY AND THIRD PARTY RISK: Transactions involving a counterparty other than the issuer of the instrument, or a third party responsible for servicing the instrument, are subject to the credit risk of the counterparty or third party, and to the counterparty's or third party's ability to perform in accordance with the terms of the transaction.
LIQUIDITY RISK: Certain investments and types of investments are subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. As a result, it may not be possible to sell the investment at any particular time or at an acceptable price.
LEVERAGING RISK: Certain transactions, including when-issued, delayed-delivery, and forward commitment purchases, loans of portfolio securities, mortgage dollar rolls, and the use of some derivatives, can result in leverage. Leverage involves investment exposure in an amount exceeding the initial investment. In transactions involving leverage, a relatively small market movement or change in other underlying indicator can lead to significantly larger losses to each fund. Leverage can cause increased volatility by magnifying gains or losses on underlying investments.
BAR CHARTS AND PERFORMANCE TABLES
The bar chart and performance table below for each fund are intended to indicate some of the risks of investing in a fund by showing changes in that fund's performance over time. The performance table also shows:
- how each fund's performance over time compares with that of a broad measure of market performance and one or more other performance measures, and
- each fund's returns before the deduction of taxes and returns after the deduction of certain taxes for Class A shares.
The charts and tables provide past performance information. Each fund's past performance (before and after taxes) does not necessarily indicate how the fund will perform in the future. The performance information in the chart and table is based upon calendar year periods, while the performance information presented under the caption "Financial Highlights" and in the fund's shareholder reports is based upon the fund's fiscal year. Therefore, these performance results may differ.
BAR CHARTS. The bar chart will show changes over time in the annual total return of Class A shares for ten calendar years, and assumes the reinvestment of distributions. The charts and related notes do not take into account any sales charges (loads) that you may be required to pay upon purchase or redemption of a
fund's shares. If these sales charges were included, they would reduce these returns. The return of the fund's other classes of shares will differ from the Class A share returns shown in that fund's bar chart, depending upon the expenses of those classes.
MFS CONSERVATIVE ALLOCATION FUND
[CHART]
CALENDAR GAIN OR YEAR LOSS (%) -------- -------- 2003 11.65% 2004 7.23% 2005 3.94% 2006 8.65% |
The total return for the six-month period ended June 30, 2007 was 4.50%. During
the periods shown in the bar chart, the highest quarterly return was 6.67% (for
the calendar quarter ended June 30, 2003) and the lowest quarterly return was
(1.12)% (for the calendar quarter ended March 31, 2003).
MFS MODERATE ALLOCATION FUND
[CHART]
CALENDAR GAIN OR YEAR LOSS (%) -------- -------- 2003 18.95% 2004 10.59% 2005 5.12% 2006 10.26% |
The total return for the six-month period ended June 30, 2007 was 6.06%. During
the periods shown in the bar chart, the highest quarterly return was 10.04% (for
the calendar quarter ended June 30, 2003) and the lowest quarterly return was
(1.69)% (for the calendar quarter ended June 30, 2006).
MFS GROWTH ALLOCATION FUND
[CHART]
CALENDAR GAIN OR YEAR LOSS (%) -------- -------- 2003 26.16% 2004 13.75% 2005 6.66% 2006 12.61% |
The total return for the six-month period ended June 30, 2007 was 7.72%. During
the periods shown in the bar chart, the highest quarterly return was 13.22% (for
the calendar quarter ended June 30, 2003) and the lowest quarterly return was
(2.68)% (for the calendar quarter ended March 31, 2003).
MFS AGGRESSIVE GROWTH ALLOCATION FUND
[CHART]
CALENDAR GAIN OR YEAR LOSS (%) -------- -------- 2003 31.88% 2004 15.21% 2005 7.32% 2006 13.06% |
The total return for the six-month period ended June 30, 2007 was 9.56%. During
the periods shown in the bar chart, the highest quarterly return was 16.28% (for
the calendar quarter ended June 30, 2003) and the lowest quarterly return was
(3.94)% (for the calendar quarter ended June 30, 2006).
PERFORMANCE TABLES. The tables show how the average annual total returns of each class of each fund, before the deduction of taxes ("Returns Before Taxes"), compare to a broad measure of market performance and one or more other performance measures, and assumes the deduction of the maximum applicable sales loads (initial sales charge and/or contingent deferred sales charge (CDSC), as applicable), and the reinvestment of distributions. In addition, for each fund's Class A shares, the tables show Class A average annual total returns:
- after the deduction of taxes on distributions made on Class A shares, such as capital gains and income distributions ("Class A Shares' Return After Taxes on Distributions"), and
- after the deduction of taxes on both distributions made on Class A shares and on redemption of Class A shares, assuming that the shares are redeemed at the end of the periods for which returns are shown ("Class A Shares' Return After Taxes on Distributions and Sale of Class A Shares").
MFS CONSERVATIVE ALLOCATION FUND
Average Annual Total Returns (for the Periods Ended December 31, 2006)
SHARE CLASS 1 YEAR LIFE# ------------------------------------------------------------------------------ RETURNS BEFORE TAXES B Shares, with CDSC (Declining over Six Years from 4% to 0%) 3.90% 5.51% C Shares, with CDSC (1% for 12 Months) 6.84% 5.88% I Shares, at Net Asset Value 8.95% 6.94% 529A Shares, With Initial Sales Charge (5.75%) 2.15% 4.94% 529B Shares, with CDSC (Declining over Six Years from 4% to 0%) 3.60% 5.23% 529C Shares, with CDSC (1% for 12 Months) 6.66% 5.64% R Shares, at Net Asset Value 8.42% 6.40% R1 Shares, at Net Asset Value 7.77% 5.84% R2 Shares, at Net Asset Value 8.08% 5.95% R3 Shares, at Net Asset Value 8.24% 6.09% R4 Shares, at Net Asset Value 8.56% 6.55% R5 Shares, at Net Asset Value 8.93% 6.67% A Shares, With Initial Sales Charge (5.75%) 2.40% 5.17% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, with Initial Sales Charge (5.75%) 1.28% 4.47% A Shares' Return After Taxes on Distributions and Sale of Class A Shares, with Initial Sales Charge (5.75%) 1.89% 4.09% BENCHMARK COMPARISONS (RETURNS BEFORE TAXES) Lehman Brothers U.S. Aggregate Bond Index*+ 4.33% 4.73% MFS Conservative Allocation Fund Custom Blend**+ 9.39% 7.28% |
# Life refers to the period from the commencement of investment operations of the fund, June 28, 2002, through December 31, 2006.
* The Lehman Brothers U.S. Aggregate Bond Index measures the U.S. investment grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
** The MFS Conservative Allocation Fund Custom Blend is comprised of the following indices:
1) Lehman Brothers U.S. Aggregate Bond Index (50%) measures the U.S. investment grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
2) Standard & Poor's 500 Stock Index (the S&P 500) (35%) is a market capitalization index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
3) Lehman Brothers Three-Month Treasury Bill Index (10%) is derived from secondary market Treasury bill rates published by the Federal Reserve Bank.
4) Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Index (5%) is a market capitalization index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
+ Source: FactSet Research Systems Inc.
MFS MODERATE ALLOCATION FUND
Average Annual Total Returns (for the Periods Ended December 31, 2006)
SHARE CLASS 1 YEAR LIFE# ------------------------------------------------------------------------------ RETURNS BEFORE TAXES B Shares, with CDSC (Declining over Six Years from 4% to 0%) 5.63% 7.87% C Shares, with CDSC (1% for 12 Months) 8.59% 8.21% I Shares, at Net Asset Value 10.70% 9.31% 529A Shares, With Initial Sales Charge (5.75%) 3.66% 7.19% 529B Shares, with CDSC (Declining over Six Years from 4% to 0%) 5.34% 7.61% 529C Shares, with CDSC (1% for 12 Months) 8.28% 7.96% R Shares, at Net Asset Value 10.13% 8.70% R1 Shares, at Net Asset Value 9.53% 8.16% R2 Shares, at Net Asset Value 9.81% 8.29% R3 Shares, at Net Asset Value 9.99% 8.44% R4 Shares, at Net Asset Value 10.32% 8.85% R5 Shares, at Net Asset Value 10.55% 8.96% A Shares, With Initial Sales Charge (5.75%) 3.92% 7.44% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, with 2.96% 6.83% Initial Sales Charge (5.75%) A Shares' Return After Taxes on Distributions and Sale of Class A Shares, with Initial Sales Charge (5.75%) 2.91% 6.12% BENCHMARK COMPARISONS (RETURNS BEFORE TAXES) Standard & Poor's 500 Stock Index*+ 15.79% 10.23% MFS Moderate Allocation Fund Custom Blend**+ 12.19% 8.90% |
# Life refers to the period from the commencement of investment operations of the fund, June 28, 2002, through December 31, 2006.
* The Standard & Poor's 500 Stock Index a market capitalization index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
** The MFS Moderate Allocation Fund Custom Blend is comprised of the following indices:
1) Standard & Poor's 500 Stock Index (the S&P 500) (50%) a market capitalization index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
2) Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Index (10%) is a market capitalization index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
3) Lehman Brothers U.S. Aggregate Bond Index (35%) measures the U.S. investment grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
4) Lehman Brothers Three-month Treasury Bill Index (5%) is derived from secondary market Treasury bill rates published by the Federal Reserve Bank.
+ Source: FactSet Research Systems Inc.
MFS GROWTH ALLOCATION FUND
Average Annual Total Returns (for the Periods Ended December 31, 2006)
SHARE CLASS 1 YEAR LIFE# ------------------------------------------------------------------------------ RETURNS BEFORE TAXES B Shares, with CDSC (Declining over Six Years from 4% to 0%) 7.82% 10.04% C Shares, with CDSC (1% for 12 Months) 10.86% 10.36% I Shares, at Net Asset Value 12.96% 11.48% 529A Shares, With Initial Sales Charge (5.75%) 5.81% 9.38% 529B Shares, with CDSC (Declining over Six Years from 4% to 0%) 7.53% 9.73% 529C Shares, with CDSC (1% for 12 Months) 10.58% 10.08% R Shares, at Net Asset Value 12.36% 10.97% R1 Shares, at Net Asset Value 11.76% 10.31% R2 Shares, at Net Asset Value 12.07% 10.45% R3 Shares, at Net Asset Value 12.22% 10.57% R4 Shares, at Net Asset Value 12.49% 11.07% R5 Shares, at Net Asset Value 12.87% 11.21% A Shares, With Initial Sales Charge (5.75%) 6.13% 9.65% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, with Initial Sales Charge (5.75%) 5.34% 9.13% A Shares' Return After Taxes on Distributions and Sale of Class A Shares, with Initial Sales Charge (5.75%) 4.44% 8.14% BENCHMARK COMPARISONS (RETURNS BEFORE TAXES) Standard & Poor's 500 Stock Index*+ 15.79% 10.23% MFS Growth Allocation Fund Custom Blend**+ 15.57% 10.87% |
# Life refers to the period from the commencement of investment operations of the fund, June 28, 2002, through December 31, 2006.
* The Standard & Poor's 500 Stock Index is a market capitalization index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
** The MFS Growth Allocation Fund Custom Blend is comprised of the following indices:
1) Standard & Poor's 500 Stock Index (the S&P 500) (60%) is a market capitalization index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
2) Lehman Brothers U.S. Aggregate Bond Index (20%) measures the U.S. investment grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
3) Morgan Stanley Capital International (MSCI) (20%) EAFE (Europe, Australasia, Far East) Index is a market capitalization index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
+ Source: FactSet Research Systems Inc.
MFS AGGRESSIVE GROWTH ALLOCATION FUND
Average Annual Total Returns (for the Periods Ended December 31, 2006)
SHARE CLASS 1 YEAR LIFE# ------------------------------------------------------------------------------ RETURNS BEFORE TAXES B Shares, with CDSC (Declining over Six Years from 4% to 0%) 8.32% 10.74% C Shares, with CDSC (1% for 12 Months) 11.36% 11.02% I Shares, at Net Asset Value 13.52% 12.14% 529A Shares, With Initial Sales Charge (5.75%) 6.32% 10.04% 529B Shares, with CDSC (Declining over Six Years from 4% to 0%) 8.07% 10.39% 529C Shares, with CDSC (1% for 12 Months) 11.10% 10.77% R Shares, at Net Asset Value 12.97% 11.60% R1 Shares, at Net Asset Value 12.27% 11.01% R2 Shares, at Net Asset Value 12.59% 11.15% R3 Shares, at Net Asset Value 12.76% 11.28% R4 Shares, at Net Asset Value 13.03% 11.69% R5 Shares, at Net Asset Value 13.33% 11.81% A Shares, With Initial Sales Charge (5.75%) 6.56% 10.25% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, with Initial Sales Charge (5.75%) 6.20% 9.98% A Shares' Return After Taxes on Distributions and Sale of Class A Shares, with Initial Sales Charge (5.75%) 4.75% 8.83% BENCHMARK COMPARISONS (RETURNS BEFORE TAXES) Standard & Poor's 500 Stock Index*+ 15.79% 10.23% MFS Aggressive Growth Allocation Fund Custom Blend**+ 17.96% 11.86% |
# Life refers to the period from the commencement of investment operations of the fund, June 28, 2002, through December 31, 2006.
* The Standard & Poor's 500 Stock Index is a market capitalization index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
** The MFS Aggressive Growth Allocation Fund Custom Blend is comprised of the following indices:
1) Standard & Poor's 500 Stock Index (the S&P 500) (80%) is a market capitalization index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
2) Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Index (20%) is a market capitalization index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
+ Source: FactSet Research Systems Inc.
All performance results reflect any applicable fee and expense waivers in effect during the periods shown; without these, the results would have been lower.
After-tax returns are calculated using the historical highest individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your own tax situation, and may
differ from those shown. The after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns are shown for only one of each fund's classes of shares, and after-tax returns for the fund's other classes of shares will vary from the returns shown.
Each fund commenced investment operations on June 28, 2002, with the offering of Class A, Class B, Class C, and Class I shares, and subsequently offered Class 529A, Class 529B and Class 529C on July 31, 2002, Class R shares on December 31, 2002, Class R3 shares on October 31, 2003 and Class R1, Class R2, Class R4 and Class R5 shares on April 1, 2005.
Performance for Class R, Class R4, Class R5, and Class 529A shares includes the performance of the fund's Class A shares for periods prior to their offering. Performance for each fund's Class R1, Class R2, Class R3, and Class 529B shares includes the performance of that fund's Class B shares for periods prior to their offering. Performance for Class 529C shares includes the performance of the fund's Class C shares for periods prior to their offering. Blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class specific operating expenses (such as Rule 12b-1 fees). Compared to performance these share classes would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance for share classes with higher operating expenses than those of the share class to which they are blended, and lower performance for share classes with lower operating expenses than those of the share class to which they are blended.
EXPENSE SUMMARY
EXPENSE TABLE
The following tables describe the fees and expenses that you may pay when you buy, redeem, and hold shares of the funds. In addition to the fees and expenses which you bear directly, you will indirectly bear a fund's pro rata share of the fees and expenses of the underlying funds in which a fund invests.
The annual fund operating expenses shown in each fund's fee table below are based on expenses incurred during the fund's most recently completed fiscal year, adjusted to reflect current fees, and a weighted average of the total annual operating expenses (as reported in each underlying fund's most recent shareholder report) of, and the fee charged by (if any), the underlying funds in which the fund invested during the fund's most recently completed fiscal year. The fund's annual operating expenses may vary in future years.
MFS CONSERVATIVE ALLOCATION FUND:
Shareholder Fees (fees paid directly from your investment):
A AND B AND C AND
SHARE CLASS 529A 529B 529C I ALL R
----------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price) 5.75% N/A N/A N/A N/A
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase
price or redemption proceeds,
whichever is less) See Below(#) 4.00% 1.00% N/A N/A
|
Annual Fund Operating Expenses (expenses that are deducted from fund assets):
SHARE CLASS A B C I
-------------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A
Other Expenses(2) 0.06% 0.06% 0.06% 0.06%
Acquired (Underlying) Fund Fees and Expenses(2) 0.59% 0.59% 0.59% 0.59%
---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.00% 1.65% 1.65% 0.65%
SHARE CLASS 529A 529B 529C
----------------------------------------------------------------------
Management Fee N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00%
Other Expenses(2) 0.31% 0.31% 0.31%
Acquired (Underlying) Fund Fees and Expenses(2) 0.59% 0.59% 0.59%
---- ---- ----
Total Annual Fund Operating Expenses(2) 1.25% 1.90% 1.90%
SHARE CLASS R R1 R2 R3 R4 R5
-------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A N/A N/A
Distribution and Service
(12b-1) Fees(1) 0.50% 0.75% 0.50% 0.50% 0.25% N/A
Other Expenses(2) 0.06% 0.41% 0.31% 0.21% 0.21% 0.16%
Acquired (Underlying) Fund
Fees and Expenses(2) 0.59% 0.59% 0.59% 0.59% 0.59% 0.59%
---- ---- ---- ---- ---- ----
Total Annual Fund
Operating Expenses(2) 1.15% 1.75% 1.40% 1.30% 1.05% 0.75%
|
MFS MODERATE ALLOCATION FUND:
Shareholder Fees (fees paid directly from your investment):
A AND B AND C AND
SHARE CLASS 529A 529B 529C I ALL R
----------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price) 5.75% N/A N/A N/A N/A
Maximum Deferred Sales Charge
(Load) (as a percentage of original
purchase price or redemption proceeds,
whichever is less) See Below(#) 4.00% 1.00% N/A N/A
|
Annual Fund Operating Expenses (expenses that are deducted from fund assets):
SHARE CLASS A B C I
------------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A
Other Expenses(2) 0.05% 0.05% 0.05% 0.05%
Acquired (Underlying) Fund Fees and Expenses(2) 0.70% 0.70% 0.70% 0.70%
---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.10% 1.75% 1.75% 0.75%
SHARE CLASS 529A 529B 529C
----------------------------------------------------------------------
Management Fee N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00%
Other Expenses(2) 0.30% 0.30% 0.30%
Acquired (Underlying) Fund Fees and Expenses(2) 0.70% 0.70% 0.70%
---- ---- ----
Total Annual Fund Operating Expenses(2) 1.35% 2.00% 2.00%
SHARE CLASS R R1 R2 R3 R4 R5
--------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A N/A N/A
Distribution and Service
(12b-1) Fees(1) 0.50% 0.75% 0.50% 0.50% 0.25% N/A
Other Expenses(2) 0.05% 0.40% 0.30% 0.20% 0.20% 0.15%
Acquired (Underlying) Fund
Fees and Expenses(2) 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
---- ---- ---- ---- ---- ----
Total Annual Fund Operating
Expenses(2) 1.25% 1.85% 1.50% 1.40% 1.15% 0.85%
|
MFS GROWTH ALLOCATION FUND:
Shareholder Fees (fees paid directly from your investment):
A AND B AND C AND
SHARE CLASS 529A 529B 529C I ALL R
----------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price) 5.75% N/A N/A N/A N/A
Maximum Deferred Sales Charge
(Load)(as a percentage of original
purchase price or redemption proceeds,
whichever is less) See Below(#) 4.00% 1.00% N/A N/A
|
Annual Fund Operating Expenses (expenses that are deducted from fund assets):
SHARE CLASS A B C I
-------------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A
Other Expenses(2) 0.06% 0.06% 0.06% 0.06%
Acquired (Underlying) Fund Fees and Expenses(2) 0.83% 0.83% 0.83% 0.83%
---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.24% 1.89% 1.89% 0.89%
SHARE CLASS 529A 529B 529C
-----------------------------------------------------------------------
Management Fee N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00%
Other Expenses(2) 0.31% 0.31% 0.31%
Acquired (Underlying) Fund Fees and Expenses(2) 0.83% 0.83% 0.83%
---- ---- ----
Total Annual Fund Operating Expenses(2) 1.49% 2.14% 2.14%
|
SHARE CLASS R R1 R2 R3 R4 R5
-----------------------------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.50% 0.75% 0.50% 0.50% 0.25% N/A
Other Expenses(2) 0.06% 0.41% 0.31% 0.21% 0.21% 0.16%
Acquired (Underlying) Fund Fees and Expenses(2) 0.83% 0.83% 0.83% 0.83% 0.83% 0.83%
---- ---- ---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.39% 1.99% 1.64% 1.54% 1.29% 0.99%
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND:
Shareholder Fees (fees paid directly from your investment):
A AND B AND C AND
SHARE CLASS 529A 529B 529C I AII R
-------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price) 5.75% N/A N/A N/A N/A
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds,
whichever is less) See Below(#) 4.00% 1.00% N/A N/A
|
Annual Fund Operating Expenses (expenses that are deducted from fund assets):
SHARE CLASS A B C I
-------------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A
Other Expenses(2) 0.03% 0.03% 0.03% 0.03%
Acquired (Underlying) Fund Fees and Expenses(2) 0.92% 0.92% 0.92% 0.92%
---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.30% 1.95% 1.95% 0.95%
SHARE CLASS 529A 529B 529C
-----------------------------------------------------------------------
Management Fee N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.35% 1.00% 1.00%
Other Expenses(2) 0.28% 0.28% 0.28%
Acquired (Underlying) Fund Fees and Expenses(2) 0.92% 0.92% 0.92%
---- ---- ----
Total Annual Fund Operating Expenses(2) 1.55% 2.20% 2.20%
|
SHARE CLASS R R1 R2 R3 R4 R5
-----------------------------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A N/A N/A
Distribution and Service (12b-1) Fees(1) 0.50% 0.75% 0.50% 0.50% 0.25% N/A
Other Expenses(2) 0.03% 0.38% 0.28% 0.18% 0.18% 0.13%
Acquired (Underlying) Fund Fees and Expenses(2) 0.92% 0.92% 0.92% 0.92% 0.92% 0.92%
---- ---- ---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.45% 2.05% 1.70% 1.60% 1.35% 1.05%
|
# A contingent deferred sales charge (referred to as a CDSC) of 1% may be deducted from your redemption proceeds if you buy $1 million or more of Class A shares or if you are investing through a retirement plan and your Class A purchase meets certain requirements and you redeem your investment within 12 months of your purchase. Class 529A shares are not subject to any CDSC.
(1) The fund's Rule 12b-1 plan permits it to pay distribution and/or service fees to support the sale and distribution of the fund's Class A, Class B, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3 and Class R4 shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "Distribution and Service Fees."
(2) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Total Annual Fund Operating Expenses" would be lower. A portion of the expenses of the fund may be paid by the underlying funds in which the fund invests. See "Management of the Fund-Special Servicing Agreement." For the 529 classes only, "Other Expenses" also include the program management fee described under "Management of the Fund." In addition, qualified tuition program accounts for which MFD serves as program manager are generally subject to a $25 annual account maintenance fee. Other qualified tuition program accounts may be subject to other account fees. Please see the program description and materials available from your financial intermediary for details about these account fees. For the Class R share classes only, "Other Expenses" also include an annual retirement plan administration and services fee paid by the fund from assets attributable to the respective class to MFS for the provision by MFS, either directly or through other affiliated and/or unaffiliated entities, of various administrative, recordkeeping and communication/educational services in an amount equal to: 0.35% for Class R1, 0.25% for Class R2, 0.15% for Class R3, 0.15% for Class R4 and 0.10% for Class R5 shares.
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in each fund with the cost of investing in other mutual funds.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you redeem your shares at the end of the time periods (unless otherwise indicated);
- Your investment has a 5% return each year and dividends and other distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's total direct and indirect operating expenses are assumed to take into account any written fee reductions for that period during which those written fee reductions are in effect. (see "Expense Summary-Expense Table" above).
Although your actual costs may be higher or lower, under these assumptions your costs would be:
MFS CONSERVATIVE ALLOCATION FUND:
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- A shares $671 $875 $1,096 $1,729 B shares(1) Assuming redemption at end of period $568 $820 $1,097 $1,781 Assuming no redemption $168 $520 $ 897 $1,781 C shares Assuming redemption at end of period $268 $520 $ 897 $1,955 Assuming no redemption $168 $520 $ 897 $1,955 I shares $ 66 $208 $ 362 $ 810 529A shares $695 $949 $1,222 $1,999 529B shares(1) Assuming redemption at end of period $593 $897 $1,226 $2,053 Assuming no redemption $193 $597 $1,026 $2,053 529C shares Assuming redemption at end of period $293 $597 $1,026 $2,222 Assuming no redemption $193 $597 $1,026 $2,222 R shares $117 $365 $ 633 $1,398 R1 shares $178 $551 $ 949 $2,062 R2 shares $143 $443 $ 766 $1,680 R3 shares $132 $412 $ 713 $1,568 R4 shares $107 $334 $ 579 $1,283 R5 shares $ 77 $240 $ 417 $ 930 |
MFS MODERATE ALLOCATION FUND:
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- A shares $681 $905 $1,146 $1,838 B shares(1) Assuming redemption at end of period $578 $851 $1,149 $1,891 Assuming no redemption $178 $551 $ 949 $1,891 C shares Assuming redemption at end of period $278 $551 $ 949 $2,062 Assuming no redemption $178 $551 $ 949 $2,062 I shares $ 77 $240 $ 417 $ 930 529A shares $705 $978 $1,272 $2,105 529B shares(1) Assuming redemption at end of period $603 $927 $1,278 $2,160 Assuming no redemption $203 $627 $1,078 $2,160 529C shares Assuming redemption at end of period $303 $627 $1,078 $2,327 Assuming no redemption $203 $627 $1,078 $2,327 R shares $127 $397 $ 686 $1,511 R1 shares $188 $582 $1,001 $2,169 R2 shares $153 $474 $ 818 $1,791 R3 shares $143 $443 $ 766 $1,680 R4 shares $117 $365 $ 633 $1,398 R5 shares $ 87 $271 $ 471 $1,049 |
MFS GROWTH ALLOCATION FUND:
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- A shares $694 $ 946 $1,217 $1,989 B shares(1) Assuming redemption at end of period $592 $ 894 $1,221 $2,042 Assuming no redemption $192 $ 594 $1,021 $2,042 C shares Assuming redemption at end of period $292 $ 594 $1,021 $2,212 Assuming no redemption $192 $ 594 $1,021 $2,212 I shares $ 91 $ 284 $ 493 $1,096 529A shares $718 $1,019 $1,341 $2,252 529B shares(1) Assuming redemption at end of period $617 $ 970 $1,349 $2,307 Assuming no redemption $217 $ 670 $1,149 $2,307 529C shares Assuming redemption at end of period $317 $ 670 $1,149 $2,472 Assuming no redemption $217 $ 670 $1,149 $2,472 R shares $142 $ 440 $ 761 $1,669 R1 shares $202 $ 624 $1,073 $2,317 R2 shares $167 $ 517 $ 892 $1,944 R3 shares $157 $ 486 $ 839 $1,835 R4 shares $131 $ 409 $ 708 $1,556 R5 shares $101 $ 315 $ 547 $1,213 |
MFS AGGRESSIVE GROWTH ALLOCATION FUND:
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- A shares $700 $ 963 $1,247 $2,053 B shares(1) Assuming redemption at end of period $598 $ 912 $1,252 $2,107 Assuming no redemption $198 $ 612 $1,052 $2,107 C shares Assuming redemption at end of period $298 $ 612 $1,052 $2,275 Assuming no redemption $198 $ 612 $1,052 $2,275 I shares $ 97 $ 303 $ 526 $1,166 529A shares $724 $1,036 $1,371 $2,314 529B shares(1) Assuming redemption at end of period $623 $ 988 $1,380 $2,370 Assuming no redemption $223 $ 688 $1,180 $2,370 529C shares Assuming redemption at end of period $323 $ 688 $1,180 $2,534 Assuming no redemption $223 $ 688 $1,180 $2,534 R shares $148 $ 459 $ 792 $1,735 R1 shares $208 $ 643 $1,103 $2,379 R2 shares $173 $ 536 $ 923 $2,009 R3 shares $163 $ 505 $ 871 $1,900 R4 shares $137 $ 428 $ 739 $1,624 R5 shares $107 $ 334 $ 579 $1,283 |
(1) Class B and Class 529B shares convert to Class A and Class 529A shares, respectively, approximately eight years after purchase; therefore, years nine and ten reflect Class A and Class 529A expenses, respectively.
CERTAIN INVESTMENT POLICIES AND RISKS
TURNOVER
MFS may engage in active and frequent trading in pursuing each underlying fund's principal investment strategies. Frequent trading increases transaction costs, which may reduce the underlying fund's return. Frequent trading can also result in the realization of a higher percentage of short-term capital gains and a lower percentage of long-term capital gains as compared to a fund that trades less frequently. Because short-term capital gains are distributed as ordinary income, this would generally increase your tax liability unless you hold your shares through a tax-deferred or exempt vehicle.
TEMPORARY DEFENSIVE POLICY
In response to market, economic, political, or other conditions, MFS may depart from each fund's as well as each underlying fund's principal investment strategies by temporarily investing for defensive purposes. When MFS invests defensively, different factors could affect the fund's as well as each underlying fund's performance and the fund may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Information about investment strategies and investment types not described in the Prospectus and the risks associated with those investment strategies and investment types are described in the fund's Statement of Additional Information ("SAI").
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS"), located at 500 Boylston Street, Boston, Massachusetts, serves as the investment adviser for each fund. Subject to the supervision of the Board of Trustees, MFS is responsible for managing each fund's investments, executing transactions and providing related administrative services and facilities under an Investment Advisory Agreement between each fund and MFS.
Each fund pays no management fee to MFS; however the underlying funds pay management fees to MFS which are reflected in the "Expense Table."
MFS has agreed in writing to bear the fund's expenses such that "Other Expenses," determined without giving effect to the expense offset arrangement described above, do not exceed 0.10% annually for each of Class A, Class B, Class C, Class I and Class R shares; 0.45% annually for Class R1 shares; 0.35% annually for each of Class 529A, Class 529B, Class 529C and Class R2 shares; 0.25% annually for Class R3 shares and Class R4 shares; and 0.20% annually for Class R5 shares. This written agreement excludes management fees, distribution and service fees, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, and will continue until at least September 30, 2008.
A discussion regarding the basis for the Board of Trustees' approval of the Investment Advisory Agreement is available in each fund's most recent semi-annual report for the six-month period that ends November 30.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $202 billion as of June 30, 2007.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of the MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, and inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries with respect to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The lawsuits assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of
1940, the Employee Retirement Income Security Act of 1974 (ERISA), as well as fiduciary duties and other violations of common law. The lawsuits variously have been commenced as class actions or individual actions on behalf of investors who purchased, held, or redeemed shares of the MFS funds during specified periods, as ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT
LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER),
NO. 1:04-MD-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS funds include RIGGS V. MFS et al., CASE NO. 04-CV-01162-JFM
(direct), HAMMERSLOUGH V. MFS et al., CASE NO. 04-MD-01620 (derivative), ANITA
WALKER V. MFS ET AL., CASE NO. 1:04-CV-01758 (ERISA), and REAVES V. MFS SERIES
TRUST I, et al., CASE NO. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District of
Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., ET AL., NO. 04CV10584 (GAO)
(a consolidated action, first filed on March 25, 2004) and MARCUS DUMOND, ET AL.
V. MASSACHUSETTS FINANCIAL SERVS. CO., ET AL., NO. 04CV11458 (GAO) (filed on May
4, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages,
punitive damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. Insofar as any of the actions is appropriately
brought derivatively on behalf of any of the MFS funds, any recovery will inure
to the benefit of the MFS funds. Several claims of the various lawsuits have
been dismissed; MFS and the other named defendants continue to defend the
various lawsuits.
DISCLOSURE OF PORTFOLIO HOLDINGS. The MFS funds have established a policy with respect to the disclosure of fund portfolio holdings. A description of this policy is provided in the SAI. In addition, by clicking on a fund name under "Select a fund" on the MFS Web site (MFS.COM), the following information is generally available to you:
INFORMATION APPROXIMATE DATE OF POSTING TO WEB SITE -------------------------------------------------------------------------------- Fund's top 10 securities holdings as 14 days after month end of each month's end Fund's full securities holdings as of 24 days after month end each month's end |
If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for funds that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the funds or MFS may suspend the posting of this information or modify the elements of this web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
PORTFOLIO MANAGER(S)
Information regarding the portfolio manager(s) of each fund is set forth below. Further information regarding the portfolio manager(s), including other accounts managed, compensation, ownership of fund shares, and possible conflicts of interest, is available in the fund's SAI. The portfolio manager is primarily responsible for the day-to-day management of the fund unless otherwise specified.
PORTFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
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Joseph C. Flaherty, Jr. Portfolio Manager, General 2002 Investment Officer of MFS;
Oversight of a team of employed in the investment
Quantitative Professionals management area of MFS
since 1993.
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ADMINISTRATOR
MFS provides each fund with certain financial, legal, and other administrative services under a Master Administrative Services Agreement between each fund and MFS. Under the Agreement, MFS is paid an annual fee for providing these services.
In addition, MFS provides, either directly or through affiliated and/or unaffiliated entities, certain administrative, recordkeeping, and communication/educational services to the retirement plans and retirement plan participants which invest in Class R1, Class R2, Class R3, Class R4 and Class R5 shares under a Master Class R Administration and Services Agreement. Under the Agreement, each fund pays an annual fee to MFS for these services at the following percentages of the average
daily net assets attributable to that class of shares: 0.35% for Class R1; 0.25% for Class R2; 0.15% for Class R3; 0.15% for Class R4; and 0.10% for Class R5 shares.
DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of each fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of each fund under a Shareholder Servicing Agent Agreement. MFSC may receive a fee based on the costs it incurs in providing these services plus a target profit margin, including payments made to affiliated and unaffiliated service providers that provide certain sub-accounting and other shareholder services (shareholder servicing payments) and out-of-pocket expenses.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, the underlying funds and each fund, each underlying fund may pay a portion of the transfer-agent-related expenses of each fund, including sub-accounting fees payable to financial intermediaries, to the extent that such payments are less than the amount of the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the fund.
PROGRAM MANAGER(S)
MFD serves as program manager for a qualified tuition program under Section 529 of the Internal Revenue Code through which 529 share classes of each fund are included as investment options to program participants. MFD provides recordkeeping, tax reporting, and account services, as well as services designed to maintain the program's compliance with the Internal Revenue Code (the "Code") and other regulatory requirements under a Master 529 Administrative Services Agreement. Each fund's 529 share classes may also be offered through qualified tuition programs for which MFD does not serve as program manager.
Under the Agreement, each fund pays MFD an annual fee of up to 0.35% of the average daily net assets attributable to each 529 share class. The current annual fee has been established at 0.25% of the average daily net assets attributable to each 529 share class up to $10 billion in assets, 0.225% from $10 billion in assets up to $20 billion in assets, and 0.20% from $20 billion in assets and above. The fee may only be increased with the approval of the fund's Board of Trustees. MFD may pay a portion of this fee to program managers of other qualified tuition programs which provide similar services to those programs.
Please consult the program description for your particular qualified tuition program for a discussion of the fees paid to and services received from the program manager.
DESCRIPTION OF SHARE CLASSES
Each fund offers Class A, Class B, Class C, Class I, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 through this prospectus.
Class I shares generally are available only to the following eligible investors:
- certain retirement plans established for the benefit of employees and former employees of MFS or its affiliates;
- retirement plans, endowments or foundations that: (i) have, at the time of purchase of Class I shares, aggregate assets of at least $100 million; and (ii) invest at least $10 million in Class I shares of the fund and other MFS funds;
- bank trust departments or law firms acting as trustee or manager for trust accounts which, on behalf of their clients (i) initially invest at least $100,000 in Class I shares of the fund, or (ii) have, at the time of purchase of Class I shares, aggregate assets of at least $10 million invested in Class I shares of the fund and other MFS funds; and
- certain retirement plans offered, administered, or sponsored by insurance companies, as permitted by MFD based on their overall relationship with MFS.
In addition, MFD may accept, in its sole discretion, investments in Class I shares from purchasers not listed above or that do not meet these qualification requirements.
Class 529A, Class 529B and Class 529C shares are generally only available to
qualified tuition programs (tuition programs) established in accordance with
Section 529 of the Code.
Class R shares are available for purchase only by retirement plans that held Class R shares of a fund on March 31, 2005, and by retirement plans (other than plans for which MFS or an affiliate provides participant recordkeeping, and plans for which MFS Heritage Trust Company serves as a trustee) that are held by MFSC at the plan or omnibus level.
Class R1, Class R2, Class R3, Class R4 and Class R5 shares generally are available only to 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans, defined benefit plans and non-qualified deferred compensation plans (eligible retirement plans). Class R1, Class R2, Class R3, Class R4 and Class R5 shares generally are available to retirement plans only if either MFS or one of its affiliates is responsible for providing participant recordkeeping services (Serviced Plan) or MFS or one of its affiliates has entered into an administrative arrangement with a third party to provide certain recordkeeping and/or administrative services (Alliance Plan). Class R1, Class R2, Class R3, Class R4 and Class R5 shares are not generally available to retail non-
retirement accounts, traditional and Roth IRAs, Coverdell Educational Savings Accounts, SEPs, SAR-SEPs, SIMPLE IRAs, individual 403(b) plans, and 529 tuition plans.
A Serviced Plan will be limited as to which class of shares it will be eligible to purchase under the terms of the service agreement between MFS or an affiliate and the sponsor of the retirement plan. Currently only Class R1, Class R2, Class R3, Class R4, Class R5, and Class I shares are offered to Serviced Plans; provided that Serviced Plans that held certain other classes of shares of a fund on June 30, 2005 (March 31, 2005 with respect to Class R shares), may purchase additional shares of the same class of the fund and may exchange their shares for shares of the same class of any other fund.
SALES CHARGES AND WAIVERS OR REDUCTIONS
You may be subject to an initial sales charge when you purchase Class A or Class 529A shares, or a CDSC when you redeem Class A, Class B, Class C, Class 529B or Class 529C shares. These sales charges are paid to MFD.
In the circumstances described below, you may qualify for a sales charge waiver or reduction for purchases or redemptions of Class A, Class B, Class C, Class 529A, Class 529B, and Class 529C shares. In addition, other sales charge waivers or reductions may apply to certain transactions by retirement plans, section 529 tuition programs, and certain other groups (e.g., affiliated persons of MFS) and with respect to certain types of investment programs (e.g., certain wrap accounts or fund supermarket investments). Details regarding the types of investment programs and categories of investors eligible for these waivers or reductions are provided in the SAI, which is available to you free of charge, and on the fund's Web site at MFS.COM. Some of these programs and waivers or reductions may not be available to you if your shares are held through certain types of accounts, such as retirement accounts and 529s plans, or certain accounts that you may have with your financial intermediary. Waivers or reductions may be eliminated, modified, and added at any time without providing advance notice.
CLASS A AND CLASS 529A SHARES. You may purchase Class A and Class 529A shares at the offering price (which includes the applicable initial sales charge). In some cases, you may purchase Class A and Class 529A shares without an initial sales charge; in these cases, for Class A shares only, you will generally be subject to a 1% CDSC upon redemption within 12 months of your purchase.
The amount of the initial sales charge you pay when you buy Class A or Class 529A shares differs depending upon the amount you invest, as follows:
GROSS PURCHASE AMOUNT
AMOUNT OF PURCHASE (OFFERING PRICE*) NET AMOUNT INVESTED
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Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1,000,000 2.00% 2.04%
$1,000,000 or more None** None**
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* Offering price is calculated by dividing the net asset value of a share by the difference between 1 and the initial sales charge percentage. Because the offering price is rounded to two decimal places, actual sales charges you pay may be more or less than those calculated using these percentages.
** For Class A shares only, a 1% CDSC will generally apply to such purchases.
You pay no initial sales charge when you invest $1 million or more in Class A and Class 529A shares (or, with respect to certain retirement plans, if MFD determines in its sole discretion that the total purchases by the retirement plan (or by multiple plans maintained by the same plan sponsor) will equal or exceed within a reasonable period of time a specified threshold determined by MFD). However, for Class A shares, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS B AND CLASS 529B SHARES. You may purchase Class B and Class 529B shares at net asset value without an initial sales charge, but if you redeem your shares within the first six years after purchase, you may be subject to a CDSC (declining from 4% during the first year to 0% after six years).
The CDSC is imposed according to the following schedule:
If you hold Class B or Class 529B shares for approximately eight years, they will convert to Class A or Class 529A shares of the fund, respectively. All Class B or Class 529B shares you acquire through the reinvestment of dividends and distributions will be held in a separate sub-account. Each time any Class B or Class 529B shares in your account convert to Class A or Class 529A shares, a proportionate number of the Class B or Class 529B shares in the sub-account will also convert to Class A or Class 529A shares, respectively.
CLASS C AND CLASS 529C SHARES. You may purchase Class C or Class 529C shares at net asset value without an initial sales charge. However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS I SHARES. Eligible investors may purchase Class I shares at net asset value without an initial sales charge or a CDSC upon redemption.
CLASS R, CLASS R1, CLASS R2, CLASS R3, CLASS R4, AND CLASS R5 SHARES. Eligible retirement plans may purchase Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares at net asset value without an initial sales charge or a CDSC upon redemption.
SALES CHARGE WAIVERS OR REDUCTIONS. Below is a summary of certain investor programs whereby the applicable sales charge may be waived or reduced. You or your financial intermediary must inform MFSC upon purchasing fund shares of your intention to invest in a fund under one of the programs below. You can provide this information in your account application or through a separate document provided by your financial intermediary.
INVESTMENTS ELIGIBLE FOR:
-----------------------------------------
WAIVED INITIAL REDUCED INITIAL WAIVED
PROGRAM SALES CHARGE SALES CHARGE CDSC
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Letter of Intent X
Right of Accumulation X
Automatic Exchange Plan X*
Exchange Privilege X*
Systematic Withdrawal Plan X**
Distribution Reinvestment X
Distribution Investment Program X
Other Sales Charge Waivers X X
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* Investments under the Automatic Exchange Plan or certain other exchanges under the Exchange Privilege may be subject to a sales charge in certain cases.
** Not available for Class A shares and limited for Class B, Class C, Class 529B and Class 529C shares.
- LETTER OF INTENT (LOI). You may pay a reduced or no initial sales charge on purchases of Class A or Class 529A shares if you intend to invest a specific dollar amount, based on the gross amount of your investment (including the amount of any sales charge paid), including investments through any linked accounts in any class of any MFS fund (and the MFS Fixed Fund, a bank collective investment trust) within a 13-month period (36 months for a $1 million commitment). Distributions reinvested in additional shares of the fund or distributions from other MFS funds automatically invested in shares of the fund will not apply toward the satisfaction of the LOI.
For each purchase you make under the LOI you will pay the initial sales charge rate applicable to the total amount you intended to purchase. If, however, you do not purchase the intended amount within the relevant time period, your account will be adjusted by redemption of the amount of shares needed to pay the higher initial sales charge level for the amount actually purchased.
To establish a LOI, you may complete the Letter of Intent section of your account application or service application. In order to benefit
from the LOI, you or your financial intermediary must inform MFSC that the LOI is in effect each time shares of a fund are purchased.
- RIGHT OF ACCUMULATION (ROA). Under the ROA, you may pay a reduced or no initial sales charge on purchases of Class A or Class 529A shares by aggregating the total dollar amount of your investment with your existing investments or any linked accounts in any class of any MFS fund (and the MFS Fixed Fund), based on the current maximum public offering price of the funds. For example, you will pay a sales charge on your current purchase at the rate applicable to the total value of all eligible accounts based on the sales charge schedule above.
- LINKING ACCOUNTS FOR LOI AND ROA. For purposes of obtaining reduced sales charges under the LOI and ROA, you may combine the value of your current purchase of shares of an MFS fund with the value of existing accounts held with the MFS funds (or the MFS Fixed Fund) by you, your spouse (or legal equivalent under applicable state law), and your children under the age of 21.
Eligible accounts that you may link under a LOI and ROA may include:
- Individual accounts;
- Joint accounts;
- Trust accounts of which you, your spouse (or legal equivalent under applicable state law), or child under the age of 21 is the grantor;
- MFS 529 College Savings Plan accounts;
- Certain single-participant retirement plan accounts;
- Certain Individual Retirement Accounts;
- Uniform Gifts/Transfers to Minor Acts accounts; and
- Accounts held in the name of your financial intermediary on your behalf, except accounts investing in Class W shares of certain MFS funds.
In order to link such accounts under a LOI or ROA, the broker/dealer at the time of your current purchase must be the broker/dealer (or the clearing broker/dealer for your broker/dealer so long as your account is not aggregated by the clearing broker/dealer with other accounts) for any additional accounts to be linked. MFS fund shares held as follows cannot be combined with your current purchase for purposes of a LOI or ROA:
- Shares held indirectly through financial intermediaries other than the broker/dealer for your current purchase (for example, shares held in a different broker/dealer's brokerage account or with a
bank, an insurance company separate account or an investment adviser); or
- Shares held directly in a MFS fund account on which the broker/dealer is different than the broker/dealer for your current purchase.
It is your responsibility to inform the broker/dealer for each current purchase of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. If you have not designated a broker/dealer, you should inform MFSC directly of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. You should provide your financial intermediary (including MFSC if you have not designated a broker/dealer) with certain supporting information at the time of each purchase regarding accounts held with the MFS funds that are eligible to be combined for purposes of a LOI or ROA. Such information may include shareholder identification numbers or applicable account numbers or account statements. You should request that your financial intermediary provide this information to the funds or their agents when placing each purchase order.
SPECIAL NOTE FOR LOI OR ROA ELIGIBLE ACCOUNTS LINKED PRIOR TO MAY 1, 2006. Any LOI or ROA eligible accounts linked prior to May 1, 2006, will remain linked to the extent the broker/dealer information for such accounts is not modified. In the event you change the broker/dealer for any such account, your accounts will no longer be eligible to be linked under a LOI or ROA. In addition, you will not be able to link additional accounts to the extent they do not meet the criteria discussed above.
- AUTOMATIC EXCHANGE PLAN (not available for R share classes). If you have an account balance of at least $2,000 in the fund, you may participate in the automatic exchange plan, a dollar-cost averaging program. This plan permits you to make automatic periodic exchanges from your account in the fund for shares of the same class of other MFS funds. Exchanges will generally be made at net asset value without any sales charges. If you exchange shares out of the MFS Money Market Fund or MFS Government Money Market Fund, or if you exchange Class A or Class 529A shares out of the MFS Cash Reserve Fund into Class A or Class 529A shares of any other MFS fund, you will pay an initial sales charge if you have not already paid this charge on these shares.
- SYSTEMATIC WITHDRAWAL PLAN. If you have an account balance of at least $5,000 in your account in the fund, you may elect to receive (or designate someone else to receive) regular periodic payments (of at least $50 if by check) through an automatic redemption of Class A, Class B, Class C, Class I, Class 529A, Class 529B, Class 529C, Class R,
Class R1, Class R2, Class R3, Class R4, or Class R5. For Class B, Class C, Class 529B and Class 529C shares, you may incur a CDSC when Class B, Class C, Class 529B or Class 529C shares are redeemed under the plan (or plans if more than one plan is established) if amounts greater than 10% of the value of your account are withdrawn under the plan(s) in any one year (with respect to Class B or Class 529B shares, determined at the time of your first withdrawal under the plan(s) or January 1, 2007, whichever is later and reset annually thereafter and with respect to Class C or Class 529C shares, determined at the time the plan is established). For Class A shares, you may incur a CDSC when Class A shares are redeemed under this plan.
- DISTRIBUTION REINVESTMENT. You may automatically reinvest dividend and capital gain distributions in the same fund without paying an initial sales charge.
- DISTRIBUTION INVESTMENT PROGRAM. You may automatically reinvest dividend and capital gain distributions into the same class of another MFS fund without paying a CDSC or an initial sales charge.
CALCULATION OF CDSC. As discussed above, certain investments in Class A, Class B, Class C, Class 529B and Class 529C shares are subject to a CDSC. For purposes of calculating the CDSC, purchases made on any day during a calendar month will age one month on the last day of that month, and on the last day of each subsequent month. For example, a 1% CDSC on Class A shares purchased on August 10 will expire at the close of business on July 31 of the following calendar year, and a redemption of those shares made on or after August 1 of the following calendar year will not be subject to the CDSC.
Shares acquired through reinvestment of distributions are not subject to a CDSC. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. For purposes of determining the CDSC, if you sell only some of your shares, shares not subject to a CDSC are sold first, followed by shares held the longest.
DISTRIBUTION AND SERVICE FEES
Each fund has adopted a plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"). Under the Distribution Plan, each fund pays distribution and service fees to MFD to support the sale and distribution of Class A, Class B, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3 and Class R4 shares, as well as shareholder servicing and account maintenance activities. The fund has not adopted a Rule 12b-1 plan with respect to its Class I or Class R5 shares. These distribution and service fees equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
MAXIMUM TOTAL
MAXIMUM DISTRIBUTION AND
CLASS DISTRIBUTION FEE MAXIMUM SERVICE FEE SERVICE FEE
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Class A 0.10% 0.25% 0.35%
Class B 0.75% 0.25% 1.00%
Class C 0.75% 0.25% 1.00%
Class 529A 0.25% 0.25% 0.50%
Class 529B 0.75% 0.25% 1.00%
Class 529C 0.75% 0.25% 1.00%
Class R 0.25% 0.25% 0.50%
Class R1 0.50% 0.25% 0.75%
Class R2 0.25% 0.25% 0.50%
Class R3 0.25% 0.25% 0.50%
Class R4 N/A 0.25% 0.25%
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These fees are paid out of fund assets of the applicable class of shares. Because these fees are an ongoing expense of the fund, they increase the cost of your investment over time and may cost you more than other types of sales charges.
A portion of the Class 529A distribution fee equal to 0.10% is currently in effect; the remaining portion is not in effect but may be implemented on such date as the Board of Trustees may determine.
FINANCIAL INTERMEDIARY COMPENSATION
The term "financial intermediary" includes any broker/dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administrator, insurance company, and any other institutions having a selling, administration, or any similar agreement with MFD, MFS, or one of its affiliates.
Financial intermediaries receive various forms of compensation in connection with the sale of shares of a fund and/or the servicing of shareholder accounts. Financial intermediaries may receive such compensation (i) in the form of up front commissions and ongoing asset-based compensation paid by MFD based on sales charges received and expected to be received by MFD from shareholders and Distribution Plan distribution and service payments received by MFD from each fund, (ii) in the form of 529 administrative services payments, retirement plan administrative and service payments, and shareholder servicing payments paid by MFD and/or one or more of its affiliates (for purposes of this section only, collectively, "MFD") based on the receipt of such payments by MFD from each fund, and (iii) in the form of payments paid by MFD from MFD's own additional resources.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-
referenced categories and such payments can be significant to the financial intermediary. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular fund or share class.
Financial intermediaries may receive up front commissions of up to the following percentage amounts for sales of the following share classes:
UP FRONT COMMISSION AS A
SHARE CLASS PERCENTAGE OF OFFERING PRICE
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Class A or Class 529A 5.75%
Class B or Class 529B 3.75%
Class C or Class 529C 1.00%
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Financial intermediaries may also receive all or a portion of the following payments: Distribution Plan distribution and service fees as described in "Description of Share Classes - Distribution and Service Fees"; 529 administrative services fees as described in "Management of the Fund - Program Manager(s)"; retirement plan administration and service fees as described in "Management of the Fund - Administrator"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
In addition, financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS funds, to cooperate with MFD's promotional efforts and/or in recognition of their marketing, administrative services, and/or processing support. This compensation from MFD is not reflected in the fees and expenses listed in the fee table section of the fund's prospectus. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary and the quality of the overall relationship with the financial intermediary.
These additional payments by MFD may take the form of payments to financial intermediaries that provide marketing support and administrative services to MFD with respect to fund shares sold or held through the financial intermediary's retail distribution network and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. MFD may also make payments to financial intermediaries to help offset the cost associated with client account maintenance support, statement preparation, and transaction processing. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, MFD may make other payments or allow other promotional incentives or payments to financial intermediaries.
You can find further details in the SAI about the payments made by MFD and the services provided by financial intermediaries. Financial intermediaries may charge you additional fees and/or commissions other than those disclosed in this prospectus. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries that sell fund shares may also act as a broker/dealer in connection with a MFS fund's purchase or sale of portfolio securities. However, the fund and MFS do not consider financial intermediaries' sales of shares of a MFS fund as a factor when choosing broker/dealers to effect portfolio transactions for the MFS funds.
HOW TO PURCHASE, REDEEM, AND EXCHANGE SHARES
You may purchase, redeem, and exchange shares of each fund in the manner described below. If you buy or sell shares of a fund through a retirement account, 529 plan, or financial intermediary, the procedures for buying, selling, and exchanging shares of the fund and the features, policies and fees may differ from those discussed in this prospectus.
HOW TO PURCHASE SHARES
Your shares will be bought at the offering price (the net asset value per share plus any applicable initial sales charge) next calculated after your purchase order is received in proper form. MFSC reserves the right to reject any purchase order that is not in proper form. The specific requirements for proper form vary among account types and transactions. Certain restrictions apply to the use of a transfer on death registration. You or your financial intermediary should contact MFSC to obtain a Transfer on Death registration form and for information regarding MFSC's other requirements for transfer on death registrations.
Each fund may reject for any reason, or cancel as permitted or required by law, any purchase orders, including exchanges. Each fund may stop offering shares completely, or may offer shares only on a limited basis, for a period of time or permanently.
Each fund is required by law to obtain from you certain personal information that will be used to verify your identify. If you do not provide the information, the fund may not be able to open your account. Each fund must also take certain steps to verify that the account information you provide is correct.
CLASS A, CLASS B, AND CLASS C SHARES. With respect to Class A, Class B, and Class C shares, you can establish an account by having your financial intermediary process your purchase. The minimum initial investment is generally $1,000, except for: fee-based and wrap accounts offered through certain financial intermediaries, for which there is no minimum initial investment; and IRAs, for which the minimum initial investment is generally $250 ($200 for rollovers from certain Serviced Plans). In addition, the minimum initial investment is $50 for automatic investment or exchange plans. MFSC waives or lowers the initial investment minimum for certain types of investors and investments.
Purchases of Class B shares are subject to a total account value limitation at the time of purchase of $99,999, and purchases of Class C shares are subject to a total account value limitation at the time of purchase of $999,999. If your existing accounts for all share classes held with the MFS funds have a total value equal to $99,999 for Class B share purchases or $999,999 for Class C share purchases, you will not be able to purchase Class B or Class C shares, as applicable. For the purpose of determining your total account value, existing accounts for all share classes held with the MFS funds that are linked under a LOI or ROA will be included.
The fund or its agents may at their discretion accept a purchase request for Class B shares or Class C shares that would otherwise exceed the total account value limitation of $99,999 and $999,999, respectively, under certain circumstances, including, but not limited to, purchases by certain types of group retirement plans sponsored or serviced by MFS or an affiliate.
You may have your financial intermediary process your subsequent purchases or you may contact MFS directly. Generally, there is no minimum for subsequent investments except there is generally a $50 minimum for subsequent investments by check and through automatic exchange plans.
- ADDITIONAL PURCHASES DIRECTLY THROUGH MFSC.
- BY MAIL. You may purchase additional shares by mailing a check with the returnable portion of your statement to MFSC.
- BY TELEPHONE. You may purchase additional shares by transferring money by phone from your pre-designated bank account. You must elect this privilege on your account application or service application.
- ELECTRONICALLY. You may purchase additional shares from a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- BY WIRE. To purchase additional shares by wire, call MFSC for instructions.
- AUTOMATIC INVESTMENT PLAN. You may purchase additional shares by automatically investing a designated amount from your checking or savings account on any day of the month. You must elect this privilege on your account application or service application.
- ADDITIONAL PURCHASES THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary purchase shares on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
CLASS I SHARES. With respect to Class I shares, you can establish an account through your MFD representative, by contacting MFSC directly, or by having your financial intermediary process your purchase. Generally, there are no initial or subsequent investment minimums except as may be required to be an eligible purchaser of Class I shares.
R SHARE CLASSES. With respect to the R share classes, you can establish an account through your financial intermediary or by contacting MFSC directly. Generally, there are no initial or subsequent investment minimums except as may be required to be an eligible purchaser of such class of shares.
Class R shares are available for purchase only by retirement plans that held Class R shares of a fund on March 31, 2005, and by retirement plans (other than plans for which MFS or an affiliate provides participant recordkeeping, and plans for which MFS Heritage Trust Company serves as a trustee) that are held by MFSC at the plan or omnibus level.
529 SHARE CLASSES. With respect to the 529 share classes, you can establish an account by having your financial intermediary process your purchase. Generally, the minimum initial investment is $250. MFSC waives or lowers the initial investment minimums for certain types of investors and investments.
You may have your financial intermediary process your subsequent purchases or you may contact MFSC directly. Generally, there is no minimum for subsequent investments except there is generally a $50 minimum for subsequent investments by check and through automatic exchange plans.
Purchases of Class 529B shares are subject to a total account value limitation at the time of purchase of $99,999, and purchases of Class 529C shares are subject to a total account value limitation at the time of purchase of $999,999. If your existing accounts for all share classes held with the MFS funds have a total value equal to $99,999 for Class 529B share purchases or $999,999 for Class 529C share purchases, you will not be able to purchase Class 529B or Class 529C shares, as applicable. For the purpose of determining your total account value, existing accounts for all share classes held with the MFS funds that are linked under a LOI or ROA will be included.
In addition, the Code and tuition programs impose a maximum total contribution limitation for designated beneficiaries on behalf of whom assets under tuition programs are held, which may result in a limitation on your ability to purchase the fund's 529 share classes. Please see the program description for details concerning the maximum contribution limitation and its application. An account owner of a newly-established account under a tuition program in which the designated beneficiary is age 12 or older will not be permitted to purchase Class 529B shares, unless the newly established account results from a transfer of registration from another MFS fund account. Please see the program description for details and additional restrictions.
- ADDITIONAL PURCHASES DIRECTLY THROUGH MFSC.
- BY MAIL. You may purchase additional shares by mailing a check with the returnable portion of your statement to MFSC.
- BY TELEPHONE. You may purchase additional shares by transferring money by phone from your pre-designated bank account. You must elect this privilege on your account application or service application.
- ELECTRONICALLY. You may purchase additional shares from a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or
service application and establish a personal identification number (PIN) on MFS Access to use this service.
- BY WIRE. To purchase additional shares by wire, call MFSC for instructions.
- AUTOMATIC PURCHASE PLAN. You may purchase additional shares by automatically investing a designated amount from your checking or savings account on any day of the month. You must elect this privilege on your account application or service application.
- ADDITIONAL PURCHASES THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary purchase shares on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
HOW TO REDEEM SHARES
Your shares will be sold at the net asset value per share next calculated after your redemption order is received in proper form, minus any applicable CDSC. MFSC reserves the right to reject any redemption request that is not in proper form. The specific requirements for proper form vary among types of accounts and transactions. In certain circumstances, you may need to have your signature guaranteed and/or submit additional documentation to redeem your shares. In general, no signature guarantee is required for a redemption order for up to $100,000 that is signed by all owners or fiduciaries identified in the account registration, paid as registered, and mailed to the address of record.
The fund normally sends out your redemption proceeds within seven days after your request is received in proper form. Under unusual circumstances, such as when the New York Stock Exchange is closed, trading on the Exchange is restricted, or as permitted by the SEC, the fund may suspend redemptions or postpone payment for more than seven days. Redemption proceeds (other than exchanges) may be delayed until money from prior purchases sufficient to cover your redemption has been received and collected. This can take up to seven days after a purchase.
You may redeem your shares either by having your financial intermediary process your redemption or by contacting MFSC directly.
REDEEMING DIRECTLY THROUGH MFSC.
- BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the name of the fund, your account number, and the number of shares or dollar amount to be redeemed.
- BY TELEPHONE. If a signature guarantee is not required, you can call MFSC to have shares redeemed from your account and proceeds mailed to the address of record on the account. You can also call MFSC
to have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account. You must elect this privilege on your account application or service application if you wish to have proceeds wired to your bank account.
- ELECTRONICALLY. You can have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- SYSTEMATIC WITHDRAWAL PLAN. For Class A, Class B, Class C, Class I, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, or Class R5 shares, you may elect to automatically receive (or designate someone else to receive) regular periodic payments through an automatic redemption of such classes. Please contact MFSC for details.
REDEEMING THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary process a redemption on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. If a signature guarantee is required, your signature may be guaranteed by an eligible bank, broker/dealer, credit union, national securities exchange, registered securities association, clearing agency, or savings association. MFSC may require additional documentation for certain types of registrations and under certain circumstances. Signature guarantees and this additional documentation shall be accepted in accordance with policies established by MFSC, and MFSC may, at its discretion, make certain exceptions to these requirements. Please contact MFSC with any questions and for the requirements for your particular situation.
SHARE CERTIFICATES. If certificates are outstanding for your shares, you may only redeem such shares by mailing the certificates to MFSC. Telephone, electronic, and systematic withdrawal plan redemptions and checkwriting are not available if certificates are outstanding for your shares.
REDEMPTIONS IN KIND. If, during any 90-day period, you redeem shares in an amount greater than the lesser of $250,000 or 1% of fund net assets, the fund has the right to pay the redemption amount above such threshold by a distribution in-kind of portfolio securities (redemption in kind). In the event that the fund makes a redemption in kind, you should expect to incur brokerage and other transaction charges when converting the securities to cash, and the securities may increase or decrease in value before you sell them.
INVOLUNTARY REDEMPTIONS. Because it is costly to maintain small accounts, the MFS funds have reserved the right to redeem your shares without your permission when your account contains less than $500 due to your redemptions
or exchanges. Before the fund makes such a redemption, you will be notified and given 60 days to increase your investment to at least $500.
In addition, the MFS funds have reserved the right to redeem your shares without your permission in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Any applicable CDSC will be assessed upon redemption of your shares.
HOW TO EXCHANGE SHARES
An exchange involves the redemption of shares of one fund and the purchase of shares of another fund.
EXCHANGE PRIVILEGE. You can exchange your shares for shares of the same class of most other MFS funds by having your financial intermediary process your exchange request or by contacting MFSC directly. Your shares will be bought at the net asset value next calculated after your exchange order is received in proper form.
You can exchange your Class A shares and your Class I shares for shares of the MFS Money Market Fund or the MFS Government Money Market Fund.
Eligible qualified retirement plans other than Serviced Plans can exchange their Class R, Class R1, Class R2, Class R3, Class R4 and Class R5 shares for shares of the MFS Money Market Fund. In addition, Serviced Plans holding Class R or Class R3 shares on March 31, 2005, can exchange their Class R or Class R3 shares for shares of the MFS Money Market Fund.
Certain qualified retirement plans may make certain exchanges between the MFS funds and the MFS Fixed Fund. With respect to Class C shares subject to a CDSC, you will only be eligible to make the exchange to the MFS Fixed Fund if the CDSC would have been waived had the Class C shares been redeemed. Contact MFSC for information concerning transactions involving the MFS Fixed Fund.
Your ability to exchange your Class 529A, Class 529B, or Class 529C shares of the fund for corresponding Class 529A, Class 529B, and Class 529C shares of other MFS funds may be limited under Section 529 of the Code and the tuition program through which your investment in the MFS funds is made. Please see the program description for details.
The MFS funds allow certain financial intermediaries to place exchange orders on behalf of a group of their discretionary investment advisory clients ("group exchange orders"). As with any exchange request, the funds and their agents reserve the right to reject any group exchange order, and the funds' agents will generally reject any group exchange order received by the funds or their agents after 1 p.m., Eastern time. In addition, MFD has agreements with certain financial intermediaries which set forth the terms and conditions under which group exchange orders may be placed by these financial intermediaries. These conditions may be more restrictive than those applicable to individual exchange
orders, and may include the requirement to provide the funds or their agents with advance notice of group exchange orders.
Except with respect to the R share classes, the minimum exchange amount is generally $1,000 (generally $50 for exchanges made under the automatic exchange plan) or all the shares in an account. MFSC waives or lowers the minimum exchange amount for certain types of investors and investments. There is no minimum exchange amount for the R share classes.
Shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged fund and the original purchase date of the shares subject to the CDSC.
Other funds may have different exchange restrictions. You should read the prospectus of the MFS fund into which you are exchanging and consider the differences in objectives, policies, and risks before making any exchange. The exchange privilege may be changed or discontinued at any time, and all exchanges are subject to certain limitations and MFS funds' policies concerning excessive trading practices, which are designed to protect the funds and their shareholders from the harmful effects of frequent trading.
OTHER CONSIDERATIONS
FREQUENT TRADING
- RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. The Board of Trustees of the MFS funds has adopted the purchase and exchange limitation policies described below, which it believes are reasonably designed to discourage frequent fund share transactions. MFSC seeks to monitor and enforce these policies, subject to oversight by the Board of Trustees, pursuant to procedures approved by the Board of Trustees. The MFS funds may alter their policies at any time without notice to shareholders.
- GENERAL PURCHASE AND EXCHANGE LIMITATION POLICIES. The MFS funds reserve the right to restrict, reject, or cancel (with respect to cancellations, within one business day of the order), without any prior notice, any purchase or exchange order, including transactions believed to represent frequent trading activity. For example, MFSC may in its discretion restrict, reject, or cancel a purchase or exchange order even if the transaction is not subject to specific exchange or other limitations described in this prospectus if MFSC determines that accepting the order could interfere with the efficient management of a fund's portfolio, increase costs to the fund, dilute the value of an investment in the fund to long-term shareholders, or otherwise not be in the fund's best interests. In the event that MFSC rejects or cancels an exchange request, neither the redemption nor the purchase side of the exchange will be processed. Each MFS fund reserves the right to delay for one
business day the processing of exchange requests in the event that, in MFSC's judgment, such delay would be in the fund's best interest, in which case both the redemption and purchase side of the exchange will receive the fund's net asset values at the conclusion of the delay period.
- SPECIFIC EXCHANGE AND PURCHASE LIMITATION POLICIES. Under the MFS Funds' purchase and exchange limitation policy, MFSC will generally restrict, reject or cancel purchase and exchange orders if MFSC determines that an accountholder has made two exchanges, each in an amount of $5,000 or more, out of an account in an MFS fund during a calendar quarter ("two exchange limit"). This policy does not apply to exchanges:
- out of the MFS money market funds; or
- initiated by a retirement plan trustee or sponsor rather than by a plan participant, and other similar non-discretionary exchanges (e.g., in connection with fund mergers/acquisitions/liquidations).
In circumstances where shareholders hold shares through financial intermediaries, the MFS funds may rely upon the financial intermediary's policy to restrict frequent trading and its monitoring of such policy in lieu of the MFS funds' two-exchange limit if MFSC believes that the financial intermediary's policy is reasonably designed to identify and curtail trading activity that is not in the best interest of the fund.
In addition, MFSC may make exceptions to this policy if, in its judgment, the transaction does not represent frequent trading activity, such as purchases made through systematic purchase plans or payroll contributions. In applying this policy, MFSC considers the information available to it at the time and reserves the right to consider trading multiple accounts under common ownership, control, or influence to be trading out of a single account.
Exchanges made on the same day in the same account are aggregated for purposes of counting the number and dollar amount of exchanges made by the accountholder (e.g., a shareholder who on the same day exchanges $6,000 from one MFS fund into two other MFS funds, by exchanging $3,000 into each of the two MFS funds, will be viewed as having made one exchange transaction exceeding $5,000 in value).
- LIMITATIONS ON THE ABILITY TO DETECT AND CURTAIL FREQUENT TRADING PRACTICES. Shareholders seeking to engage in frequent trading practices may deploy a variety of strategies to avoid detection, and, despite the efforts of MFSC to prevent frequent trading, there is no assurance that MFSC will be able to identify such shareholders or curtail their trading practices. The ability of MFSC to detect and curtail frequent trading practices may also be limited by operational systems and technological limitations.
MFSC receives purchase, exchange, and redemption orders through certain financial intermediaries that hold omnibus accounts with an MFS fund. Omnibus account arrangements are common forms of holding shares of MFS funds, particularly among certain financial intermediaries such as brokers, retirement and 529 plans, investment advisors, and variable insurance products. A financial intermediary's policy restricting frequent trading may be more or less restrictive than the MFS funds' policies, may permit certain transactions not permitted by the MFS funds' policies, or prohibit transactions not subject to the MFS funds' policies.
MFSC is generally not able to identify trading by a particular underlying shareholder within an omnibus account, which makes it difficult or impossible to determine if a particular underlying shareholder has violated the two exchange limit or is otherwise engaged in frequent trading. However, MFSC reviews trading activity at the omnibus level to detect suspicious trading activity. If MFSC detects suspicious trading activity at the omnibus level it will contact the financial intermediary to request underlying shareholder level activity to determine whether there is underlying shareholder level frequent trading. In certain instances, a financial intermediary may be unwilling or unable to provide MFSC with information about underlying shareholder level activity.
If frequent trading is identified, MFSC will take appropriate action. MFSC's ability to monitor and deter frequent trading in omnibus accounts at the underlying shareholder level is dependent upon the capability and cooperation of the financial intermediary. Accordingly, depending upon the composition of a fund's shareholder accounts, the level of cooperation provided by the financial intermediary and in light of efforts made by certain shareholders to evade these limitations, MFSC may not be in a position to monitor and deter frequent trading with respect to a significant percentage of a fund's shareholders. You should consult your financial intermediary regarding the application of these limitations and whether your financial intermediary imposes any additional or different limitations.
- FREQUENT TRADING RISKS. To the extent that the MFS funds or their agents are unable to curtail excessive trading practices in a fund, these practices may interfere with the efficient management of the fund's portfolio, may result in increased transaction and administrative costs, and may adversely impact the fund's performance.
In addition, to the extent that an underlying fund invests in foreign securities, the interests of long-term shareholders may be diluted as a result of time-zone arbitrage, a short-term trading practice that seeks to exploit changes in the value of the fund's investments that result from events occurring after the close of the foreign markets on which the investments trade, but prior to the time the fund determines its net
asset value. The fund's use of fair valuation can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that the fund's fair valuation policies and procedures will prevent dilution of the fund's net asset value by short-term traders.
To the extent that an underlying fund invests in securities that trade infrequently or are difficult to value, such as the securities of smaller companies, high yield debt instruments, and floating rate loans, the interests of long-term shareholders may be diluted as a result of price arbitrage, a short-term trading strategy that seeks to exploit perceived pricing inefficiencies in the fund's investments. Such short-term trading strategies may interfere with efficient management of the fund's portfolio to a greater degree than funds that invest in more frequently traded or liquid securities, in part because the fund may have difficulty selling these portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage may also cause dilution in the value of fund shares held by other shareholders.
UNAUTHORIZED TRANSACTIONS. MFS will not be responsible for losses that result from unauthorized transactions unless MFSC does not follow procedures reasonably designed to verify your identity. If an account has more than one owner or authorized person, MFSC will accept telephone and online instructions from any one owner or authorized person. It is important that you contact MFSC immediately about any transactions you believe to be unauthorized.
ABILITY TO CONTACT MFSC. Certain methods of contacting MFSC, such as by mail, telephone, or electronically, may be unavailable or delayed (for example, after natural disasters or during periods of significant/major political, social, or economic instability).
RESERVATION OF OTHER RIGHTS. In addition to the rights expressly stated elsewhere in this prospectus, MFSC reserves the right to: 1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; and 2) freeze any account or suspend account services when MFSC has received reasonable notice (written or otherwise) of a dispute between registered or beneficial account owners or when MFSC believes a fraudulent transaction may occur or has occurred.
ANTI-MONEY LAUNDERING RESTRICTIONS. Federal law requires each fund to implement policies and procedures reasonably designed to prevent, detect and report money laundering and other illegal activity. Each fund, consistent with applicable federal law, may redeem your shares and close your account; suspend, restrict or cancel purchase and redemption orders; process redemption requests and withhold your proceeds; and take other action if it is unable to verify your identity within a reasonable time or conduct required due diligence on your account or as otherwise permitted by its anti-money laundering policies and
procedures. Any applicable CDSC will be assessed upon redemption of your shares.
CONFIRMATIONS IN QUARTERLY STATEMENTS. Transactions made under certain periodic investment and withdrawal programs (including reinvestment plans) will be confirmed on quarterly account statements.
OTHER INFORMATION
VALUATION
The price of each class of each fund's shares is based on its net asset value. The net asset value of each class of shares is determined each day the New York Stock Exchange (the Exchange) is open for trading as of the close of regular trading on the Exchange (generally 4:00 p.m. Eastern time). However, net asset value may be calculated earlier as permitted by the SEC. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. On days when the Exchange is closed (such as week-ends and holidays), net asset value is not calculated, and each fund does not transact purchase and redemption orders. To the extent an underlying fund's assets are traded in other markets on days when each fund does not price its shares, the value of the underlying funds' assets may change when you will not be able to purchase or redeem shares.
To determine net asset value, underlying funds are generally valued at their net asset value per share. Underlying funds' investments for which reliable market quotations are readily available are valued at market value, except that underlying funds' investments in certain short term debt instruments and a money market fund's investments are valued at amortized cost.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of each underlying funds' investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees.
Under each underlying funds' valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. These valuations can be based on both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as a foreign exchange or market) and prior to the determination of an underlying fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a
frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of an underlying fund's net asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, an underlying fund's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating an underlying fund's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund's net asset value may differ from quoted or published prices for the same investments.
DISTRIBUTIONS
Each fund intends to declare and pay a dividend to shareholders at least annually.
Any capital gains are distributed at least annually.
DISTRIBUTION OPTIONS
The following distribution options are generally available:
- Dividend and capital gain distributions reinvested in additional shares (THIS OPTION WILL BE ASSIGNED IF NO OTHER OPTION IS SPECIFIED);
- Dividend distributions in cash; capital gain distributions reinvested in additional shares;
- Dividend and capital gain distributions in cash; or
- Dividend and capital gain distributions reinvested into the same class of shares of another MFS Fund.
Dividends and capital gain distributions for Class R, Class R1, Class R2, Class R3, Class R4, Class R5, Class 529A, Class 529B, and Class 529C will automatically be reinvested in additional shares of the fund.
The distribution option for accounts with dividend distributions of less than $10 will generally be changed to reinvestment in additional shares of the fund. If you have elected to receive distributions in cash, and the postal service is unable to deliver checks to your address of record, or you do not respond to mailings from MFSC with regard to uncashed distribution checks, your distribution option may be converted to having all distributions reinvested in additional shares. You should contact MFSC to change your distribution option, and your request to do so must be received by MFSC before the record date for a distribution in order to
be effective for that distribution. No interest will accrue on amounts represented by uncashed distribution checks.
TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in a fund may have on your particular tax situation, including possible foreign, state, and local taxes. Also, this discussion does not apply to shares of a fund held through tax-exempt retirement plans.
Each fund expects to distribute substantially all of its income and gains annually. Distributions from the fund are taxable whether you receive them in cash or reinvest them in additional shares. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Any gain resulting from the sale or exchange of your shares will generally also be subject to tax.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the fund owned the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains from the sale of investments that the fund owned for more than one year and that are properly designated by the fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the fund owned for one year or less will be taxable as ordinary income. For taxable years beginning before January 1, 2011, if some or all of the fund's income derives from "qualified dividend income" and if you are an individual who meets holding period and other requirements with respect to the fund's shares, those distributions that are properly designated by the fund as derived from "qualified dividend income" are taxed at the rates applicable to long-term capital gains. The portion of a fund's distributions that will be derived from qualified dividend income will increase with increased allocations to stock fund classes.
Long-term capital gain rates applicable to most individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
Under current law, a fund of funds cannot pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying fund. A fund is permitted to elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and securities at the close of its taxable year. Foreign securities held indirectly through an underlying fund do not contribute to this 50% threshold.
Investing in underlying funds could affect the amount, timing, and character of distributions from the fund, and, therefore, may increase the amount of taxes payable by shareholders.
The Form 1099 that is mailed to you every January details your distributions and how they are treated for federal tax purposes.
SPECIAL CONSIDERATIONS FOR 529 SHARE CLASSES. In addition to the tax considerations discussed above, please note the following tax considerations that apply specifically to the ownership of each fund's 529 share classes through a tuition program that qualifies under Section 529 of the Code.
Each fund is an investment option under one or more tuition programs designed to qualify under Section 529 so that earnings on investments are not subject to federal income tax (to either a contributor to the tuition program or a designated beneficiary) until the earnings are withdrawn. Withdrawals of earnings that are used to pay "qualified higher education expenses" are tax-free for federal income tax purposes. State and local income taxes may still apply. These tax benefits are not available to 529 shares that are not owned through a qualifying Section 529 tuition program.
Withdrawals of earnings that are not used for the designated beneficiary's qualified higher education expenses generally are subject not only to federal income tax but also to a 10% penalty tax (unless such amounts are transferred within sixty (60) days to another tuition program for the same designated beneficiary or another designated beneficiary who is a member of the family of the designated beneficiary with respect to which the distribution was made and certain other conditions are satisfied). The 10% penalty tax will not apply to distributions made under certain circumstances, including certain distributions made after the designated beneficiary dies, becomes disabled, or receives a scholarship or other tax-free payment for educational expenses that does not exceed the amount of the distribution. Distributions attributable to contributions to the tuition program (including the portion of any rollover from another tuition program that is attributable to contributions to that program) are not subject to tax.
You are urged to consult your own tax adviser for information about the federal, state, and local tax consequences of your investment in each fund's 529 share classes.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS AND PROSPECTUSES
Each fund produces financial reports every six months and updates its prospectus annually. To avoid sending duplicate copies of materials to households, only one copy of the fund's annual and semiannual report and prospectus will be mailed to shareholders having the same residential address on the fund's records. However, any shareholder may contact MFSC (please see back cover for address and telephone number) to request that copies of these reports and prospectuses be sent personally to that shareholder.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a fund's financial performance for the past five years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all distributions) held for the entire period. This information has been audited by each fund's independent registered public accounting firm, whose report, together with each fund's financial statements, are included in the fund's Annual Report to shareholders. The fund's Annual Report is available upon request by contacting MFS Service Center, Inc. (please see back cover for address and telephone number). The financial statements contained in the Annual Report are incorporated by reference into the SAI. Each fund's independent registered public accounting firm is Ernst & Young LLP.
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
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2007 2006 2005 2004 2003(c)
CLASS A
Net asset value, beginning of period $ 11.68 $ 11.41 $ 10.88 $ 10.35 $ 10.00
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INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.36 $ 0.30 $ 0.25 $ 0.24 $ 0.20
Net realized and unrealized gain (loss) on investments 1.05 0.29 0.49 0.47 0.15
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Total from investment operations $ 1.41 $ 0.59 $ 0.74 $ 0.71 $ 0.35
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LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.36) $ (0.29) $ (0.21) $ (0.18) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
-------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.51) $ (0.32) $ (0.21) $ (0.18) $ --
-------- -------- -------- -------- -------
Net asset value, end of period $ 12.58 $ 11.68 $ 11.41 $ 10.88 $ 10.35
======== ======== ======== ======== =======
Total return (%) (r)(t) 12.25 5.20 6.83 6.85 3.50(n)
-------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.49 0.52 0.51 0.53 0.91(a)
Expenses after expense reductions (f)(h) 0.45 0.45 0.45 0.45 0.45(a)
Net investment income 2.96 2.55 2.28 2.24 2.33(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $298,190 $251,699 $226,530 $155,476 $59,469
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS B
Net asset value, beginning of period $ 11.57 $ 11.31 $ 10.80 $ 10.29 $ 10.00
-------- -------- -------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.28 $ 0.22 $ 0.18 $ 0.17 $ 0.14
Net realized and unrealized gain (loss) on investments 1.04 0.29 0.48 0.47 0.15
-------- -------- -------- -------- -------
Total from investment operations $ 1.32 $ 0.51 $ 0.66 $ 0.64 $ 0.29
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.28) $ (0.22) $ (0.15) $ (0.13) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
-------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.43) $ (0.25) $ (0.15) $ (0.13) $ --
-------- -------- -------- -------- -------
Net asset value, end of period $ 12.46 $ 11.57 $ 11.31 $ 10.80 $ 10.29
======== ======== ======== ======== =======
Total return (%) (r)(t) 11.52 4.49 6.08 6.23 2.90(n)
-------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.14 1.17 1.16 1.18 1.56(a)
Expenses after expense reductions (f)(h) 1.10 1.10 1.10 1.10 1.10(a)
Net investment income 2.32 1.90 1.63 1.61 1.66(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $162,210 $162,941 $163,735 $134,200 $63,256
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS C
Net asset value, beginning of period $ 11.56 $ 11.30 $ 10.79 $ 10.30 $ 10.00
-------- -------- -------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.28 $ 0.22 $ 0.18 $ 0.17 $ 0.14
Net realized and unrealized gain (loss) on
investments 1.03 0.29 0.48 0.46 0.16
-------- -------- -------- ------- -------
Total from investment operations $ 1.31 $ 0.51 $ 0.66 $ 0.63 $ 0.30
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.28) $ (0.22) $ (0.15) $ (0.14) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
-------- -------- -------- ------- -------
Total distributions declared to shareholders $ (0.43) $ (0.25) $ (0.15) $ (0.14) $ --
-------- -------- -------- ------- -------
Net asset value, end of period $ 12.44 $ 11.56 $ 11.30 $ 10.79 $ 10.30
======== ======== ======== ======= =======
Total return (%) (r)(t) 11.47 4.54 6.12 6.13 3.00(n)
-------- -------- -------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.14 1.17 1.16 1.18 1.56(a)
Expenses after expense reductions (f)(h) 1.10 1.10 1.10 1.10 1.10(a)
Net investment income 2.32 1.90 1.63 1.60 1.66(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $139,457 $130,916 $118,003 $87,876 $31,002
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
----------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS I
Net asset value, beginning of period $ 11.75 $ 11.48 $ 10.94 $10.39 $10.00
------- ------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.41 $ 0.34 $ 0.30 $ 0.28 $ 0.22
Net realized and unrealized gain (loss) on investments 1.06 0.29 0.49 0.47 0.17
------- ------- ------- ------ ------
Total from investment operations $ 1.47 $ 0.63 $ 0.79 $ 0.75 $ 0.39
------- ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.40) $ (0.33) $ (0.25) $(0.20) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
------- ------- ------- ------ ------
Total distributions declared to shareholders $(0.55) $ (0.36) $(0.25) $(0.20) $ --
------- ------- ------- ------ ------
Net asset value, end of period $ 12.67 $ 11.75 $ 11.48 $10.94 $10.39
======= ======= ======= ====== ======
Total return (%) (r) 12.72 5.51 7.18 7.26 3.90(n)
------- ------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.14 0.17 0.16 0.18 0.56(a)
Expenses after expense reductions (f)(h) 0.10 0.10 0.10 0.10 0.10(a)
Net investment income 3.30 2.91 2.63 2.61 2.65(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $24,782 $18,158 $14,175 $9,214 $7,003
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
----------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529A
Net asset value, beginning of period $ 11.63 $ 11.37 $ 10.86 $ 10.34 $ 9.70
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.33 $ 0.27 $ 0.23 $ 0.21 $ 0.16
Net realized and unrealized gain (loss) on investments 1.05 0.29 0.47 0.47 0.48
------- ------- ------- ------- ------
Total from investment operations $ 1.38 $ 0.56 $ 0.70 $ 0.68 $ 0.64
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.34) $ (0.27) $ (0.19) $ (0.16) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.49) $ (0.30) $ (0.19) $ (0.16) $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 12.52 $ 11.63 $ 11.37 $ 10.86 $10.34
======= ======= ======= ======= ======
Total return (%) (r)(t) 12.00 4.95 6.49 6.59 6.60(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.74 0.77 0.76 0.78 1.16(a)
Expenses after expense reductions (f)(h) 0.70 0.70 0.70 0.70 0.70(a)
Net investment income 2.71 2.31 2.02 1.99 2.07(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $26,359 $17,978 $12,840 $ 6,339 $2,975
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529B
Net asset value, beginning of period $ 11.54 $11.28 $10.77 $10.27 $ 9.69
------- ------ ------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.24 $ 0.19 $ 0.15 $ 0.15 $ 0.11
Net realized and unrealized gain (loss) on investments 1.04 0.29 0.48 0.46 0.47
------- ------ ------ ------ ------
Total from investment operations $ 1.28 $ 0.48 $ 0.63 $ 0.61 $ 0.58
------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.27) $(0.19) $(0.12) $(0.11) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
------- ------ ------ ------ ------
Total distributions declared to shareholders $ (0.42) $(0.22) $(0.12) $(0.11) $ --
------- ------ ------ ------ ------
Net asset value, end of period $ 12.40 $11.54 $11.28 $10.77 $10.27
======= ====== ====== ====== ======
Total return (%) (r)(t) 11.24 4.25 5.84 5.90 5.99(n)
------- ------ ------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.39 1.42 1.41 1.43 1.81(a)
Expenses after expense reductions (f)(h) 1.35 1.35 1.35 1.35 1.35(a)
Net investment income 2.04 1.65 1.38 1.36 1.42(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $ 3,779 $2,008 $1,611 $1,320 $ 854
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
-----------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529C
Net asset value, beginning of period $ 11.49 $ 11.25 $10.76 $10.28 $ 9.69
------- ------- ------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.24 $ 0.19 $ 0.15 $ 0.14 $ 0.11
Net realized and unrealized gain (loss) on investments 1.04 0.29 0.47 0.47 0.48
------- ------- ------ ------ ------
Total from investment operations $ 1.28 $ 0.48 $ 0.62 $ 0.61 $ 0.59
------- ------- ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.27) $ (0.21) $(0.13) $(0.13) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
------- ------- ------ ------ ------
Total distributions declared to shareholders $ (0.42) $ (0.24) $(0.13) $(0.13) $ --
------- ------- ------ ------ ------
Net asset value, end of period $ 12.35 $ 11.49 $11.25 $10.76 $10.28
======= ======= ====== ====== ======
Total return (%) (r)(t) 11.22 4.29 5.79 5.91 6.09(n)
------- ------- ------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.39 1.42 1.41 1.43 1.81(a)
Expenses after expense reductions (f)(h) 1.35 1.35 1.35 1.35 1.35(a)
Net investment income 2.06 1.66 1.37 1.32 1.38(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $14,845 $11,031 $7,522 $4,798 $1,555
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS R
Net asset value, beginning of period $ 11.62 $ 11.36 $ 10.85 $10.33 $ 9.85
------- ------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.34 $ 0.28 $ 0.24 $ 0.23 $ 0.08
Net realized and unrealized gain (loss) on investments 1.05 0.29 0.47 0.47 0.40
------- ------- ------- ------ ------
Total from investment operations $ 1.39 $ 0.57 $ 0.71 $ 0.70 $ 0.48
------- ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.34) $ (0.28) $ (0.20) $(0.18) $ --
From net realized gain on investments (0.15) (0.03) (0.00)(w) -- --
------- ------- ------- ------ ------
Total distributions declared to shareholders $ (0.49) $ (0.31) $ (0.20) $(0.18) $ --
--------------------------- ----------------
Net asset value, end of period $ 12.52 $ 11.62 $ 11.36 $10.85 $10.33
======= ======= ======= ====== ======
Total return (%) (r) 12.13 5.04 6.57 6.79 4.87(n)
------- ------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.64 0.67 0.66 0.68 1.06(a)
Expenses after expense reductions (f)(h) 0.60 0.60 0.60 0.60 0.60(a)
Net investment income 2.83 2.41 2.12 2.10 2.15(a)
Portfolio turnover 8 4 1 1 1
Net assets at end of period (000 omitted) $14,628 $16,679 $13,661 $6,658 $ 863
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
--------------------------
2007 2006 2005(i)
CLASS R1
Net asset value, beginning of period $11.48 $11.30 $11.23
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.26 $ 0.22 $ 0.02
Net realized and unrealized gain (loss) on investments 1.04 0.29 0.05
------ ------ ------
Total from investment operations $ 1.30 $ 0.51 $ 0.07
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.32) $(0.30) $ --
From net realized gain on investments (0.15) (0.03) --
------ ------ ------
Total distributions declared to shareholders $(0.47) (0.33) $ --
------ ------ ------
Net asset value, end of period $12.31 $11.48 $11.30
====== ====== ======
Total return (%) (r) 11.44 4.49 0.62(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.30 1.37 1.36(a)
Expenses after expense reductions (f)(h) 1.19 1.21 1.30(a)
Net investment income 2.18 1.88 1.08(a)
Portfolio turnover 8 4 1
Net assets at end of period (000 omitted) $4,739 $1,145 $ 50
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
--------------------------
2007 2006 2005(i)
------ ------ --------
CLASS R2
Net asset value, beginning of period $11.53 $11.31 $11.23
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.30 $ 0.24 $ 0.03
Net realized and unrealized gain (loss) on investments 1.05 0.30 0.05
------ ------ ------
Total from investment operations $ 1.35 $ 0.54 $ 0.08
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.35) $(0.29) $ --
From net realized gain on investments (0.15) (0.03) --
------ ------ ------
Total distributions declared to shareholders $(0.50) $(0.32) $ --
------ ------ ------
Net asset value, end of period $12.38 $11.53 $11.31
====== ====== ======
Total return (%) (r) 11.83 4.77 0.71(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.99 1.07 1.06(a)
Expenses after expense reductions (f)(h) 0.84 0.86 1.00(a)
Net investment income 2.52 2.16 1.38(a)
Portfolio turnover 8 4 1
Net assets at end of period (000 omitted) $2,992 $ 464 $ 50
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
---------------------------------------
2007 2006 2005 2004(i)
CLASS R3
Net asset value, beginning of period $ 11.51 $11.29 $10.82 $10.63
------- ------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.32 $ 0.26 $ 0.20 $ 0.11
Net realized and unrealized gain (loss) on investments 1.04 0.28 0.48 0.27
------- ------ ------ ------
Total from investment operations $ 1.36 $ 0.54 $ 0.68 $ 0.38
------- ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.36) $(0.29) $(0.21) $(0.19)
From net realized gain on investments (0.15) (0.03) (0.00)(w) --
------- ------ ------ ------
Total distributions declared to shareholders $ (0.51) $(0.32) $(0.21) $(0.19)
------- ------ ------ ------
Net asset value, end of period $ 12.36 $11.51 $11.29 $10.82
======= ====== ====== ======
Total return (%) (r) 12.00 4.82 6.31 3.58(n)
------- ------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.85 0.92 0.91 0.91(a)
Expenses after expense reductions (f)(h) 0.74 0.76 0.85 0.83(a)
Net investment income 2.61 2.29 1.85 1.84(a)
Portfolio turnover 8 4 1 1
Net assets at end of period (000 omitted) $21,885 $3,004 $ 330 $ 13
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
----------------------------
2007 2006 2005(i)
CLASS R4
Net asset value, beginning of period $ 11.65 $11.41 $11.32
------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.34 $ 0.23 $ 0.04
Net realized and unrealized gain (loss) on investments 1.06 0.36(g) 0.05
------- ------ ------
Total from investment operations $ 1.40 $ 0.59 $ 0.09
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.38) $(0.32) $ --
From net realized gain on investments (0.15) (0.03) --
------- ------ ------
Total distributions declared to shareholders $ (0.53) $(0.35) $ --
------- ------ ------
Net asset value, end of period $ 12.52 $11.65 $11.41
======= ====== ======
Total return (%) (r) 12.18 5.18 0.80(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.53 0.57 0.57(a)
Expenses after expense reductions (f)(h) 0.49 0.50 0.51(a)
Net investment income 2.88 2.54 1.88(a)
Portfolio turnover 8 4 1
Net assets at end of period (000 omitted) $13,701 $2,518 $ 50
|
MFS CONSERVATIVE ALLOCATION FUND
YEARS ENDED 5/31
----------------------------
2007 2006 2005(i)
CLASS R5
Net asset value, beginning of period $ 11.68 $ 11.41 $11.32
------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.39 $ 0.29 $ 0.04
Net realized and unrealized gain (loss) on investments 1.05 0.34(g) 0.05
------- ------- ------
Total from investment operations $ 1.44 $ 0.63 $ 0.09
------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.39) $ (0.33) $ --
From net realized gain on investments (0.15) (0.03) --
------- ------- ------
Total distributions declared to shareholders $ (0.54) $ (0.36) $ --
------- ------- ------
Net asset value, end of period $ 12.58 $ 11.68 $11.41
======= ======= ======
Total return (%) (r) 12.53 5.55 0.80(n)
------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.24 0.27 0.27(a)
Expenses after expense reductions (f)(h) 0.20 0.20 0.21(a)
Net investment income 3.22 2.76 2.18(a)
Portfolio turnover 8 4 1
Net assets at end of period (000 omitted) $15,512 $10,630 $ 50
|
Any redemption fees charged by the fund during 2005 fiscal year resulted in a per share impact of less than $0.01.
(a) Annualized.
(c) For the period from the commencement of the fund's investment operations, June 28, 2002, through the stated period end.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(g) The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because of the timing of sales of fund shares and the per share amount of realized and unrealized gains and losses at such time.
(h) In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the fund invests. Because the underlying funds have varied expense and fee levels and the fund may own different proportions of the underlying funds at different times, the amount of fees and expenses incurred directly by the fund will vary.
(i) For the period from the class' inception, July 31, 2002 (Classes 529A, 529B, and 529C), December 31, 2002 (Class R), October 31, 2003 (Class R3), and April 1, 2005 (Classes R1, R2, R4, and R5) through the stated period end.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(t) Total returns do not include any applicable sales charges.
(w) Per share amount was less than $0.01.
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS A
Net asset value, beginning of period $ 12.76 $ 12.21 $ 11.44 $ 10.34 $ 10.00
-------- -------- -------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.30 $ 0.25 $ 0.25 $ 0.20 $ 0.15
Net realized and unrealized gain (loss) on investments 1.71 0.66 0.73 1.03 0.19
-------- -------- -------- -------- --------
Total from investment operations $ 2.01 $ 0.91 $ 0.98 $ 1.23 $ 0.34
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.34) $ (0.31) $ (0.21) $ (0.13) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.50) $ (0.36) $ (0.21) $ (0.13) $ --
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.27 $ 12.76 $ 12.21 $ 11.44 $ 10.34
======== ======== ======== ======== ========
Total return (%) (r)(t) 16.02 7.50 8.53 11.94 3.40(n)
-------- -------- -------- -------- --------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.46 0.47 0.48 0.51 0.78(a)
Expenses after expense reductions (f)(h) 0.45 0.45 0.45 0.45 0.45(a)
Net investment income 2.22 1.97 2.09 1.79 1.79(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $905,702 $773,647 $643,285 $416,219 $126,033
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS B
Net asset value, beginning of period $ 12.64 $ 12.10 $ 11.36 $ 10.30 $ 10.00
-------- -------- -------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.21 $ 0.17 $ 0.17 $ 0.13 $ 0.09
Net realized and unrealized gain (loss) on investments 1.69 0.66 0.71 1.02 0.21
-------- -------- -------- -------- --------
Total from investment operations $ 1.90 $ 0.83 $ 0.88 $ 1.15 $ 0.30
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.25) $ (0.24) $ (0.14) $ (0.09) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.41) $ (0.29) $ (0.14) $ (0.09) $ --
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.13 $ 12.64 $ 12.10 $ 11.36 $ 10.30
======== ======== ======== ======== ========
Total return (%) (r)(t) 15.26 6.85 7.75 11.20 3.00(n)
-------- -------- -------- -------- --------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.11 1.12 1.13 1.17 1.43(a)
Expenses after expense reductions (f)(h) 1.10 1.10 1.10 1.11 1.10(a)
Net investment income 1.58 1.32 1.44 1.15 1.11(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $559,478 $525,991 $471,665 $343,299 $111,637
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS C
Net asset value, beginning of period $ 12.63 $ 12.09 $ 11.36 $ 10.30 $ 10.00
-------- -------- -------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.21 $ 0.17 $ 0.17 $ 0.13 $ 0.09
Net realized and unrealized gain (loss) on investments 1.68 0.66 0.70 1.03 0.21
-------- -------- -------- -------- -------
Total from investment operations $ 1.89 $ 0.83 $ 0.87 $ 1.16 $ 0.30
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.25) $ (0.24) $ (0.14) $ (0.10) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
-------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.41) $ (0.29) $ (0.14) $ (0.10) $ --
-------- -------- -------- -------- -------
Net asset value, end of period $ 14.11 $ 12.63 $ 12.09 $ 11.36 $ 10.30
======== ======== ======== ======== =======
Total return (%) (r)(t) 15.22 6.90 7.67 11.28 3.00(n)
-------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.11 1.12 1.13 1.17 1.43(a)
Expenses after expense reductions (f)(h) 1.10 1.10 1.10 1.11 1.10(a)
Net investment income 1.58 1.32 1.44 1.14 1.10(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $455,611 $408,740 $335,759 $228,905 $59,054
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
--------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS I
Net asset value, beginning of period $ 12.87 $ 12.30 $ 11.53 $ 10.40 $ 10.00
------- ------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.35 $ 0.30 $ 0.30 $ 0.24 $ 0.17
Net realized and unrealized gain (loss) on investments 1.72 0.67 0.71 1.04 0.23
------- ------- ------- ------- -------
Total from investment operations $ 2.07 $ 0.97 $ 1.01 $ 1.28 $ 0.40
------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.38) $ (0.35) $ (0.24) $ (0.15) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.54) $ (0.40) $ (0.24) $ (0.15) $ --
------- ------- ------- ------- -------
Net asset value, end of period $ 14.40 $ 12.87 $ 12.30 $ 11.53 $ 10.40
======= ======= ======= ======= =======
Total return (%) (r) 16.41 7.95 8.75 12.38 4.00(n)
------- ------- ------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.11 0.12 0.13 0.16 0.43(a)
Expenses after expense reductions (f)(h) 0.10 0.10 0.10 0.10 0.10(a)
Net investment income 2.57 2.32 2.46 2.17 2.10(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $44,957 $40,643 $32,927 $23,094 $12,252
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
--------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529A
Net asset value, beginning of period $ 12.71 $ 12.16 $ 11.42 $ 10.33 $ 9.54
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.26 $ 0.22 $ 0.22 $ 0.17 $ 0.12
Net realized and unrealized gain (loss) on investments 1.70 0.66 0.71 1.04 0.67
------- ------- ------- ------- ------
Total from investment operations $ 1.96 $ 0.88 $ 0.93 $ 1.21 $ 0.79
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.31) $ (0.28) $ (0.19) $ (0.12) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.47) $ (0.33) $ (0.19) $ (0.12) $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 14.20 $ 12.71 $ 12.16 $ 11.42 $10.33
======= ======= ======= ======= ======
Total return (%) (r)(t) 15.67 7.32 8.08 11.71 8.28(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.71 0.72 0.73 0.76 1.03(a)
Expenses after expense reductions (f)(h) 0.70 0.70 0.70 0.70 0.70(a)
Net investment income 1.97 1.72 1.82 1.53 1.52(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $37,441 $29,414 $23,623 $13,766 $4,416
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529B
Net asset value, beginning of period $ 12.56 $ 12.04 $ 11.33 $10.28 $ 9.54
------- ------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.17 $ 0.13 $ 0.14 $ 0.10 $ 0.07
Net realized and unrealized gain (loss) on investments 1.68 0.66 0.70 1.03 0.67
------- ------- ------- ------ ------
Total from investment operations $ 1.85 $ 0.79 $ 0.84 $ 1.13 $ 0.74
------- ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.24) $ (0.22) $ (0.13) $(0.08) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
------- ------- ------- ------ ------
Total distributions declared to shareholders $ (0.40) $ (0.27) $ (0.13) $(0.08) $ --
------- ------- ------- ------ ------
Net asset value, end of period $ 14.01 $ 12.56 $ 12.04 $11.33 $10.28
======= ======= ======= ====== ======
Total return (%) (r)(t) 14.93 6.63 7.42 10.99 7.76(n)
------- ------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.36 1.37 1.38 1.42 1.68(a)
Expenses after expense reductions (f)(h) 1.35 1.35 1.35 1.36 1.35(a)
Net investment income 1.32 1.07 1.18 0.86 0.86(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $22,586 $16,274 $10,673 $5,481 $1,427
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529C
Net asset value, beginning of period $ 12.58 $ 12.05 $ 11.33 $10.29 $ 9.54
------- ------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.17 $ 0.13 $ 0.14 $ 0.10 $ 0.06
Net realized and unrealized gain (loss) on investments 1.68 0.67 0.70 1.03 0.69
------- ------- ------- ------ ------
Total from investment operations $ 1.85 $ 0.80 $ 0.84 $ 1.13 $ 0.75
------- ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.23) $ (0.22) $ (0.12) $(0.09) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
------- ------- ------- ------ ------
Total distributions declared to shareholders $ (0.39) $ (0.27) $ (0.12) $(0.09) $ --
------- ------- ------- ------ ------
Net asset value, end of period $ 14.04 $ 12.58 $ 12.05 $11.33 $10.29
======= ======= ======= ====== ======
Total return (%) (r)(t) 14.94 6.63 7.42 10.94 7.86(n)
------- ------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.36 1.37 1.38 1.42 1.68(a)
Expenses after expense reductions (f)(h) 1.35 1.35 1.35 1.36 1.35(a)
Net investment income 1.32 1.07 1.19 0.87 0.84(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $17,364 $13,978 $10,547 $6,922 $2,057
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS R
Net asset value, beginning of period $ 12.70 $ 12.16 $ 11.41 $ 10.33 $ 9.62
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.28 $ 0.23 $ 0.23 $ 0.17 $ 0.06
Net realized and unrealized gain (loss) on investments 1.70 0.66 0.72 1.04 0.65
------- ------- ------- ------- ------
Total from investment operations $ 1.98 $ 0.89 $ 0.95 $ 1.21 $ 0.71
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.32) $ (0.30) $ (0.20) $ (0.13) $ --
From net realized gain on investments (0.16) (0.05) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $(0.48) $ (0.35) $ (0.20) $ (0.13) $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 14.20 $ 12.70 $ 12.16 $ 11.41 $10.33
======= ======= ======= ======= ======
Total return (%) (r) 15.83 7.33 8.30 11.78 7.38(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.61 0.62 0.63 0.66 0.93(a)
Expenses after expense reductions (f)(h) 0.60 0.60 0.60 0.60 0.60(a)
Net investment income 2.12 1.82 1.94 1.53 1.57(a)
Portfolio turnover 6 2 0(u) 1 2
Net assets at end of period (000 omitted) $40,503 $57,067 $47,477 $26,172 $1,338
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
--------------------------
2007 2006 2005(i)
CLASS R1
Net asset value, beginning of period $ 12.54 $12.09 $12.03
------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.19 $ 0.14 $ 0.01
Net realized and unrealized gain (loss) on investments 1.67 0.68 0.05
------- ------ ------
Total from investment operations $ 1.86 $ 0.82 $ 0.06
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.30) $(0.32) $ --
From net realized gain on investments (0.16) (0.05) --
------- ------ ------
Total distributions declared to shareholders $ (0.46) $(0.37) $ --
------- ------ ------
Net asset value, end of period $ 13.94 $12.54 $12.09
======= ====== ======
Total return (%) (r) 15.06 6.84 0.50(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.28 1.32 1.33(a)
Expenses after expense reductions (f)(h) 1.19 1.20 1.30(a)
Net investment income 1.46 1.18 0.57(a)
Portfolio turnover 6 2 0(u)
Net assets at end of period (000 omitted) $14,507 $4,640 $ 52
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
--------------------------
2007 2006 2005(i)
CLASS R2
Net asset value, beginning of period $ 12.73 $12.10 $12.03
------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.24 $ 0.16 $ 0.02
Net realized and unrealized gain (loss) on investments 1.70 0.70 0.05
------- ------ ------
Total from investment operations $ 1.94 $ 0.86 $ 0.07
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.33) $(0.18) $ --
From net realized gain on investments (0.16) (0.05) --
------- ------ ------
Total distributions declared to shareholders $ (0.49) $(0.23) $ --
------- ------ ------
Net asset value, end of period $ 14.18 $12.73 $12.10
======= ====== ======
Total return (%) (r) 15.51 7.15 0.58(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.96 1.02 1.03(a)
Expenses after expense reductions (f)(h) 0.84 0.88 1.00(a)
Net investment income 1.79 1.34 0.88(a)
Portfolio turnover 6 2 0(u)
Net assets at end of period (000 omitted) $11,023 $1,999 $ 50
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
---------------------------------------
2007 2006 2005 2004(i)
CLASS R3
Net asset value, beginning of period $ 12.64 $ 12.11 $11.39 $10.93
------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.25 $ 0.19 $ 0.20 $ 0.04
Net realized and unrealized gain (loss) on investments 1.68 0.69 0.72 0.56
------- ------- ------ ------
Total from investment operations $ 1.93 $ 0.88 $ 0.92 $ 0.60
------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.33) $ (0.30) $(0.20) $(0.14)
From net realized gain on investments (0.16) (0.05) (0.00)(w) --
------- ------- ------ ------
Total distributions declared to shareholders $ (0.49) $ (0.35) $(0.20) $(0.14)
------- ------- ------ ------
Net asset value, end of period $ 14.08 $ 12.64 $12.11 $11.39
======= ======= ====== ======
Total return (%) (r) 15.56 7.28 8.03 5.52(n)
------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.82 0.87 0.88 0.92(a)
Expenses after expense reductions (f)(h) 0.74 0.77 0.85 0.86(a)
Net investment income 1.86 1.59 1.68 0.94(a)
Portfolio turnover 6 2 0(u) 1
Net assets at end of period (000 omitted) $68,519 $18,161 $2,763 $1,082
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
---------------------------
2007 2006 2005(i)
CLASS R4
Net asset value, beginning of period $ 12.73 $ 12.20 $12.12
------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.29 $ 0.22 $ 0.03
Net realized and unrealized gain (loss) on investments 1.69 0.70 0.05
------- ------- ------
Total from investment operations $ 1.98 $ 0.92 $ 0.08
------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.35) $ (0.34) $ --
From net realized gain on investments (0.16) (0.05) --
------- ------- ------
Total distributions declared to shareholders $ (0.51) $ (0.39) $ --
------- ------- ------
Net asset value, end of period $ 14.20 $ 12.73 $12.20
======= ======= ======
Total return (%) (r) 15.85 7.59 0.66(n)
------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.51 0.52 0.53(a)
Expenses after expense reductions (f)(h) 0.49 0.50 0.50(a)
Net investment income 2.15 1.78 1.37(a)
Portfolio turnover 6 2 0(u)
Net assets at end of period (000 omitted) $87,814 $27,954 $ 50
|
MFS MODERATE ALLOCATION FUND
YEARS ENDED 5/31
---------------------------
2007 2006 2005(i)
CLASS R5
Net asset value, beginning of period $ 12.75 $ 12.21 $12.12
------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.33 $ 0.23 $ 0.03
Net realized and unrealized gain (loss) on investments 1.70 0.71 0.06
------- ------- ------
Total from investment operations $ 2.03 $ 0.94 $ 0.09
------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.37) $ (0.35) $ --
From net realized gain on investments (0.16) (0.05) --
------- ------- ------
Total distributions declared to shareholders $ (0.53) $ (0.40) $ --
------- ------- ------
Net asset value, end of period $ 14.25 $ 12.75 $12.21
======= ======= ======
Total return (%) (r) 16.24 7.76 0.74(n)
------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.21 0.22 0.23(a)
Expenses after expense reductions (f)(h) 0.20 0.20 0.20(a)
Net investment income 2.47 1.99 1.67(a)
Portfolio turnover 6 2 0(u)
Net assets at end of period (000 omitted) $42,690 $28,253 $ 50
|
Any redemption fees charged by the fund during the 2005 fiscal year resulted in a per share impact of less than $0.01.
(a) Annualized.
(c) For the period from the commencement of the fund's investment operations, June 28, 2002, through the stated period end.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(h) In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the fund invests. Because the underlying funds have varied expense and fee levels and the fund may own different proportions of the underlying funds at different times, the amount of fees and expenses incurred directly by the fund will vary.
(i) For the period from the class' inception, July 31, 2002 (Classes 529A, 529B, and 529C), December 31, 2002 (Class R), October 31, 2003 (Class R3), and April 1, 2005 (Classes R1, R2, R4, and R5) through the stated period end.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(t) Total returns do not include any applicable sales charges.
(u) Portfolio turnover is less than 1%.
(w) Per share amount was less than $0.01.
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
------------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS A
Net asset value, beginning of period $ 13.88 $ 12.87 $ 11.94 $ 10.17 $ 10.00
---------- -------- -------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.20 $ 0.16 $ 0.22 $ 0.12 $ 0.08
Net realized and unrealized gain (loss) on investments 2.48 1.27 0.91 1.73 0.09
---------- -------- -------- -------- -------
Total from investment operations $ 2.68 $ 1.43 $ 1.13 $ 1.85 $ 0.17
---------- -------- -------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.29) $ (0.32) $ (0.20) $ (0.08) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
---------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.51) $ (0.42) $ (0.20) $ (0.08) $ --
---------- -------- -------- -------- -------
Net asset value, end of period $ 16.05 $ 13.88 $ 12.87 $ 11.94 $ 10.17
========== ======== ======== ======== =======
Total return (%) (r)(t) 19.63 11.13 9.41 18.21 1.70(n)
---------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.46 0.49 0.49 0.53 0.86(a)
Expenses after expense reductions (f)(h) 0.44 0.45 0.45 0.45 0.45(a)
Net investment income 1.36 1.17 1.79 1.07 1.00(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $1,129,667 $880,411 $645,029 $379,702 $85,484
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
----------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS B
Net asset value, beginning of period $ 13.70 $ 12.72 $ 11.82 $ 10.11 $ 10.00
-------- -------- -------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.10 $ 0.07 $ 0.14 $ 0.05 $ 0.03
Net realized and unrealized gain (loss) on investments 2.45 1.25 0.89 1.70 0.08
-------- -------- -------- -------- -------
Total from investment operations $ 2.55 $ 1.32 $ 1.03 $ 1.75 $ 0.11
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.20) $ (0.24) $ (0.13) $ (0.04) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
-------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.42) $ (0.34) $ (0.13) $ (0.04) $ --
-------- -------- -------- -------- -------
Net asset value, end of period $ 15.83 $ 13.70 $ 12.72 $ 11.82 $ 10.11
======== ======== ======== ======== =======
Total return (%) (r)(t) 18.85 10.40 8.73 17.35 1.10(n)
-------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.11 1.14 1.14 1.18 1.51(a)
Expenses after expense reductions (f)(h) 1.09 1.10 1.10 1.10 1.10(a)
Net investment income 0.71 0.51 1.15 0.43 0.34(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $690,098 $594,867 $461,019 $291,778 $71,154
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
----------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS C
Net asset value, beginning of period $ 13.69 $ 12.71 $ 11.81 $ 10.11 $ 10.00
-------- -------- -------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.10 $ 0.07 $ 0.14 $ 0.05 $ 0.03
Net realized and unrealized gain (loss) on investments 2.44 1.25 0.89 1.70 0.08
-------- -------- -------- -------- -------
Total from investment operations $ 2.54 $ 1.32 $ 1.03 $ 1.75 $ 0.11
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.20) $ (0.24) $ (0.13) $ (0.05) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
-------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.42) $ (0.34) $ (0.13) $ (0.05) $ --
-------- -------- -------- -------- -------
Net asset value, end of period $ 15.81 $ 13.69 $ 12.71 $ 11.81 $ 10.11
======== ======== ======== ======== =======
Total return (%) (r)(t) 18.82 10.44 8.72 17.32 1.10(n)
-------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.11 1.14 1.14 1.18 1.51(a)
Expenses after expense reductions (f)(h) 1.09 1.10 1.10 1.10 1.10(a)
Net investment income 0.71 0.51 1.13 0.43 0.33(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $542,939 $448,003 $331,896 $209,448 $40,583
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
--------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS I
Net asset value, beginning of period $ 13.97 $ 12.94 $ 11.99 $ 10.20 $ 10.00
------- ------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.26 $ 0.21 $ 0.28 $ 0.17 $ 0.11
Net realized and unrealized gain (loss) on investments 2.49 1.28 0.90 1.72 0.09
------- ------- ------- ------- -------
Total from investment operations $ 2.75 $ 1.49 $ 1.18 $ 1.89 $ 0.20
------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.34) $ (0.36) $ (0.23) $ (0.10) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.56) $ (0.46) $ (0.23) $ (0.10) $ --
------- ------- ------- ------- -------
Net asset value, end of period $ 16.16 $ 13.97 $ 12.94 $ 11.99 $ 10.20
======= ======= ======= ======= =======
Total return (%) (r) 20.02 11.56 9.81 18.56 2.00(n)
------- ------- ------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.11 0.14 0.14 0.18 0.51(a)
Expenses after expense reductions (f)(h) 0.09 0.10 0.10 0.10 0.10(a)
Net investment income 1.71 1.52 2.22 1.46 1.34(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $61,883 $53,465 $40,853 $24,930 $11,078
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
--------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529A
Net asset value, beginning of period $ 13.81 $ 12.82 $ 11.90 $ 10.16 $ 9.33
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.16 $ 0.13 $ 0.18 $ 0.09 $ 0.06
Net realized and unrealized gain (loss) on investments 2.47 1.25 0.91 1.72 0.77
------- ------- ------- ------- ------
Total from investment operations $ 2.63 $ 1.38 $ 1.09 $ 1.81 $ 0.83
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.26) $ (0.29) $ (0.17) $ (0.07) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.48) $ (0.39) $ (0.17) $ (0.07) $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 15.96 $ 13.81 $ 12.82 $ 11.90 $10.16
======= ======= ======= ======= ======
Total return (%) (r)(t) 19.32 10.80 9.17 17.79 8.90(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.71 0.74 0.74 0.78 1.11(a)
Expenses after expense reductions (f)(h) 0.69 0.70 0.70 0.70 0.70(a)
Net investment income 1.10 0.91 1.48 0.81 0.74(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $49,948 $36,241 $26,537 $13,802 $3,510
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
----------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529B
Net asset value, beginning of period $ 13.62 $ 12.65 $11.77 $ 10.07 $ 9.31
------- ------- ------ ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.07 $ 0.04 $ 0.11 $ 0.02 $ 0.01
Net realized and unrealized gain (loss) on investments 2.42 1.24 0.88 1.70 0.75
------- ------- ------ ------- ------
Total from investment operations $ 2.49 $ 1.28 $ 0.99 $ 1.72 $ 0.76
------- ------- ------ ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.17) $ (0.21) $(0.11) $ (0.02) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.39) $ (0.31) $(0.11) $ (0.02) $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 15.72 $ 13.62 $12.65 $ 11.77 $10.07
======= ======= ======= ======= ======
Total return (%) (r)(t) 18.52 10.15 8.39 17.12 8.16(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.36 1.39 1.39 1.43 1.76(a)
Expenses after expense reductions (f)(h) 1.34 1.35 1.35 1.35 1.35(a)
Net investment income 0.46 0.26 0.90 0.18 0.09(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $34,319 $25,755 $19,855 $12,858 $3,623
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-----------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529C
Net asset value, beginning of period $ 13.62 $ 12.65 $ 11.76 $10.08 $ 9.31
------- ------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.07 $ 0.04 $ 0.11 $ 0.02 $ 0.00(w)
Net realized and unrealized gain (loss) on investments 2.42 1.25 0.89 1.70 0.77
------- ------- ------- ------ ------
Total from investment operations $ 2.49 $ 1.29 $ 1.00 $ 1.72 $ 0.77
------- ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.18) $ (0.22) $ (0.11) $(0.04) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
------- ------- ------- ------ ------
Total distributions declared to shareholders $ (0.40) $ (0.32) $ (0.11) $(0.04) $ --
------- ------- ------- ------ ------
Net asset value, end of period $ 15.71 $ 13.62 $ 12.65 $11.76 $10.08
======= ======= ======= ====== ======
Total return (%) (r)(t) 18.50 10.20 8.48 17.05 8.27(n)
------- ------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.36 1.39 1.39 1.43 1.76(a)
Expenses after expense reductions (f)(h) 1.34 1.35 1.35 1.35 1.35(a)
Net investment income 0.45 0.26 0.91 0.14 0.06(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $20,282 $14,713 $10,688 $7,318 $1,760
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
------------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS R
Net asset value, beginning of period $ 13.85 $ 12.85 $ 11.93 $ 10.18 $ 9.32
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.18 $ 0.14 $ 0.20 $ 0.10 $ 0.02
Net realized and unrealized gain (loss) on investments 2.47 1.26 0.91 1.73 0.84
------- ------- ------- ------- ------
Total from investment operations $ 2.65 $ 1.40 $ 1.11 $ 1.83 $ 0.86
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.27) $ (0.30) $ (0.19) $ (0.08) $ --
From net realized gain on investments (0.22) (0.10) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.49) $ (0.40) $ (0.19) $ (0.08) $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 16.01 $ 13.85 $ 12.85 $ 11.93 $10.18
======= ======= ======= ======= ======
Total return (%) (r) 19.39 10.94 9.28 18.01 9.23(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.61 0.64 0.64 0.68 1.01(a)
Expenses after expense reductions (f)(h) 0.60 0.60 0.60 0.60 0.60(a)
Net investment income 1.22 1.01 1.62 0.88 0.72(a)
Portfolio turnover 3 0(u) 0(u) 0(u) 1
Net assets at end of period (000 omitted) $52,013 $59,768 $48,045 $19,172 $1,193
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
----------------------------
2007 2006 2005(i)
CLASS R1
Net asset value, beginning of period $ 13.59 $12.71 $12.70
------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.08 $ 0.06 $(0.00)(w)
Net realized and unrealized gain (loss) on investments 2.43 1.25 0.01
------- ------ ------
Total from investment operations $ 2.51 $ 1.31 $ 0.01
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.24) $(0.33) $ --
From net realized gain on investments (0.22) (0.10) --
------- ------ ------
Total distributions declared to shareholders $ (0.46) $(0.43) $ --
------- ------ ------
Net asset value, end of period $ 15.64 $13.59 $12.71
======= ====== ======
Total return (%) (r) 18.72 10.37 0.08(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.28 1.34 1.34(a)
Expenses after expense reductions (f)(h) 1.19 1.20 1.30(a)
Net investment income (loss) 0.58 0.47 (0.18)(a)
Portfolio turnover 3 0(u) 0(u)
Net assets at end of period (000 omitted) $17,596 $5,164 $ 50
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
----------------------------
2007 2006 2005(i)
CLASS R2
Net asset value, beginning of period $ 13.63 $12.72 $12.70
------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.14 $ 0.07 $ 0.00(w)
Net realized and unrealized gain (loss) on investments 2.43 1.28 0.02
------- ------ ------
Total from investment operations $ 2.57 $ 1.35 $ 0.02
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.27) $(0.34) $ --
From net realized gain on investments (0.22) (0.10) --
------- ------ ------
Total distributions declared to shareholders $ (0.49) $(0.44) $ --
------- ------ ------
Net asset value, end of period $ 15.71 $13.63 $12.72
======= ====== ======
Total return (%) (r) 19.17 10.65 0.16(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.98 1.04 1.05(a)
Expenses after expense reductions (f)(h) 0.83 0.85 1.01(a)
Net investment income 0.96 0.56 0.11(a)
Portfolio turnover 3 0(u) 0(u)
Net assets at end of period (000 omitted) $17,955 $6,650 $ 50
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-----------------------------------------
2007 2006 2005 2004(i)
CLASS R3
Net asset value, beginning of period $ 13.73 $ 12.76 $11.90 $11.15
------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.15 $ 0.10 $ 0.16 $ 0.05
Net realized and unrealized gain (loss) on investments 2.45 1.28 0.90 0.79
------- ------- ------ ------
Total from investment operations $ 2.60 $ 1.38 $ 1.06 $ 0.84
------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.29) $ (0.31) $(0.20) $(0.09)
From net realized gain on investments (0.22) (0.10) (0.00)(w) --
------- ------- ------ ------
Total distributions declared to shareholders $ (0.51) $ (0.41) $(0.20) $(0.09)
------- ------- ------ ------
Net asset value, end of period $ 15.82 $ 13.73 $12.76 $11.90
======= ======= ====== ======
Total return (%) (r) 19.19 10.81 8.91 7.52(n)
------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.83 0.89 0.89 0.91(a)
Expenses after expense reductions (f)(h) 0.74 0.77 0.85 0.83(a)
Net investment income 1.02 0.76 1.35 0.78(a)
Portfolio turnover 3 0(u) 0(u) 0(u)
Net assets at end of period (000 omitted) $71,128 $20,059 $2,963 $ 6
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-----------------------------
2007 2006 2005(i)
CLASS R4
Net asset value, beginning of period $ 13.84 $ 12.87 $12.84
------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.19 $ 0.12 $ 0.01
Net realized and unrealized gain (loss) on investments 2.47 1.30 0.02
------- ------- ------
Total from investment operations $ 2.66 $ 1.42 $ 0.03
------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.31) $ (0.35) $ --
From net realized gain on investments (0.22) (0.10) --
------- ------- ------
Total distributions declared to shareholders $ (0.53) $ (0.45) $ --
------- ------- ------
Net asset value, end of period $ 15.97 $ 13.84 $12.87
======= ======= ======
Total return (%) (r) 19.55 11.04 0.23(n)
------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.51 0.54 0.54(a)
Expenses after expense reductions (f)(h) 0.49 0.50 0.50(a)
Net investment income 1.28 0.94 0.60(a)
Portfolio turnover 3 0(u) 0(u)
Net assets at end of period (000 omitted) $80,683 $12,724 $ 50
|
MFS GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-----------------------------
2007 2006 2005(i)
CLASS R5
Net asset value, beginning of period $ 13.89 $ 12.88 $12.84
------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.24 $ 0.14 $ 0.02
Net realized and unrealized gain (loss) on investments 2.48 1.33 0.02
------- ------- ------
Total from investment operations $ 2.72 $ 1.47 $ 0.04
------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.33) $ (0.36) $ --
From net realized gain on investments (0.22) (0.10) --
------- ------- ------
Total distributions declared to shareholders $ (0.55) $ (0.46) $ --
------- ------- ------
Net asset value, end of period $ 16.06 $ 13.89 $12.88
======= ======= ======
Total return (%) (r) 19.88 11.45 0.31(n)
------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.21 0.24 0.25(a)
Expenses after expense reductions (f)(h) 0.20 0.20 0.21(a)
Net investment income 1.60 1.06 0.91(a)
Portfolio turnover 3 0(u) 0(u)
Net assets at end of period (000 omitted) $49,144 $32,963 $ 50
|
Any redemption fees charged by the fund during the 2005 fiscal year resulted in a per share impact of less than $0.01.
(a) Annualized.
(c) For the period from the commencement of the fund's investment operations, June 28, 2002, through the stated period end.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(h) In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the fund invests. Because the underlying funds have varied expense and fee levels and the fund may own different proportions of the underlying funds at different times, the amount of fees and expenses incurred directly by the fund will vary.
(i) For the period from the class' inception, July 31, 2002 (Classes 529A, 529B, and 529C), December 31, 2002 (Class R), October 31, 2003 (Class R3) and April 1, 2005 (Classes R1, R2, R4, and R5) through the stated period end.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(t) Total returns do not include any applicable sales charges.
(u) Portfolio turnover is less than 1%.
(w) Per share amount was less than $0.01.
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------------
2007 2006 2004 2005 2003(c)
CLASS A
Net asset value, beginning of period $ 14.44 $ 13.07 $ 12.12 $ 9.87 $ 10.00
-------- -------- -------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.04 $ 0.00(w) $ 0.13 $ (0.01) $ (0.02)
Net realized and unrealized gain (loss) on investments 3.16 1.69 0.96 2.26 (0.11)
-------- -------- -------- -------- -------
Total from investment operations $ 3.20 $ 1.69 $ 1.09 $ 2.25 $ (0.13)
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.12) $ (0.19) $ (0.14) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
-------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.36) $ (0.32) $ (0.14) $ -- $ --
-------- -------- -------- -------- -------
Net asset value, end of period $ 17.28 $ 14.44 $ 13.07 $ 12.12 $ 9.87
======== ======== ======== ======== =======
Total return (%) (r)(t) 22.45 12.94 8.98 22.80 (1.30)(n)
-------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.49 0.51 0.54 0.55 1.09(a)
Expenses after expense reductions (f)(h) 0.45 0.45 0.45 0.45 0.45(a)
Net investment income (loss) 0.23 0.02 1.06 (0.07) (0.24)(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $513,017 $396,481 $293,814 $172,787 $43,541
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
------------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS B
Net asset value, beginning of period $ 14.25 $ 12.92 $ 12.01 $ 9.84 $ 10.00
-------- -------- -------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ (0.06) $ (0.09) $ 0.05 $ (0.08) $ (0.07)
Net realized and unrealized gain (loss) on investments 3.11 1.67 0.94 2.25 (0.09)
-------- -------- -------- -------- -------
Total from investment operations $ 3.05 $ 1.58 $ 0.99 $ 2.17 $ (0.16)
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.03) $ (0.12) $ (0.08) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
-------- -------- -------- -------- -------
Total distributions declared to shareholders $ (0.27) $ (0.25) $ (0.08) $ -- $ --
-------- -------- -------- -------- -------
Net asset value, end of period $ 17.03 $ 14.25 $ 12.92 $ 12.01 $ 9.84
======== ======== ======== ======== =======
Total return (%) (r)(t) 21.60 12.21 8.20 22.05 (1.60)(n)
-------- -------- -------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.14 1.16 1.19 1.20 1.74(a)
Expenses after expense reductions (f)(h) 1.10 1.10 1.10 1.10 1.10(a)
Net investment income (loss) (0.41) (0.65) 0.42 (0.71) (0.90)(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $263,272 $220,003 $159,948 $103,720 $26,215
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-----------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS C
Net asset value, beginning of period $ 14.24 $ 12.91 $ 11.99 $ 9.83 $ 10.00
-------- -------- -------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ (0.06) $ (0.09) $ 0.05 $ (0.08) $ (0.07)
Net realized and unrealized gain (loss) on investments 3.11 1.67 0.94 2.24 (0.10)
-------- -------- -------- ------- -------
Total from investment operations $ 3.05 $ 1.58 $ 0.99 $ 2.16 $ (0.17)
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.03) $ (0.12) $ (0.07) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
-------- -------- -------- ------- -------
Total distributions declared to shareholders $ (0.27) $ (0.25) $ (0.07) $ -- $ --
-------- -------- -------- ------- -------
Net asset value, end of period $ 17.02 $ 14.24 $ 12.91 $ 11.99 $ 9.83
======== ======== ======== ======= =======
Total return (%) (r)(t) 21.65 12.20 8.25 21.97 (1.70)(n)
-------- -------- -------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.14 1.16 1.19 1.20 1.74(a)
Expenses after expense reductions (f)(h) 1.09 1.10 1.10 1.10 1.10(a)
Net investment income (loss) (0.42) (0.65) 0.42 (0.71) (0.91)(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $213,653 $162,999 $121,631 $87,253 $17,460
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
--------------------------------------------------
2007 2006 2005 2004 2003(c)
CLASS I
Net asset value, beginning of period $ 14.57 $ 13.19 $ 12.22 $ 9.91 $10.00
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.09 $ 0.05 $ 0.19 $ 0.03 $ 0.01
Net realized and unrealized gain (loss) on investments 3.20 1.70 0.95 2.28 (0.10)
------- ------- ------- ------- ------
Total from investment operations $ 3.29 $ 1.75 $ 1.14 $ 2.31 $(0.09)
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.17) $ (0.24) $(0.17) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.41) $ (0.37) $(0.17) $ -- $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 17.45 $ 14.57 $ 13.19 $ 12.22 $ 9.91
======= ======= ======= ======= ======
Total return (%) (r) 22.91 13.27 9.34 23.31 (0.90)(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.14 0.16 0.19 0.20 0.74(a)
Expenses after expense reductions (f)(h) 0.10 0.10 0.10 0.10 0.10(a)
Net investment income 0.58 0.34 1.48 0.28 0.12(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $60,173 $49,636 $37,069 $23,649 $6,058
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-----------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529A
Net asset value, beginning of period $ 14.38 $ 13.03 $ 12.10 $ 9.87 $ 9.13
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ (0.00)(w) $ (0.04) $ 0.09 $ (0.04) $(0.04)
Net realized and unrealized gain (loss) on investments 3.15 1.69 0.96 2.27 0.78
------- ------- ------- ------- ------
Total from investment operations $ 3.15 $ 1.65 $ 1.05 $ 2.23 $ 0.74
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.09) $ (0.17) $ (0.12) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $(0.33) $ (0.30) $ (0.12) $ -- $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 17.20 $ 14.38 $ 13.03 $ 12.10 $ 9.87
======= ======= ======= ======= ======
Total return (%) (r)(t) 22.16 12.66 8.66 22.59 8.11(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.74 0.76 0.79 0.80 1.34(a)
Expenses after expense reductions (f)(h) 0.70 0.70 0.70 0.70 0.70(a)
Net investment income (loss) (0.02) (0.25) 0.75 (0.33) (0.50)(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $44,563 $31,747 $22,247 $10,690 $2,552
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
--------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529B
Net asset value, beginning of period $ 14.12 $ 12.82 $ 11.92 $ 9.79 $ 9.13
------- ------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ (0.10) $ (0.12) $ 0.02 $ (0.11) $(0.08)
Net realized and unrealized gain (loss) on investments 3.09 1.64 0.93 2.24 0.74
------- ------- ------- ------- ------
Total from investment operations $ 2.99 $ 1.52 $ 0.95 $ 2.13 $ 0.66
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ -- $ (0.09) $ (0.05) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.24) $ (0.22) $ (0.05) $ -- $ --
------- ------- ------- ------- ------
Net asset value, end of period $ 16.87 $ 14.12 $ 12.82 $ 11.92 $ 9.79
======= ======= ======= ======= ======
Total return (%) (r)(t) 21.37 11.82 7.98 21.76 7.23(n)
------- ------- ------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.39 1.41 1.44 1.45 1.99(a)
Expenses after expense reductions (f)(h) 1.35 1.35 1.35 1.35 1.35(a)
Net investment income (loss) (0.66) (0.89) 0.18 (0.96) (1.16)(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $26,887 $22,559 $17,698 $12,133 $2,858
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS 529C
Net asset value, beginning of period 14.13 $12.83 $11.94 $ 9.81 $ 9.13
------- ------ ------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ (0.10) $(0.13) $ 0.02 $(0.11) $(0.08)
Net realized and unrealized gain (loss) on investments 3.09 1.66 0.93 2.24 0.76
------- ------ ------ ------ ------
Total from investment operations $ 2.99 $ 1.53 $ 0.95 $ 2.13 $ 0.68
------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.00)(w) $(0.10) $(0.06) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
------- ------ ------ ------ ------
Total distributions declared to shareholders $ (0.24) $(0.23) $(0.06) $ -- $ --
------- ------ ------ ------ ------
Net asset value, end of period $ 16.88 $14.13 $12.83 $11.94 $ 9.81
======= ====== ====== ====== ======
Total return (%) (r)(t) 21.39 11.94 7.95 21.71 7.45(n)
------- ------ ------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.39 1.41 1.44 1.45 1.99(a)
Expenses after expense reductions (f)(h) 1.34 1.35 1.35 1.35 1.35(a)
Net investment income (loss) (0.69) (0.90) 0.18 (0.97) (1.18)(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $12,982 $8,460 $5,221 $3,087 $ 807
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-------------------------------------------------
2007 2006 2005 2004 2003(i)
CLASS R
Net asset value, beginning of period $ 14.39 $ 13.04 $ 12.11 $ 9.86 $ 8.92
------- ------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.01 $ (0.02) $ 0.12 $(0.03) $(0.02)
Net realized and unrealized gain (loss) on investments 3.16 1.68 0.95 2.28 0.96
------- ------- ------- ------ ------
Total from investment operations $ 3.17 $ 1.66 $ 1.07 $ 2.25 $ 0.94
------- ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.09) $ (0.18) $ (0.14) $ -- $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) -- --
------- ------- ------- ------ ------
Total distributions declared to shareholders $ (0.33) $ (0.31) $ (0.14) $ -- $ --
------- ------- ------- ------ ------
Net asset value, end of period $ 17.23 $ 14.39 $ 13.04 $12.11 $ 9.86
======= ======= ======= ====== ======
Total return (%) (r) 22.31 12.71 8.82 22.82 10.54(n)
------- ------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.64 0.66 0.69 0.70 1.24(a)
Expenses after expense reductions (f)(h) 0.60 0.60 0.60 0.60 0.60(a)
Net investment income (loss) 0.09 (0.15) 0.96 (0.27) (0.55)(a)
Portfolio turnover 3 1 1 0(u) 9
Net assets at end of period (000 omitted) $28,325 $31,286 $23,713 $6,704 $ 741
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
---------------------------
2007 2006 2005(i)
CLASS R1
Net asset value, beginning of period $ 14.15 $12.92 $12.93
------- ------ ------
Income (loss) from investment operations
Net investment loss (d) $ (0.08) $(0.11) $(0.03)
Net realized and unrealized gain (loss) on investments 3.10 1.66 0.02
------- ------ ------
Total from investment operations $ 3.02 $ 1.55 $(0.01)
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.07) $(0.19) $ --
From net realized gain on investments (0.24) (0.13) --
------- ------ ------
Total distributions declared to shareholders $ (0.31) $(0.32) $ --
------- ------ ------
Net asset value, end of period $ 16.86 $14.15 $12.92
======= ====== ======
Total return (%) (r) 21.58 12.03 (0.08)(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.31 1.36 1.39(a)
Expenses after expense reductions (f)(h) 1.19 1.21 1.30(a)
Net investment loss (0.54) (0.79) (1.29)(a)
Portfolio turnover 3 1 1
Net assets at end of period (000 omitted) $12,146 $4,093 $ 50
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
-------------------------
2007 2006 2005(i)
CLASS R2
Net asset value, beginning of period $14.21 $12.93 $12.93
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment loss (d) $(0.03) $(0.08) $(0.02)
Net realized and unrealized gain (loss) on investments 3.11 1.68 0.02
------ ------ ------
Total from investment operations $ 3.08 $ 1.60 $ --
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.11) $(0.19) $ --
From net realized gain on investments (0.24) (0.13) --
------ ------ ------
Total distributions declared to shareholders $(0.35) $(0.32) $ --
------ ------ ------
Net asset value, end of period $16.94 $14.21 $12.93
====== ====== ======
Total return (%) (r) 21.95 12.42 0.00(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.99 1.06 1.09(a)
Expenses after expense reductions (f)(h) 0.84 0.86 1.00(a)
Net investment loss (0.18) (0.59) (1.00)(a)
Portfolio turnover 3 1 1
Net assets at end of period (000 omitted) $7,598 $1,579 $ 50
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
--------------------------------------
2007 2006 2005 2004(i)
CLASS R3
Net asset value, beginning of period $ 14.29 $ 12.98 $12.09 $11.13
------- ------- ------ ------
Income (loss) from investment operations
Net investment income (loss) (d) $ (0.02) $ (0.05) $ 0.03 $(0.02)
Net realized and unrealized gain (loss) on investments 3.14 1.67 1.00 0.98
------- ------- ------ ------
Total from investment operations $ 3.12 $ 1.62 $ 1.03 $ 0.96
------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.11) $ (0.18) $(0.14) $ --
From net realized gain on investments (0.24) (0.13) (0.00)(w) --
------- ------- ------ ------
Total distributions declared to shareholders $ (0.35) $ (0.31) $(0.14) $ --
------- ------- ------ ------
Net asset value, end of period $ 17.06 $ 14.29 $12.98 $12.09
======= ======= ====== ======
Total return (%) (r) 22.12 12.52 8.54 8.63(n)
------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.86 0.91 0.94 0.93(a)
Expenses after expense reductions (f)(h) 0.74 0.77 0.85 0.83(a)
Net investment income (loss) (0.13) (0.38) 0.31 (0.33)(a)
Portfolio turnover 3 1 1 0(u)
Net assets at end of period (000 omitted) $45,727 $11,483 $1,978 $ 5
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
--------------------------
2007 2006 2005(i)
CLASS R4
Net asset value, beginning of period $ 14.39 $13.07 $13.06
------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.02 $(0.02) $(0.01)
Net realized and unrealized gain (loss) on investments 3.16 1.69 0.02
------- ------ ------
Total from investment operations $ 3.18 $ 1.67 $ 0.01
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.14) $(0.22) $ --
From net realized gain on investments (0.24) (0.13) --
------- ------ ------
Total distributions declared to shareholders $ (0.38) $(0.35) $ --
------- ------ ------
Net asset value, end of period $ 17.19 $14.39 $13.07
======= ====== ======
Total return (%) (r) 22.41 12.82 0.08(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.54 0.56 0.59(a)
Expenses after expense reductions (f)(h) 0.49 0.50 0.50(a)
Net investment income (loss) 0.14 (0.15) (0.50)(a)
Portfolio turnover 3 1 1
Net assets at end of period (000 omitted) $45,124 $7,251 $ 50
|
MFS AGGRESSIVE GROWTH ALLOCATION FUND
YEARS ENDED 5/31
---------------------------
2007 2006 2005(i)
CLASS R5
Net asset value, beginning of period $ 14.43 $ 13.07 $13.06
------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.07 $ (0.01) $(0.00)(w)
Net realized and unrealized gain (loss) on investments 3.18 1.74 0.01
------- ------- ------
Total from investment operations $ 3.25 $ 1.73 $ 0.01
------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.16) $ (0.24) $ --
From net realized gain on investments (0.24) (0.13) --
------- ------- ------
Total distributions declared to shareholders $ (0.40) $ (0.37) $ --
------- ------- ------
Net asset value, end of period $ 17.28 $ 14.43 $13.07
======= ======= ======
Total return (%) (r) 22.81 13.23 0.08(n)
------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.24 0.26 0.29(a)
Expenses after expense reductions (f)(h) 0.20 0.20 0.20(a)
Net investment income (loss) 0.47 (0.07) (0.19)(a)
Portfolio turnover 3 1 1
Net assets at end of period (000 omitted) $84,407 $67,013 $ 50
|
Any redemption fees charged by the fund during the 2005 fiscal year resulted in a per share impact of less than $0.01.
(a) Annualized.
(c) For the period from the commencement of the fund's investment operations, June 28, 2002, through the stated period end.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(h) In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the fund invests. Because the underlying funds have varied expense and fee levels and the fund may own different proportions of the underlying funds at different times, the amount of fees and expenses incurred directly by the fund will vary.
(i) For the period from the class' inception, July 31, 2002 (Classes 529A, 529B, and 529C), December 31, 2002 (Class R), October 31, 2003 (Class R3), and April 1, 2005 (Classes R1, R2, R4, and R5) through the stated period end.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(t) Total returns do not include any applicable sales charges.
(u) Portfolio turnover is less than 1%.
(w) Per share amount was less than $0.01.
APPENDIX A
DESCRIPTION OF UNDERLYING FUNDS
Further information about each underlying fund, including a copy of an underlying fund's most recent Prospectus, SAI, and Annual and Semi-Annual Reports, may be obtained on-line at mfs.com, or by contacting MFSC.
MFS NEW DISCOVERY FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in equity securities.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
While MFS may invest the fund's assets in companies of any size, MFS generally focuses on companies with small capitalizations.
MFS may invest the fund's assets in foreign securities.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the underlying fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS MID CAP GROWTH FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests at least 80% of the fund's net assets in issuers with medium market capitalizations. MFS generally defines medium market capitalization issuers as issuers within the range of the Russell Midcap(R) Growth Index at the time of purchase. As of November 30, 2006, the range of the Russell Midcap(R) Growth Index was between $1.4 billion and $20.8 billion. Issuers whose market capitalizations fall outside this range after purchase continue to be considered to have a medium market capitalization for purposes of the 80% policy.
MFS normally invests the fund's assets primarily in equity securities.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
MFS may invest the fund's assets in foreign securities.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
Investments for the fund are selected based on fundamental and quantitative analysis. MFS uses bottom-up fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position and management ability. MFS also uses proprietary quantitative models to forecast the expected return of an investment. Factors considered by the quantitative model include valuation, price momentum and earnings quality.
MFS MID CAP VALUE FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests at least 80% of the fund's net assets in issuers with medium
market capitalizations. MFS generally defines medium market capitalization issuers as issuers within the range of the Russell Midcap(R) Value Index at the time of purchase. As of December 31, 2006, the range of the Russell Midcap(R) Value Index was between $1.34 billion and $19.20 billion. Issuers whose market capitalizations fall outside this range after purchase continue to be considered to have a medium market capitalization for purposes of the 80% policy.
MFS normally invests the fund's assets primarily in equity securities.
MFS may invest the fund's assets in foreign securities.
MFS focuses on investing the fund's assets in the stocks of companies that it believes are undervalued compared to their perceived worth (value companies). Value companies tend to have stock prices that are low relative to their earnings, dividends, assets, or other financial measures.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
Investments for the fund are selected based on fundamental and quantitative analysis. MFS uses bottom-up fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position and management ability. MFS also uses proprietary quantitative models to forecast the expected return of an investment. Factors considered by the quantitative model include valuation, price momentum and earnings quality.
MFS CORE GROWTH FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in equity securities.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
While MFS may invest the fund's assets in companies of any size, MFS generally focuses on companies with large capitalizations.
MFS may invest the fund's assets in foreign securities.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the underlying fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS RESEARCH FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in equity securities.
In selecting investments for the fund, MFS is not constrained to any particular investment style. MFS may invest the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies), in the stocks of companies it believes are undervalued compared to their perceived worth (value companies), or in a combination of growth and value companies.
MFS may invest the fund's assets in companies of any size.
MFS may invest the fund's assets in foreign securities.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
A team of investment research analysts selects investments for the fund. MFS allocates the fund's assets to analysts by broad market sectors.
MFS uses a bottom-up investment approach in buying and selling investments for the underlying fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS VALUE FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in equity securities.
MFS focuses on investing the fund's assets in the stocks of companies that it believes are undervalued compared to their perceived worth (value companies). Value companies tend to have stock prices that are low relative to their earnings, dividends, assets, or other financial measures.
While MFS may invest the fund's assets in companies of any size, MFS generally focuses on companies with large capitalizations.
MFS may invest the fund's assets in foreign securities.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the underlying fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS INTERNATIONAL NEW DISCOVERY FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies
(growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
While MFS may invest the fund's assets in companies of any size, MFS generally focuses on companies with small to medium capitalizations.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the underlying fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS RESEARCH INTERNATIONAL FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
In selecting investments for the fund, MFS is not constrained to any particular investment style. MFS may invest the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies), in the stocks of companies it believes are undervalued compared to their perceived worth (value companies), or in a combination of growth and value companies.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
A team of investment research analysts selects investments for the fund. MFS allocates the fund's assets to analysts by broad market sectors.
MFS uses a bottom-up investment approach in buying and selling investments for
the underlying fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS HIGH INCOME FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek total return with an emphasis on high current income, but also considering capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests at least 80% of the fund's net assets in high income debt instruments.
MFS may invest the fund's assets in other types of debt instruments.
MFS may invest up to 100% of the fund's assets in lower quality debt instruments.
MFS may invest the fund's assets in foreign securities.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of instruments and their issuers in light of current market, economic, political, and regulatory conditions. Factors considered may include the instrument's credit quality, collateral characteristics, and indenture provisions, and the issuer's management ability, capital structure, leverage, and ability to meet its current obligations. Quantitative analysis of the structure of the instrument and its features may also be considered.
MFS RESEARCH BOND FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek total return with an emphasis on current income, but also considering capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests at least 80% of the fund's net assets in debt instruments.
MFS primarily invests the fund's assets in investment grade debt instruments, but may also invest in lower quality debt instruments.
MFS may invest the fund's assets in foreign securities.
MFS may invest the fund's assets in mortgage dollar rolls.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
A team of investment research analysts selects investments for the fund. MFS allocates the fund's assets to analysts by sectors of the debt market.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of instruments and their issuers in light of current market, economic, political, and regulatory conditions. Factors considered may include the instrument's credit quality, collateral characteristics, and indenture provisions, and the issuer's management ability, capital structure, leverage, and ability to meet its current obligations. Quantitative analysis of the structure of the instrument and its features may also be considered.
MFS GOVERNMENT SECURITIES FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek total return with an emphasis on current income, but also considering capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests at least 80% of the fund's net assets in U.S. Government securities.
MFS generally invests substantially all of the fund's assets in investment grade debt instruments.
MFS may invest the fund's assets in mortgage dollar rolls.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of
instruments and their issuers in light of current market, economic, political, and regulatory conditions. Factors considered may include the instrument's credit quality, collateral characteristics, and indenture provisions, and the issuer's management ability, capital structure, leverage, and ability to meet its current obligations. Quantitative analysis of the structure of the instrument and its features may also be considered.
MFS LIMITED MATURITY FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek total return with an emphasis on current income, but also considering capital preservation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in debt instruments.
MFS generally invests substantially all of the fund's assets in investment grade debt instruments.
The fund's dollar-weighted average life will normally not exceed five years. In determining an instrument's life for purposes of calculating the fund's average life, an estimate of the average time for its principal to be paid is used. This can be substantially shorter than its stated maturity.
MFS may invest the fund's assets in U.S. dollar-denominated foreign securities.
MFS may invest the fund's assets in mortgage dollar rolls.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of instruments and their issuers in light of current market, economic, political, and regulatory conditions. Factors considered may include the instrument's credit quality, collateral characteristics, and indenture provisions, and the issuer's management ability, capital structure, leverage, and ability to meet its current obligations. Quantitative analysis of the structure of the instrument and its features may also be considered.
MFS MONEY MARKET FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek a high level of current income
consistent with preservation of capital and liquidity. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets in money market instruments and repurchase agreements.
MFS may invest the fund's assets in U.S. dollar-denominated foreign money market instruments.
In buying and selling investments for the fund, MFS complies with industry-standard regulatory requirements for money market funds regarding credit quality, diversification and maturity. MFS stresses maintaining a stable $1 share price, liquidity, and income.
MFS ASSET ALLOCATION FUNDS
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF TRUSTEES. The Board of Trustees of the MFS funds has adopted procedures by which shareholders may send communications to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [fund name], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116-3741, Attention: Frank Tarantino, Independent Chief Compliance Officer of each Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the MFS fund to which they relate and (iii) identify the class and number of shares held by the shareholder.
IF YOU WANT MORE INFORMATION ABOUT MFS ASSET ALLOCATION FUNDS, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about each fund's actual investments. Annual reports discuss the effect of recent market conditions and investment strategies on each fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated October 1, 2007, provides more detailed information about each fund and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about each fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: mfs.com
Information about the fund (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other information about each fund are available on the Edgar Database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
Each fund's Investment Company Act file number is 811-4492.
[MFS(R) INVESTMENT MANAGEMENT LOGO] STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 2007
MFS CONSERVATIVE ALLOCATION FUND, MFS MODERATE ALLOCATION FUND, MFS GROWTH
ALLOCATION FUND, MFS AGGRESSIVE GROWTH ALLOCATION FUND,
EACH A SERIES OF MFS SERIES TRUST X
500 BOYLSTON STREET, BOSTON, MA 02116
This Statement of Additional Information ("SAI") contains additional information about each Fund and should be read in conjunction with each Fund's Prospectus dated October 1, 2007. Each Fund's financial statements are incorporated into this SAI by reference to each Fund's most recent Annual Report to shareholders. A copy of the Annual Report accompanies this SAI. You may obtain a copy of each Fund's Prospectus and Annual Report without charge by contacting each Fund's transfer agent, MFS Service Center, Inc. (please see the back cover of Part II of this SAI for address and telephone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains information that is particular to each Fund, while Part II contains information that generally applies to all of the funds in the MFS Family of Funds (the "MFS Funds"). Each part of this SAI has a variety of appendices which can be found at the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION (SAI) - PART I
Part I of this SAI contains information that is particular to each Fund.
DEFINITIONS 1 MANAGEMENT OF THE FUND 1 SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS 2 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS 3 TAX CONSIDERATIONS 3 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS 3 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS 3 APPENDIX A - TRUSTEE COMPENSATION AND COMMITTEES A-1 APPENDIX B - SHARE OWNERSHIP B-1 APPENDIX C - PORTFOLIO MANAGER(S) C-1 APPENDIX D - CERTAIN SERVICE PROVIDER COMPENSATION D-1 APPENDIX E - SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS E-1 APPENDIX F - PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS F-1 |
DEFINITIONS
"Funds" - MFS Conservative Allocation Fund, MFS Moderate Allocation Fund, MFS Growth Allocation Fund, MFS Aggressive Growth Allocation Fund, each a series of the Trust.
"Trust" - MFS Series Trust X, a Massachusetts business trust organized in 1985. The Trust was previously known as MFS Government Mortgage Fund (prior to June 2, 1995), MFS Government Income Plus Fund (prior to March 1, 1993), MFS Government Income Plus Trust (prior to August 3, 1992) and MFS Government Securities High Yield Trust (prior to October 16, 1989).
"MFS" or "Adviser" - Massachusetts Financial Services Company, a Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the funds, dated October 1, 2007, as amended or supplemented from time to time.
MANAGEMENT OF THE FUND
THE FUNDS
Each Fund is a diversified series of the Trust. The Trust is an open-end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the Trust are set forth in APPENDIX A to Part II of this SAI.
TRUSTEE COMPENSATION AND COMMITTEES
Compensation paid to the non-interested Trustees for certain specified periods, as well as information regarding committees of the Board of Trustees, is set forth in APPENDIX A to this Part I.
SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and officers of the Trust as a group, as well as the dollar value range of each Trustee's share ownership in each Fund and, on an aggregate basis, in all MFS Funds overseen by the Trustee, by investors who are deemed to "control" the Fund, if any, and by investors who own 5% or more of any class of Fund shares, if any, is set forth in APPENDIX B to this Part I.
Part I-1
PORTFOLIO MANAGER(S)
Information regarding each Fund's portfolio manager(s), including other accounts managed, compensation, ownership of Fund shares, and possible conflicts of interest, is set forth in APPENDIX C to this Part I.
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by each Fund to certain of its service providers for advisory services, administrative services, retirement plan administration and services, program management services, and transfer agency services, for certain specified periods, are set forth in APPENDIX D to this Part I.
CUSTODIAN
State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, serves as the custodian of the assets of each Fund (the "Custodian"). The Custodian is responsible for safekeeping and controlling each Fund's cash and securities, handling the receipt and delivery of securities, collecting interest and dividends on each Fund's investments, serving as each Fund's foreign custody manager, providing reports on foreign securities depositaries, maintaining books of original entry and other required books and accounts for each Fund, and calculating the daily net asset value of each class of shares of each Fund. Each Fund may invest in securities of the Custodian and may deal with the Custodian as principal in securities transactions.
Each Fund has an expense offset arrangement that reduces each Fund's custodian fees based upon the amount of cash maintained by each Fund with its custodian.
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid for certain specified periods in connection with the purchase and sale of each Fund's shares are set forth in APPENDIX E to this Part I.
DISTRIBUTION PLAN PAYMENTS
Payments made by each Fund under the Fund's plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"), for the Fund's most recent fiscal year, are set forth in APPENDIX E to this Part I.
Part I-2
INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS
INVESTMENT STRATEGIES AND RISKS
Certain investment strategies and risks are described in APPENDIX E to Part II of this SAI.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions which are described in APPENDIX F of Part II of this SAI.
TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by each Fund for certain specified periods, information concerning purchases by each Fund of securities issued by its regular broker/dealers for its most recent fiscal year, and information concerning the amount of transactions and related commissions to broker/dealer firms that MFS has determined provide valuable research for each Fund's most recent fiscal year, are set forth in APPENDIX F to this Part I. Portfolio transactions and brokerage commissions are more fully described in Part II of this SAI under the heading "Portfolio Transactions and Brokerage Commissions."
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS
Ernst & Young LLP is the Independent Registered Public Accounting Firm, providing audit services, tax return review, and other related services and assistance in connection with the review of various Securities and Exchange Commission filings.
Each Fund's Financial Statements and Financial Highlights for the fiscal year ended May 31, 2007, are incorporated by reference into this SAI from the Fund's Annual Report to shareholders and have been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon reports of such firm, given upon their authority as experts in accounting and auditing. A copy of each Fund's Annual Report accompanies this SAI.
Part I-3
PART I - APPENDIX A
TRUSTEE COMPENSATION AND COMMITTEES
Each Fund pays the non-interested Trustees an annual fee plus a fee for each meeting attended. In addition, the non-interested Trustees are reimbursed for their out-of-pocket expenses.
TRUSTEE COMPENSATION TABLE
MFS CONSERVATIVE ALLOCATION FUND:
TRUSTEE RETIREMENT BENEFITS TOTAL TRUSTEE FEES
FEES FROM ACCRUED AS PART OF FROM FUND AND FUND
TRUSTEES THE FUND(1) FUND EXPENSE COMPLEX(2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $1,996 N/A $210,289
Lawrence H. Cohn, M.D $1,996 $ 0 $208,289
David H. Gunning $2,062 N/A $219,642
William R. Gutow $1,996 N/A $208,289
Michael Hegarty $1,996 N/A $209,289
J. Atwood Ives $2,548 $792 $285,289
Lawrence T. Perera $2,082 $869 $228,289
J. Dale Sherratt $2,289 $ 0 $250,289
Laurie J. Thomsen $2,057 N/A $209,289
Robert W. Uek $2,161 N/A $227,789
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Part I-A-1
MFS MODERATE ALLOCATION FUND:
TRUSTEE RETIREMENT BENEFITS TOTAL TRUSTEE FEES
FEES FROM ACCRUED AS PART OF FROM FUND AND FUND
TRUSTEES THE FUND(1) FUND EXPENSE COMPLEX(2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $3,106 N/A $210,289
Lawrence H. Cohn, M.D $3,106 $ 0 $208,289
David H. Gunning $4,812 N/A $219,642
William R. Gutow $4,517 N/A $208,289
Michael Hegarty $3,106 N/A $209,289
J. Atwood Ives $6,185 $792 $285,289
Lawrence T. Perera $3,276 $869 $228,289
J. Dale Sherratt $3,633 $ 0 $250,289
Laurie J. Thomsen $3,200 N/A $209,289
Robert W. Uek $3,403 N/A $227,789
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MFS GROWTH ALLOCATION FUND:
TRUSTEE RETIREMENT BENEFITS TOTAL TRUSTEE FEES
FEES FROM ACCRUED AS PART OF FROM FUND AND FUND
TRUSTEES THE FUND(1) FUND EXPENSE COMPLEX(2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $3,720 N/A $210,289
Lawrence H. Cohn, M.D $3,720 $ 0 $208,289
David H. Gunning $3,957 N/A $219,642
William R. Gutow $3,720 N/A $208,289
Michael Hegarty $3,720 N/A $209,289
J. Atwood Ives $5,247 $792 $285,289
Lawrence T. Perera $4,353 $869 $228,289
J. Dale Sherratt $4,530 $ 0 $250,289
Laurie J. Thomsen $3,942 N/A $209,289
Robert W. Uek $4,176 N/A $227,789
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Part I-A-2
MFS AGGRESSIVE GROWTH ALLOCATION FUND:
TRUSTEE RETIREMENT BENEFITS TOTAL TRUSTEE FEES
FEES FROM ACCRUED AS PART OF FROM FUND AND FUND
TRUSTEES THE FUND(1) FUND EXPENSE COMPLEX(2)
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $2,429 N/A $210,289
Lawrence H. Cohn, M.D $2,429 $ 0 $208,289
David H. Gunning $2,575 N/A $219,642
William R. Gutow $2,429 N/A $208,289
Michael Hegarty $2,429 N/A $209,289
J. Atwood Ives $3,291 $792 $285,289
Lawrence T. Perera $2,555 $869 $228,289
J. Dale Sherratt $2,887 $ 0 $250,289
Laurie J. Thomsen $2,533 N/A $209,289
Robert W. Uek $2,687 N/A $227,789
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(1) For the fiscal year ended May 31, 2007.
(2) Information provided is for calendar year 2006. Each Trustee receiving compensation served as Trustee of 97 funds within the MFS Fund complex (having aggregate net assets at December 31, 2006, of approximately $102 billion).
Retirement Benefit Deferral Plan-- Under a Retirement Benefit Deferral Plan, certain Trustees have deferred benefits from a prior retirement plan. The value of the benefits is periodically readjusted as though the Trustee had invested an equivalent amount in Class A shares of the Fund(s) designated by such Trustee. The value of the deferred benefits will be paid to the Trustees upon retirement or thereafter. The plan does not obligate a Fund to retain the services of any Trustee or pay any particular level of compensation to any Trustee. The plan is not funded and a Fund's obligation to pay the Trustee's deferred compensation is a general unsecured obligation.
Part I-A-3
COMMITTEES
The Board has established the following Committes:
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------
AUDIT 8 Oversees the accounting and auditing Butler*, Gutow*,
COMMITTEE procedures of the Fund and, among other Sherratt*,
duties, considers the selection of the Thomsen*, and
independent accountants for the Fund and the Uek*
scope of the audit, and considers the effect
on the independence of those accountants of
any non-audit services such accountants
provide to the Fund and any audit or
non-audit services such accountants provide
to other MFS Funds, MFS and/or certain
affiliates. The Committee is also
responsible for establishing procedures for
the receipt, retention, and treatment of
complaints received by the Fund regarding
accounting, internal accounting controls, or
auditing matters and the confidential,
anonymous submission of concerns regarding
questionable fund accounting matters by
officers of the Fund and employees of the
Fund's investment adviser, administrator,
principal underwriter, or any other provider
of accounting-related services to the Fund.
COMPLIANCE AND 8 Oversees the development and implementation Butler*, Cohn*,
GOVERNANCE of the Fund's regulatory and fiduciary Gunning*, Gutow*,
COMMITTEE compliance policies, procedures, and and Sherratt*
practices under the 1940 Act, and other
applicable laws, as well as oversight of
compliance policies of the Fund's investment
adviser and certain other service providers
as they relate to Fund activities. The
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Part I-A-4
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------
Fund's Independent Chief Compliance Officer
reports directly to the Committee and
assists the Committee in carrying out its
responsibilities. In addition, the Committee
advises and makes recommendations to the
Board on matters concerning Trustee
practices and recommendations concerning the
functions and duties of the committees of
the Board.
CONTRACTS 5 Requests, reviews, and considers the All
REVIEW information deemed reasonably necessary to non-interested
COMMITTEE evaluate the terms of the investment Trustees of the
advisory and principal underwriting Board (Butler,
agreements and the Plan of Distribution Cohn, Gunning,
under Rule 12b-1 that the Fund proposes to Gutow, Hegarty,
renew or continue, and to make its Ives, Perera,
recommendations to the full Board of Sherratt,
Trustees on these matters. Thomsen, and Uek)
NOMINATION AND 1 Recommends qualified candidates to the Board All
COMPENSATION in the event that a position is vacated or non-interested
COMMITTEE created. The Committee will consider Trustees of the
recommendations by shareholders when a Board (Butler,
vacancy exists. Shareholders wishing to Cohn, Gunning,
recommend candidates for Trustee for Gutow, Hegarty,
consideration by the Committee may do so by Ives, Perera,
writing to the Fund's Secretary at the Sherratt,
principal executive office of the Fund. Such Thomsen, and Uek)
recommendations must be accompanied by
biographical and occupational data on the
candidate (including whether the candidate
would be an "interested person" of the
Fund), a written consent by the candidate to
be named as a nominee and to serve as
Trustee if elected, record and ownership
information for the
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Part I-A-5
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------
recommending shareholder with respect to the
Fund, and a description of any arrangements
or understandings regarding recommendation
of the candidate for consideration. The
Committee is also responsible for making
recommendations to the Board regarding any
necessary standards or qualifications for
service on the Board. The Committee also
reviews and makes recommendations to the
Board regarding compensation for the
non-interested Trustees.
PORTFOLIO 8 Oversees the policies, procedures, and Cohn*, Gunning*,
TRADING AND practices of the Fund with respect to Hegarty*, and
MARKET REVIEW brokerage transactions involving portfolio Perera*
COMMITTEE securities as those policies, procedures,
and practices are carried out by MFS and its
affiliates. The Committee also oversees the
administration of the Fund's proxy voting
policies and procedures by MFS. In addition,
the Committee receives reports from MFS
regarding the policies, procedures, and
practices of MFS and its affiliates in
connection with their marketing and
distribution of shares of the Fund.
PRICING 8 Oversees the determination of the value of Hegarty*,
COMMITTEE the portfolio securities and other assets Perera*,
held by the Fund and determines or causes to Thomsen*, and
be determined the fair value of securities Uek*
and assets for which market quotations are
not "readily available" in accordance with
the 1940 Act. The Committee delegates
primary responsibility for carrying out
these functions to MFS and MFS' internal
valuation committee pursuant to pricing
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Part I-A-6
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------
policies and procedures approved by the
Committee and adopted by the full Board.
These policies include methodologies to be
followed by MFS in determining the fair
values of portfolio securities and other
assets held by the Fund for which market
quotations are not readily available. The
Committee meets periodically with the
members of MFS' internal valuation committee
to review and assess the quality of fair
valuation and other pricing determinations
made pursuant to the Fund's pricing policies
and procedures, and to review and assess the
policies and procedures themselves. The
Committee also exercises the
responsibilities of the Board under the
Amortized Cost Valuation Procedures approved
by the Board on behalf of each Fund which
holds itself out as a "money market fund" in
accordance with Rule 2a-7 under the 1940
Act.
SERVICES 8 Reviews and evaluates the contractual Gunning*,
CONTRACTS arrangements of the Fund relating to Sherratt*,
COMMITTEE transfer agency, administrative services, Thomsen*, and
custody, pricing and bookkeeping services, Uek*
and lending of portfolio securities, and
makes recommendations to the full Board of
Trustees on these matters.
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(1) The Trustees' identification and background are set forth in Appendix A to
Part II.
* Non-interested or independent Trustees. Although Mr. Ives is not a member of all Committees of the Board, he is invited to and attends many of the Committees' meetings in his capacity as Chair of the Trustees.
Part I-A-7
PART I - APPENDIX B
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 1, 2007, the current Trustees and officers of the Trust as a group owned less than 1% of any class of each Fund's shares. The following table shows the dollar range of equity securities beneficially owned by each current Trustee in each Fund and, on an aggregate basis, in all MFS Funds overseen by each current Trustee, as of December 31, 2006.
The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. Over $100,000
Part I-B-1
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL MFS
NAME OF TRUSTEE DOLLAR RANGE OF EQUITY SECURITIES IN THE FUND FUNDS OVERSEEN BY TRUSTEES
--------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N D
Robert C. Pozen B (MFS Growth Allocation Fund) D
NON-INTERESTED TRUSTEES
Robert E. Butler B (MFS Aggressive Growth Allocation Fund) D
Lawrence H. Cohn, M.D D (MFS Moderate Allocation Fund) D
David H. Gunning N D
William R. Gutow N D
Michael Hegarty C (MFS Aggressive Growth Allocation Fund) D
J. Atwood Ives N D
Lawrence T. Perera N D
J. Dale Sherratt N D
Laurie J. Thomsen N D
Robert W. Uek N D
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25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of a Fund's shares (all share classes taken together) as of September 1, 2007, and are therefore presumed to control the Fund. All holdings are of record unless otherwise indicated.
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
----------------------------------------------------------------------------------
N/A N/A N/A
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5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any class of a Fund's shares as of September 1, 2007. All holdings are of record unless otherwise indicated.
NAME AND ADDRESS OF INVESTOR FUND PERCENTAGE OWNERSHIP
----------------------------------------------------------------------------------------------------------------
Merrill Lynch Pierce Fenner & Smith, Inc. MFS Aggressive Growth Allocation Fund 17.74% of Class C Shares
For the Sole Benefit of Its Customers MFS Conservative Allocation Fund 5.57% of Class B Shares
4800 Deer Lake Drive East 21.11% of Class C Shares
Jacksonville, FL 32246 7.70% of Class R Shares
MFS Growth Allocation Fund 21.55% of Class C Shares
MFS Moderate Allocation Fund 5.59% of Class B Shares
25.46% of Class C Shares
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Part I-B-2
NAME AND ADDRESS OF INVESTOR FUND PERCENTAGE OWNERSHIP ---------------------------------------------------------------------------------------------------------------- Citigroup Global Markets Inc. MFS Aggressive Growth Allocation Fund 6.37% of Class C Shares SURPAS House Account MFS Growth Allocation Fund 5.19% of Class C Shares Attn: Cindy Tempesta, 7th Floor 333 W. 34th Street New York, NY 10001-2402 GPC Agent For MFS Aggressive Growth Allocation Fund 51.00% of Class I Shares MFS Heritage Trust Co. FBO MFS Conservative Allocation Fund 48.82% of Class I Shares Dean Foods 401k Plan MFS Growth Allocation Fund 56.69% of Class I Shares PO Box 79377 MFS Moderate Allocation Fund 71.17% of Class I Shares Atlanta, GA 30357-7377 GPC Agent For MFS Aggressive Growth Allocation Fund 5.37% of Class I Shares MFS Heritage Trust Co. FBO MFS Growth Allocation Fund 10.14% of Class I Shares Dean Foods Union 401k Plan MFS Moderate Allocation Fund 12.66% of Class I Shares PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Aggressive Growth Allocation Fund 6.66% of Class R2 Shares MFS Heritage Trust Co. FBO Highground Inc. 401k Plan PO Box 79377 Atlanta, GA 30357-7377 Reliance Trust Co. Trustee MFS Aggressive Growth Allocation Fund 75.09% of Class R5 Shares MGM Mirage 401k Ret. Sav. Plan MFS Conservative Allocation Fund 79.77% of Class R5 Shares 3400 Las Vegas Blvd S. MFS Growth Allocation Fund 84.63% of Class R5 Shares Las Vegas, NV 89109 MFS Moderate Allocation Fund 87.55% of Class R5 Shares Reliance Trust Co. Trustee MFS Aggressive Growth Allocation Fund 8.10% of Class R5 Shares MGM Mirage Deferred Comp Plan II MFS Growth Allocation Fund 5.27% of Class R5 Shares 3799 Las Vegas Blvd S. Las Vegas, NV 89109 Reliance Trust Co. Trustee MFS Aggressive Growth Allocation Fund 8.07% of Class R5 Shares MGM Mirage Deferred Comp Plan MFS Conservative Allocation Fund 10.49% of Class R5 Shares 3799 Las Vegas Blvd S. Las Vegas, NV 89109 TRS MFS Def Contribution Plan MFS Aggressive Growth Allocation Fund 22.68% of Class I Shares c/o Mark Leary MFS Conservative Allocation Fund 31.56% of Class I Shares MFS Investment Management, Inc. MFS Growth Allocation Fund 18.49% of Class I Shares 500 Boylston Street, 21st Floor MFS Moderate Allocation Fund 6.19% of Class I Shares Boston, MA 02116 TRS MFS 401k Plan MFS Aggressive Growth Allocation Fund 15.30% of Class I Shares c/o Mark Leary MFS Conservative Allocation Fund 13.36% of Class I Shares MFS Investment Management, Inc. MFS Growth Allocation Fund 8.86% of Class I Shares 500 Boylston Street, 21st Floor Boston, MA 02116 MFS Heritage Trust Co. Trustee MFS Aggressive Growth Allocation Fund 5.50% of Class I Shares Treehouse Foods, Inc. 401(k) Plan MFS Growth Allocation Fund 5.62% of Class I Shares c/o Chris Giorgi MFS Moderate Allocation Fund 6.42% of Class I Shares MFS Investment Management 500 Boylston Street Boston, MA, 02116 MFS Heritage Trust Co. Trustee MFS Aggressive Growth Allocation Fund 8.14% of Class R Shares |
Part I-B-3
NAME AND ADDRESS OF INVESTOR FUND PERCENTAGE OWNERSHIP ---------------------------------------------------------------------------------------------------------------- Odyssey Healthcare 401k Plan MFS Conservative Allocation Fund 22.56% of Class R Shares c/o Chris Giorgi MFS Growth Allocation Fund 5.03% of Class R Shares MFS Investment Management MFS Moderate Allocation Fund 6.57% of Class R Shares 500 Boylston Street Boston, MA, 02116 GPC Agent For MFS Conservative Allocation Fund 6.27% of Class R1 Shares MFS Heritage Trust Co. FBO Hicksville Machine Savings Plan PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Conservative Allocation Fund 5.12% of Class R1 Shares MFS Heritage Trust Co. FBO Whitmore Group Ltd. 401(k) Plan PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Conservative Allocation Fund 5.95% of Class R2 Shares MFS Heritage Trust Co. FBO MFS Growth Allocation Fund 8.45% of Class R2 Shares Winzer Corp. 401k PS Plan PO Box 79377 Atlanta, GA 30357 GPC Agent For MFS Conservative Allocation Fund 5.30% of Class R2 Shares MFS Heritage Trust Co. FBO Vector Design Tech. Inc. Pension Plan PO Box 79377 Atlanta, GA 30357 Counsel Trust DBA Mid-Atlantic MFS Conservative Allocation Fund 10.67% of Class R3 Shares Trust Company FBO Net-Linx Publishing Solutions 401(k) Profit Sharing Plan & Trust 336 Fouth Avenue Pittsburgh, PA 15222 GPC Agent For MFS Conservative Allocation Fund 6.27% of Class R3 Shares MFS Heritage Trust Co. FBO Ortho Organizers Inc. 401k RS Plan PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Conservative Allocation Fund 6.68% of Class R4 Shares MFS Heritage Trust Co. FBO Reynolds Smith & Hills, Inc. Emp 401k P PO Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company Trustee MFS Conservative Allocation Fund 9.16% of Class A Shares American Eagle Outfitters Ret. Plan c/o Chris Giorgi MFS Investment Management 500 Boylston Street Boston, MA, 02116 J. Higgins & A. D'Souza MFS Conservative Allocation Fund 6.49% of Class R Shares |
Part I-B-4
NAME AND ADDRESS OF INVESTOR FUND PERCENTAGE OWNERSHIP ---------------------------------------------------------------------------------------------------------------- Pediatric Association of Grtr Salem Plan c/o Chris Giorgi MFS Investment Management 500 Boylston Street Boston, MA, 02116 Joey A. Prince, Trustee MFS Conservative Allocation Fund 7.18% of Class R Shares Prince Service & Mfg. P/S/P & Trust MFS Moderate Allocation Fund 7.15% of Class R Shares c/o Chris Giorgi MFS Investment Management 500 Boylston Street Boston, MA, 02116 Verland Foundation, Inc. 403b Plan MFS Conservative Allocation Fund 6.16% of Class R Shares c/o Chris Giorgi MFS Investment Management 500 Boylston Street Boston, MA, 02116 GPC Agent For MFS Growth Allocation Fund 5.80% of Class R1 Shares MFS Heritage Trust Co. FBO Bio-Cat Inc. 401k PS PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Growth Allocation Fund 10.41% of Class R2 Shares MFS Heritage Trust Co. FBO Wright Employees PSP PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Growth Allocation Fund 6.12% of Class R2 Shares MFS Heritage Trust Co. FBO North Oaks Pediatric Clinic PSP PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Growth Allocation Fund 5.55% of Class R2 Shares MFS Heritage Trust Co. FBO Good Fulton & Farrell Et Al Plan PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Growth Allocation Fund 5.11% of Class R2 Shares MFS Heritage Trust Co. FBO Upchurch Kimbrough Manag Co. Plan PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Growth Allocation Fund 5.12% of Class R3 Shares MFS Heritage Trust Co. FBO North Bay Construction Inc. PS Plan PO Box 79377 Atlanta, GA 30357-7377 GPC Agent For MFS Growth Allocation Fund 5.65% of Class R4 Shares MFS Heritage Trust Co. FBO |
Part I-B-5
NAME AND ADDRESS OF INVESTOR FUND PERCENTAGE OWNERSHIP
----------------------------------------------------------------------------------------------------------------
Greensboro Ortho Savings & PS Plan
PO Box 79377
Atlanta, GA 30357-7377
Whipkey Harter & Kennedy Trustees MFS Growth Allocation Fund 8.56% of Class R Shares
Westmoreland Emergency Medical PSP MFS Moderate Allocation Fund 7.21% of Class R Shares
c/o Chris Giorgi
MFS Investment Management
500 Boylston Street
Boston, MA, 02116
MFS Heritage Trust Co. Trustee MFS Growth Allocation Fund 5.62% of Class R Shares
Daticon 401k Plan and Trust
c/o Chris Giorgi
MFS Investment Management
500 Boylston Street
Boston, MA, 02116
GPC Agent For MFS Moderate Allocation Fund 7.47% of Class R2 Shares
MFS Heritage Trust Co. FBO
Century Concepts Inc. Ret. Plan
PO Box 79377
Atlanta, GA 30357-7377
GPC Agent For MFS Moderate Allocation Fund 6.91% of Class R4 Shares
MFS Heritage Trust Co. FBO
Lattice Group 401k Savings Plan
PO Box 79377
Atlanta, GA 30357-7377
MFS Heritage Trust MFS Moderate Allocation Fund 5.16% of Class R Shares
Hawaiian Dental Services 401k
c/o Chris Giorgi
MFS Investment Management
500 Boylston Street
Boston, MA, 02116
MFS Heritage Trust Company MFS Moderate Allocation Fund 8.00% of Class R Shares
Houston Exploration Co. 401k Plan
c/o Chris Giorgi
MFS Investment Management
500 Boylston Street
Boston, MA, 02116
MFS 529 Savings Plan MFS Conservative Allocation Fund 100% of Class 529A Shares
c/o Massachusetts Financial Services Company 100% of Class 529B Shares
500 Boylston Street MFS Moderate Allocation Fund 100% of Class 529C Shares
Boston, MA 02116
100% of Class 529A Shares
MFS Growth Allocation Fund 100% of Class 529B Shares
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Part I-B-6
NAME AND ADDRESS OF INVESTOR FUND PERCENTAGE OWNERSHIP
----------------------------------------------------------------------------------------------------------------
100% of Class 529C Shares
MFS Aggressive Growth Allocation Fund 100% of Class 529A Shares
100% of Class 529B Shares
100% of Class 529C Shares
100% of Class 529A Shares
100% of Class 529B Shares
100% of Class 529C Shares
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Part I-B-7
PART I - APPENDIX C
PORTFOLIO MANAGER(S)
COMPENSATION
Portfolio manager total cash compensation is a combination of base salary and performance bonus:
BASE SALARY - Base salary represents a smaller percentage of portfolio manager total cash compensation (generally below 33%) than incentive compensation.
PERFORMANCE BONUS - Generally, incentive compensation represents a majority of portfolio manager total cash compensation.
The performance bonus is based on a combination of quantitative and qualitative factors.
The quantitative portion is based on pre-tax performance of all of the accounts managed by the portfolio manager (which includes the Fund and any other accounts managed by the portfolio manager) over a one-, three-, and five-year period relative to the appropriate Lipper peer group universe and/or one or more benchmark indices with respect to each account. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one- and five-year periods (adjusted as appropriate if the portfolio manager has served for shorter periods).
The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts, and traders) and management's assessment of overall portfolio manager contributions to investor relations, the investment process and overall performance (distinct from fund and other account performance).
Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors.
Finally, portfolio managers are provided with a benefits package including a defined contribution plan, health coverage and other insurance, which are available to other employees of MFS on substantially similar terms. The percentage such benefits represent of any portfolio manager's compensation depends upon the length of the individual's tenure at MFS and salary level, as well as other factors.
Part I-C-1
OWNERSHIP OF FUND SHARES
The following table shows the dollar range of equity securities of each Fund beneficially owned by each Fund's portfolio manager(s) as of fiscal year ended May 31, 2007. The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
NAME OF PORTFOLIO MANAGER DOLLAR RANGE OF EQUITY SECURITIES IN FUND
---------------------------------------------------------------------
Joseph C. Flaherty D - MFS Aggressive Growth Fund
N - MFS Conservative Allocation Fund
N - MFS Moderate Allocation Fund
N - MFS Growth Allocation Fund
---------------------------------------------------------------------
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OTHER ACCOUNTS
In addition to the Fund, each Fund's portfolio manager is responsible (either individually or jointly) for the day-to-day management of certain other accounts, the number and total assets of which, as of fiscal year ended May 31, 2007, were as follows:
REGISTERED
INVESTMENT OTHER POOLED
COMPANIES* INVESTMENT VEHICLES OTHER ACCOUNTS
---------------------------------------------------------------------------------------------------
NUMBER OF TOTAL NUMBER OF NUMBER OF TOTAL
NAME ACCOUNTS ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS ASSETS
-----------------------------------------------------------------------------------------------------
Joseph C. Flaherty 9 $7.4 billion 0 N/A 1 $374.6 million
-----------------------------------------------------------------------------------------------------
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* Includes the Fund.
Advisory fees are not based upon performance of any of the accounts identified in the table above.
POTENTIAL CONFLICTS OF INTEREST
The Adviser seeks to identify potential conflicts of interest resulting from a portfolio manager's management of both a Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts.
The management of multiple funds and accounts (including proprietary accounts) may give rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a
Part I-C-2
portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there may be securities which are suitable for a Fund's portfolio as well as for accounts of the Adviser or its subsidiaries with similar investment objectives. Each Fund's trade allocation policies may give rise to conflicts of interest if a Fund's orders do not get fully executed or are delayed in getting executed due to being aggregated with those of other accounts of the Adviser or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely impact the value of a Fund's investments. Investments selected for funds or accounts other than a Fund may outperform investments selected for a Fund.
When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as a Fund is concerned. In most cases, however, the Adviser believes that a Fund's ability to participate in volume transactions will produce better executions for the Fund.
The Adviser does not receive a performance fee for its management of each Fund. As a result, the Adviser and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund - for instance, those that pay a higher advisory fee and/or have a performance fee.
Part I-C-3
PART I - APPENDIX D
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund for advisory services, administrative services, retirement plan administration and services, program management services, and transfer agency services, over the specified periods are set forth below. For information regarding sales charges and distribution payments paid to MFD, see APPENDIX E to this Part I.
MFS CONSERVATIVE ALLOCATION FUND
AMOUNT PAID
TO MFS FOR AMOUNT WAIVED AMOUNT PAID TO MFSC
FISCAL YEAR ADVISORY SERVICES BY MFS FOR ADVISORY FOR TRANSFER AGENCY
ENDED AFTER WAIVERS SERVICES SERVICES(1)
----------------------------------------------------------------------------
May 31, 2007 $0 $0 $240,551
May 31, 2006 $0 $0 N/A
May 31, 2005 $0 $0 N/A
AMOUNT PAID AMOUNT PAID TO MFS
TO MFS FOR GENERAL FOR RETIREMENT PLAN AMOUNT PAID TO MFD
FISCAL YEAR ADMINISTRATIVE ADMINISTRATION FOR PROGRAM
ENDED SERVICES AND SERVICES(2) MANAGEMENT SERVICES(4)
--------------------------------------------------------------------------------
May 31, 2007 $17,446 $49,938 $92,314
May 31, 2006 $62,430 $ 9,154 $67,954
May 31, 2005 $44,190(3) $ 503(3) $42,047
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MFS MODERATE ALLOCATION FUND
AMOUNT PAID
TO MFS FOR AMOUNT WAIVED AMOUNT PAID TO MFSC
FISCAL YEAR ADVISORY SERVICES BY MFS FOR ADVISORY FOR TRANSFER AGENCY
ENDED AFTER WAIVERS SERVICES SERVICES(1)
----------------------------------------------------------------------------
May 31, 2007 $0 $0 $774,561
May 31, 2006 $0 $0 N/A
May 31, 2005 $0 $0 N/A
AMOUNT PAID AMOUNT PAID TO MFS
TO MFS FOR GENERAL FOR RETIREMENT PLAN AMOUNT PAID TO MFD
FISCAL YEAR ADMINISTRATIVE ADMINISTRATION FOR PROGRAM
ENDED SERVICES AND SERVICES(2) MANAGEMENT SERVICES(4)
--------------------------------------------------------------------------------
May 31, 2007 $ 17,410 $257,671 $168,120
May 31, 2006 $163,027 $ 40,550 $134,188
May 31, 2005 $121,023(3) $ 5,049(3) $ 89,223
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Part I-D-1
MFS GROWTH ALLOCATION FUND
AMOUNT PAID
TO MFS FOR AMOUNT WAIVED AMOUNT PAID TO MFSC
FISCAL YEAR ADVISORY SERVICES BY MFS FOR ADVISORY FOR TRANSFER AGENCY
ENDED AFTER WAIVERS SERVICES SERVICES(1)
----------------------------------------------------------------------------
May 31, 2007 $0 $0 $996,418
May 31, 2006 $0 $0 N/A
May 31, 2005 $0 $0 N/A
AMOUNT PAID AMOUNT PAID TO MFS
TO MFS FOR GENERAL FOR RETIREMENT PLAN AMOUNT PAID TO MFD
FISCAL YEAR ADMINISTRATIVE ADMINISTRATION FOR PROGRAM
ENDED SERVICES AND SERVICES(2) MANAGEMENT SERVICES(4)
--------------------------------------------------------------------------------
May 31, 2007 $ 17,461 $218,087 $219,818
May 31, 2006 $171,221 $ 42,829 $172,049
May 31, 2005 $117,635(3) $ 3,475(3) $112,336
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MFS AGGRESSIVE GROWTH ALLOCATION FUND
AMOUNT PAID
TO MFS FOR AMOUNT WAIVED AMOUNT PAID TO MFSC
FISCAL YEAR ADVISORY SERVICES BY MFS FOR ADVISORY FOR TRANSFER AGENCY
ENDED AFTER WAIVERS SERVICES SERVICES(1)
----------------------------------------------------------------------------
May 31, 2007 $0 $0 $451,964
May 31, 2006 $0 $0 N/A
May 31, 2005 $0 $0 N/A
AMOUNT PAID AMOUNT PAID TO MFS
TO MFS FOR GENERAL FOR RETIREMENT PLAN AMOUNT PAID TO MFD
FISCAL YEAR ADMINISTRATIVE ADMINISTRATION FOR PROGRAM
ENDED SERVICES AND SERVICES(2) MANAGEMENT SERVICES(4)
--------------------------------------------------------------------------------
May 31, 2007 $17,464 $175,322 $175,432
May 31, 2006 $83,255 $ 46,979 $139,405
May 31, 2005 $51,275(3) $ 1,627(3) $ 87,721
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(1) Amount paid to MFSC for transfer agency services includes: a) reimbursements for certain out-of-pocket expenses and payments made under agreements with affiliated and unaffiliated entities that provide subaccounting services; and b) payments made pursuant to the Special Servicing Agreement for transfer agent related expenses of Fund-of-Funds investing in the Fund. In addition to the fees disclosed, the MFS Conservative Allocation Fund paid directly $108,030, the MFS Moderate Allocation Fund paid $290,664, the MFS Growth Allocation Fund paid $421,504, and the MFS Aggressive Growth Allocation Fund paid $240,043 for transfer agent related services for the fiscal year ended May 31, 2007.
(2) Payment solely from assets attributable to Class R1, R2, R3, R4, and R5 shares.
(3) With respect to Class R1, R2, R4, and R5 shares, for the period from their initial public offering on April 1, 2005.
(4) Payment solely from assets attributable to Class 529A, 529B, and 529C shares.
Part I-D-2
APPENDIX E
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
The following sales charges were paid during the specified periods:
MFS CONSERVATIVE ALLOCATION FUND
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
-------------------------------------- ----------------------------
REALLOWED TO
RETAINED FINANCIAL CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES SHARES SHARES SHARES
---------------------------------------------------------------------------------------
May 31, 2007 $ 922,681 $130,215 $ 792,466 $8,157 $328,218 $19,429
May 31, 2006 $1,621,302 $240,288 $1,381,014 $5,157 $367,909 $24,290
May 31, 2005 $2,151,621 $348,948 $1,802,673 $6,308 $350,569 $43,938
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CLASS 529A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
------------------------------------ ------------------------------
REALLOWED TO
RETAINED FINANCIAL CLASS 529C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES CLASS 529B SHARES SHARES
---------------------------------------------------------------------------------------
May 31, 2007 $134,787 $19,440 $115,347 $2,474 $532
May 31, 2006 $139,557 $20,723 $118,834 $1,446 $818
May 31, 2005 $145,750 $21,687 $124,063 $4,396 $346
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Part I-E-1
MFS MODERATE ALLOCATION
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
-------------------------------------- ------------------------------
REALLOWED TO
RETAINED FINANCIAL CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES SHARES SHARES SHARES
-----------------------------------------------------------------------------------------
May 31, 2007 $3,730,766 $521,934 $3,208,832 $25,211 $1,005,694 $62,268
May 31, 2006 $5,550,464 $840,053 $4,710,411 $27,420 $ 992,857 $70,039
May 31, 2005 $6,349,546 $986,657 $5,380,889 $20,995 $ 800,330 $94,982
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CLASS 529A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
--------------------------------------------------- ------------------------------
REALLOWED TO FINANCIAL CLASS 529B
FISCAL YEAR END TOTAL RETAINED BY MFD INTERMEDIARIES SHARES CLASS 529C SHARES
------------------------------------------------------------------------------------------------------
May 31, 2007 $277,597 $41,778 $235,819 $ 8,260 $359
May 31, 2006 $328,184 $48,526 $279,658 $10,155 $128
May 31, 2005 $421,378 $62,950 $358,428 $ 8,442 $455
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MFS GROWTH ALLOCATION FUND
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
----------------------------------------------------- ----------------------------
REALLOWED TO FINANCIAL CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL RETAINED BY MFD INTERMEDIARIES SHARES SHARES SHARES
------------------------------------------------------------------------------------------------------
May 31, 2007 $5,310,680 $ 753,320 $4,557,360 $39,666 $996,858 $62,004
May 31, 2006 $6,969,437 $1,031,950 $5,937,487 $27,199 $920,203 $63,423
May 31, 2005 $6,754,236 $ 998,242 $5,755,994 $20,698 $626,091 $77,988
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CLASS 529A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
----------------------------------------------------- -----------------------
REALLOWED TO CLASS 529B CLASS 529C
FISCAL YEAR END TOTAL RETAINED BY MFD FINANCIAL INTERMEDIARIES SHARES SHARES
-------------------------------------------------------------------------------------------------
May 31, 2007 $427,341 $63,759 $363,582 $16,745 $934
May 31, 2006 $380,576 $55,818 $324,758 $19,993 $309
May 31, 2005 $455,082 $67,642 $387,440 $ 8,331 $339
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Part I-E-2
MFS AGGRESSIVE GROWTH ALLOCATION FUND
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
-------------------------------------- ----------------------------
REALLOWED TO
RETAINED FINANCIAL CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES SHARES SHARES SHARES
---------------------------------------------------------------------------------------
May 31, 2007 $2,190,790 $302,537 $1,888,253 $18,015 $376,700 $34,890
May 31, 2006 $2,817,415 $389,277 $2,428,138 $14,296 $326,869 $31,311
May 31, 2005 $2,180,281 $300,452 $1,879,829 $15,092 $218,713 $38,758
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CLASS 529A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
------------------------------------ -----------------------
REALLOWED TO
RETAINED FINANCIAL CLASS 529B CLASS 529C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES SHARES SHARES
--------------------------------------------------------------------------------
May 31, 2007 $480,526 $71,240 $409,286 $17,512 $412
May 31, 2006 $474,552 $69,459 $405,093 $13,113 $ 91
May 31, 2005 $465,737 $70,043 $395,694 $ 8,847 $733
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DISTRIBUTION PLAN PAYMENTS
During the fiscal year ended May 31, 2007, the Fund made the following Distribution Plan payments:
Part I-E-3
MFS CONSERVATIVE ALLOCATION FUND
PAID TO FINANCIAL
CLASS OF SHARES PAID BY FUND RETAINED BY MFD INTERMEDIARIES(1)
----------------------------------------------------------------------
Class A Shares $ 960,175 $ 374,534 $ 585,641
Class B Shares $1,638,671 $1,236,358 $ 402,313
Class C Shares $1,336,438 $ 238,197 $1,098,241
Class I Shares N/A N/A N/A
Class 529A Shares $ 76,661 $ 26,678 $ 49,983
Class 529B Shares $ 25,757 $ 20,566 $ 5,191
Class 529C Shares $ 125,919 $ 34,777 $ 91,142
Class R Shares $ 81,842 $ 16,531 $ 65,311
Class R1 Shares $ 17,824 $ 4,068 $ 13,756
Class R2 Shares $ 7,540 $ 2,082 $ 5,458
Class R3 Shares $ 55,061 $ 15,163 $ 39,898
Class R4 Shares $ 17,775 $ 5,095 $ 12,680
Class R5 Shares N/A N/A N/A
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MFS MODERATE ALLOCATION FUND
PAID TO FINANCIAL
CLASS OF SHARES PAID BY FUND RETAINED BY MFD INTERMEDIARIES(1)
----------------------------------------------------------------------
Class A Shares $2,898,497 $ 991,755 $1,906,742
Class B Shares $5,408,649 $4,134,253 $1,274,396
Class C Shares $4,286,293 $ 872,838 $3,413,455
Class I Shares N/A N/A N/A
Class 529A Shares $ 114,795 $ 39,560 $ 75,235
Class 529B Shares $ 194,017 $ 155,456 $ 38,561
Class 529C Shares $ 152,823 $ 44,916 $ 107,907
Class R Shares $ 271,440 $ 42,975 $ 228,465
Class R1 Shares $ 64,850 $ 11,151 $ 53,699
Class R2 Shares $ 33,411 $ 7,565 $ 25,846
Class R3 Shares $ 183,143 $ 40,163 $ 142,980
Class R4 Shares $ 144,841 $ 28,657 $ 116,184
Class R5 Shares N/A N/A N/A
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Part I-E-4
MFS GROWTH ALLOCATION FUND
PAID TO FINANCIAL
CLASS OF SHARES PAID BY FUND RETAINED BY MFD INTERMEDIARIES(1)
----------------------------------------------------------------------
Class A Shares $3,450,617 $1,168,828 $2,281,789
Class B Shares $6,352,361 $4,859,588 $1,492,773
Class C Shares $4,885,179 $1,178,910 $3,706,269
Class I Shares N/A N/A N/A
Class 529A Shares $ 146,560 $ 51,809 $ 94,751
Class 529B Shares $ 292,724 $ 236,365 $ 56,359
Class 529C Shares $ 171,038 $ 44,517 $ 126,521
Class R Shares $ 302,448 $ 61,807 $ 240,641
Class R1 Shares $ 75,692 $ 13,602 $ 62,090
Class R2 Shares $ 57,661 $ 8,669 $ 48,992
Class R3 Shares $ 190,741 $ 38,120 $ 152,621
Class R4 Shares $ 115,693 $ 28,635 $ 87,058
Class R5 Shares N/A N/A N/A
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MFS AGGRESSIVE GROWTH ALLOCATION FUND
PAID TO FINANCIAL
CLASS OF SHARES PAID BY FUND RETAINED BY MFD INTERMEDIARIES(1)
----------------------------------------------------------------------
Class A Shares $1,544,049 $ 557,265 $ 986,784
Class B Shares $2,367,651 $1,783,819 $ 583,832
Class C Shares $1,834,547 $ 491,127 $1,343,420
Class I Shares N/A N/A N/A
Class 529A Shares $ 127,644 $ 48,864 $ 78,780
Class 529B Shares $ 239,764 $ 196,014 $ 43,750
Class 529C Shares $ 99,986 $ 40,514 $ 59,382
Class R Shares $ 153,137 $ 33,488 $ 119,649
Class R1 Shares $ 55,865 $ 9,585 $ 46,280
Class R2 Shares $ 19,112 $ 3,998 $ 15,114
Class R3 Shares $ 117,083 $ 25,670 $ 91,413
Class R4 Shares $ 63,053 $ 15,684 $ 47,369
Class R5 Shares N/A N/A N/A
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(1) May include amounts paid to financial intermediaries affiliated with MFD.
Amounts retained by MFD may represent fees paid to MFD but not yet reallowed to intermediaries as of the close of the period, compensation to MFD for commissions advanced by MFD to financial intermediaries upon sale of Fund shares, and/or compensation for MFD's distribution and shareholder servicing costs.
Part I-E-5
PART I - APPENDIX F
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
The following brokerage commissions were paid by the Funds during the specified time periods:
FISCAL YEAR END BROKERAGE COMMISSIONS PAID BY FUNDS ----------------------------------------------------- May 31, 2007 N/A May 31, 2006 N/A May 31, 2005 N/A |
SECURITIES ISSUED BY REGULAR BROKER/DEALERS
During the fiscal year ended May 31, 2007, the Funds purchased securities issued by the following regular broker/dealers of the Funds, which had the following values as of May 31, 2007:
TRANSACTIONS WITH RESEARCH FIRMS
During the fiscal year ended May 31, 2007, the Funds allocated the following amount of transactions, and related commissions, to broker/dealer firms that have been deemed by MFS to provide valuable Research ("Research Firms"). The provision of Research was not necessarily a factor in the placement of this business with such Research Firms. (1)
DOLLAR AMOUNT OF TRANSACTIONS COMMISSIONS PAID ON TRANSACTIONS WITH RESEARCH FIRMS WITH RESEARCH FIRMS ---------------------------------------------------------------- N/A N/A |
(1) The amounts shown do not include transactions directed to electronic communication networks (ECNs) owned by the Research Firms.
Part I-F-1
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI, updated through July 1, 2007, as amended or supplemented from time to time, describes policies and practices that apply to the Funds in the MFS Family of Funds. References in this Part II to a "Fund" mean each Fund in the MFS Family of Funds, unless noted otherwise. References in this Part II to a "Trust" mean the Massachusetts business trust of which the Fund is a series, or, if the Fund is itself a Massachusetts business trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
DEFINITIONS ............................................................. 3 MANAGEMENT OF THE FUND .................................................. 3 SALES CHARGE WAIVERS .................................................... 10 DISTRIBUTION PLAN ....................................................... 10 FINANCIAL INTERMEDIARY COMPENSATION ..................................... 13 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS .......................... 13 NET INCOME AND DISTRIBUTIONS ............................................ 13 TAX CONSIDERATIONS ...................................................... 14 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS ........................ 27 DISCLOSURE OF PORTFOLIO HOLDINGS ........................................ 31 DETERMINATION OF NET ASSET VALUE ........................................ 35 SHAREHOLDER SERVICES .................................................... 37 DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES .................... 40 APPENDIX A - TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND ...... 42 APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES ....................... 51 APPENDIX C - WAIVERS OF SALES CHARGES ................................... 75 APPENDIX D - FINANCIAL INTERMEDIARY COMPENSATION ........................ 91 APPENDIX E - INVESTMENT STRATEGIES AND RISKS ............................ 102 APPENDIX F - INVESTMENT RESTRICTIONS .................................... 137 APPENDIX G - RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS ........................................................ 141 APPENDIX H - DESCRIPTION OF BOND RATINGS ................................ 143 |
I. DEFINITIONS
"Alliance Plans" - include retirement plans with respect to which MFS (or one of its affiliates) has entered into an administrative arrangement with a third party to provide certain recordkeeping and/or administrative services.
"Financial intermediary" - includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administration, and any other institutions having a selling, administration or other similar agreement with MFD, MFS or one of its affiliates.
"Majority Shareholder Vote" - as defined currently in the 1940 Act to be the lesser of (i) 67% or more of the voting securities present at a meeting at which holders of voting securities representing more than 50% of the outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities.
"Serviced Plans" - include retirement plans for which MFS or one of its affiliates is responsible for providing participant recordkeeping services.
"1940 Act"- the Investment Company Act of 1940 and the rules and regulations thereunder, as amended from time to time, and as such Act, rules or regulations are interpreted by the Securities and Exchange Commission.
II. MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
Board Oversight -- The Board of Trustees which oversees the Fund provides broad supervision over the business and operations of the Fund.
Trustees and Officers -- Identification and Background -- The identification and background of the Trustees and Officers of the Trust are set forth in Appendix A of this Part II.
INVESTMENT ADVISER
MFS provides the Fund with investment advisory services. MFS and its predecessor organizations have a history of money management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc., which in turn is an indirect majority-owned subsidiary of Sun Life Financial Inc. (a diversified financial services company).
Unless otherwise noted, MFS votes proxies on behalf of the Funds pursuant to the proxy voting policies described in Appendix B to this SAI Part II (except for the MFS Union Standard Equity Fund, for which Institutional Shareholders Services, Inc., votes proxies as described in Appendix B to this SAI Part II). Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, 2006 is available without charge by visiting MFS.COM and clicking on "Proxy Voting" and by visiting the SEC's Web site at http://www.sec.gov. Prior to January 1, 2007, JMR/Financial, Inc., voted proxies on behalf of MFS Union Standard Equity Fund.
INVESTMENT SUB-ADVISERS - MFS has engaged Sun Capital Advisers LLC (referred to as Sun Capital) to act as sub-adviser with respect to the real estate related portion of the MFS Diversified Income Fund's portfolio. Sun Capital is located at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Sun Capital is an indirect wholly-owned subsidiary of Sun Life Financial Inc. ("Sun Life Financial"), a corporation organized in Canada as well as an affiliate of MFS. Sun Life Financial and its affiliates currently transact business in Canada, the United States and Asia Pacific region. Sun Life Financial is a reporting company under the Securities Exchange Act of 1934 with common shares listed on the Toronto, New York, and Philippine stock exchanges. Sun Life Financial Inc. is located at 150 King Street West, Toronto, Canada, M5H 1J9.
Sun Capital is a Delaware limited liability company and a registered investment adviser. Sun Capital provides investment management and supervisory services to mutual funds and institutional accounts.
MFS has engaged Valley Forge Capital Advisors, Inc. (referred to as Valley Forge), to act as sub-adviser with respect to the MFS Sector Rotational Fund's portfolio. Valley Forge is located at 83 General Warren Boulevard, Suite 200, Malvern, Pennsylvania 19355. Valley Forge is 56% owned by George M. Mara and 20% owned by Maryanne P. Mara.
Valley Forge is a Delaware corporation and a registered investment adviser. Valley Forge provides investment management and supervisory services to mutual funds, high net worth individuals and institutional accounts.
Unless otherwise noted, all references to "sub-adviser" shall include Sun Capital with respect to that portion of the Diversified Income Fund for which Sun Capital provides day-to-day investment advisory services and Valley Forge for MFS Sector Rotational Fund.
INVESTMENT ADVISORY AGREEMENT -- MFS manages the Fund pursuant to an Investment Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, MFS provides the Fund with investment advisory services. Subject to such policies as the Trustees may determine, MFS makes investment decisions for the Fund. For these services, MFS receives an annual investment advisory fee, computed and paid monthly, as disclosed in the Prospectus under the heading "Management of the Fund(s)."
MFS pays the compensation of the Trust's officers and of any Trustee who is an employee of MFS. MFS also furnishes at its own expense investment advisory and administrative services, office space, equipment, clerical personnel, investment advisory facilities, and executive and supervisory personnel necessary for managing the Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are "not affiliated" with MFS and all expenses of the Fund incurred in its operation and offering of shares (other than those assumed by MFS in writing) including but not limited to: management fees; Rule 12b-1 fees; administrative services fees; retirement plan administration services fees; program management services fees; governmental fees; interest charges; taxes; membership dues in the Investment Company Institute allocable to the Fund; fees and expenses of independent auditors, of legal counsel, and of any transfer agent, registrar, or dividend disbursing agent of the Fund; expenses of repurchasing and redeeming shares and servicing shareholder accounts; expenses of preparing, printing and mailing stock certificates, shareholder reports, notices, proxy statements, confirmations, periodic investment 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; organizational and start up costs; and such non-recurring or extraordinary expenses as may arise, including those relating to actions, suits, or proceedings to which the Fund is a party or otherwise may have an exposure, and the legal obligation which the Fund may have to indemnify the Trust's Trustees and officers with respect thereto. 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 to the extent that the Distribution Agreement with MFS Fund Distributors, Inc. ("MFD"), provides that MFD is to pay all of such expenses. Expenses of the Trust which are not attributable to a specific series are allocated between the series in a manner believed by management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two-year term and continues in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by Majority Shareholder Vote and, in either case, by a majority of the Trustees who are not "interested persons" of the Fund or MFS as defined by the 1940 Act. The Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a Majority Shareholder Vote, or by either party on not more than 60 days' nor less than 30 days' written notice. The Advisory Agreement may be approved, renewed, amended, or terminated as to one Fund in the Trust, even though the Agreement is not approved, renewed, amended, or terminated as to any other Fund in the Trust.
The Advisory Agreement also provides that neither MFS 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, gross negligence, or reckless disregard of its or their duties and obligations under the Advisory Agreement.
SUB-ADVISORY AGREEMENTS - Sun Capital serves as the MFS Diversified Income Fund's Sub-Adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Sun Capital (the "Sun Capital Sub-Advisory Agreement"). The Sun Capital Sub-Advisory Agreement provides that the Adviser delegate to Sun Capital the authority to make investment decisions for a portion of the MFS Diversified Income Fund (for the purposes of this paragraph, the "Fund"). Sun Capital will provide portfolio management services for the Fund for the portion of the portfolio invested in REITs ("real estate investment trust") and other real estate related investments. For these services, the Adviser pays Sun Capital an investment advisory fee, computed daily and paid monthly in arrears, at the annual rate of 0.30% of the Fund's average daily net assets managed by Sun Capital. The Sun Capital Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by a majority of the Independent Trustees. The Sun Capital Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a majority of the Independent Trustees, by a Majority Shareholder Vote, or by the Adviser or Sub-Adviser on not less than 60 days' written notice. The Sun Capital Sub-Advisory Agreement specifically provides that neither the Sub-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 misconduct, bad faith, reckless disregard, or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under the Sun Capital Sub-Advisory Agreement.
Valley Forge serves as the MFS Sector Rotational Fund's sub-adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Valley Forge (for purposes of this paragraph, the "Valley Forge Sub-Advisory Agreement"). The Valley Forge Sub-Advisory Agreement provides that the Adviser delegate to Valley Forge the authority to make investment decisions for the MFS Sector Rotational Fund (for the purposes of this paragraph, the "Fund"). For these services, the Adviser pays Valley Forge an investment advisory fee, computed and paid quarterly in arrears, in an amount equal to 0.35% annually of the first $1 billion of the fund's average daily net assets; 0.30% annually of the fund's average daily net assets in excess of $1 billion and up to $2.5 billion; 0.25% annually of the fund's average daily nets assets in excess of $2.5 billion and up to $5 billion; and 0.20% annually of the fund's average daily net assets in excess of $5 billion. The Valley Forge Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by the Board of Trustees or by the vote of a majority of the Fund's outstanding voting securities, and, in either case, by a majority of the Trustees who are not parties to the Valley Forge Sub-Advisory Agreement or interested persons of any such party. The Valley Forge Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by the Trustees, by vote of a majority of the Fund's outstanding voting securities, or by the Adviser or Valley Forge on not less than 60 days' written notice. The Valley Forge Sub-Advisory Agreement specifically provides that neither Valley Forge 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 duties or by reason of reckless disregard of its obligations and duties under the Valley Forge Sub-Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal and other administrative services under a Master Administrative Services Agreement between the Fund and MFS. Under the Agreement, the fund pays an annual fee to MFS for providing these services.
Effective August 1, 2006, the maximum annual fee payable by each Fund is $17,500 plus an amount equal to the following percentage of the Fund's average daily net assets (except for Funds investing primarily in shares of MFS Funds):
------------------------------------------------------------------- On the first $50,000,000 in assets 0.0000% ------------------------------------------------------------------- $50,000,000 - $750,000,000 in assets 0.0175% ------------------------------------------------------------------- $750,000,000 - $1,500,000,000 in assets 0.0170% ------------------------------------------------------------------- $1,500,000,000 - $2,500,000,000 in assets 0.0165% ------------------------------------------------------------------- $2,500,000,000 - $4,000,000,000 in assets 0.0120% ------------------------------------------------------------------- Over $4,000,000,000 0.0000% ------------------------------------------------------------------- |
The fees are subject to minimum and maximum fees, based on the asset level of the MFS Funds.
In addition, MFS provides, either directly or through affiliated and/or unaffiliated entities, certain administrative, recordkeeping, and communication/educational services to the retirement plans and retirement plan participants which invest in Class R1, Class R2, Class R3, Class R4 and Class R5 shares under a Master Class R Administration and Services Agreement. Under the Agreement, the Fund pays an annual fee to MFS for these services at the following percentages of the average daily net assets attributable to that class of shares: 0.35% for Class R1; 0.25% for Class R2; 0.15% for Class R3; 0.15% for Class R4; and 0.10% for Class R5 shares.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the Fund under a Shareholder Servicing Agent Agreement. Under the Agreement, MFSC may receive a fee based on the costs it incurs in providing these services, plus a target profit margin. MFSC may also contract with other affiliated and unaffiliated service providers to provide some or all of the services described above. State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, performs dividend disbursing agent functions for the Fund.
MFSC may receive a fee from the Fund designed to achieve a target pre-tax annual profit margin. Taking into account this goal, effective April 1, 2007, the Fund (except Funds investing primarily in other MFS Funds) pays MFSC a fee based on its average daily net assets equal to 0.048%. Such fee rate shall continue until modified by agreement between the Fund and MFSC, taking into account MFSC's pre-tax profit margin target.
In addition, MFSC is reimbursed by the Fund for certain expenses incurred by MFSC on behalf of the Fund. These reimbursements include payments for certain out-of-pocket expenses, such as costs related to mailing shareholder statements and the use of third party recordkeeping systems, incurred by MFSC in performing the services described above. MFSC is also reimbursed for payments made under agreements with affiliated and unaffiliated service providers that provide sub-accounting and other shareholder services, including without limitation recordkeeping, reporting and transaction processing services. Payments made under these agreements are based on the Fund's average daily net assets and/or the Fund accounts serviced by the service provider.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund which invests in other MFS Funds ("MFS fund-of-funds") and each underlying fund in which an MFS fund-of-funds invests ("underlying funds"), the underlying fund may pay a portion of each MFS fund-of-fund's transfer agent-related expenses, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the MFS fund-of-funds.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD" or the "Distributor"), a wholly owned subsidiary of MFS, serves as distributor for the continuous offering of shares of the Fund pursuant to a Distribution Agreement. The Agreement obligates MFD to use best efforts to find purchasers for shares of the Fund.
See Appendix D to this Part II for information regarding sales charges and Rule 12b-1 distribution and service payments paid to MFD.
PROGRAM MANAGER(S)
MFD serves as program manager for a qualified tuition program under Section 529 of the Internal Revenue Code through which 529 share classes are available as investment options to program participants. The Fund's 529 share classes may also be offered through qualified tuition programs for which MFD does not serve as program manager. MFD provides, either directly or through third parties, recordkeeping, tax reporting, and account services, as well as services designed to maintain the programs' compliance with the Internal Revenue Code and other regulatory requirements under a Master 529 Administrative Services Agreement.
Under the Agreement, the Fund pays MFD a fee for these services of up to 0.35% annually of the assets attributable to the 529 share classes. The current annual fee has been established at 0.25% of the average daily net assets attributable to each 529 share class up to $10 billion in assets, 0.225% from $10 billion in assets up to $20 billion in assets, and 0.20% from $20 billion in assets and above. The fee may only be increased with the approval of the Fund's Board of Trustees. MFD pays a portion of this fee to third parties who provide these services.
Please consult the program description for your particular qualified tuition program for a discussion of the fees paid to and services received from the program manager.
CODE OF ETHICS
The Fund, its Adviser, its sub-adviser (if applicable) and Distributor have adopted separate codes of ethics as required under the Investment Company Act of 1940 ("the 1940 Act"). Subject to certain conditions and restrictions, each code permits personnel subject to the code to invest in securities for their own accounts, including securities that may be purchased, held or sold by the Fund. Securities transactions by some of these persons may be subject to prior approval of the Adviser's or sub-adviser's Compliance Departments, and securities transactions of certain personnel are subject to quarterly reporting and review requirements.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge paid to MFD and imposed upon
purchases of Class A, Class A1, and Class 529A shares, and the CDSC paid to MFD
and imposed upon redemptions of Class A, Class A1, Class B, Class B1, Class C,
Class 529B, and Class 529C shares, are waived. These circumstances are described
in Appendix C of this Part II. The Fund, MFS, and their affiliates reserve the
right to eliminate, modify, and add waivers at any time in their discretion.
DISTRIBUTION PLAN
The Trustees have approved a plan for all funds (except the MFS Money Market
Fund and the MFS Government Money Market Fund) in accordance with Rule 12b-1
under the 1940 Act for Class A, Class B, Class B1, Class C, Class 529A, Class
529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, Class W and
Class J shares (the "Distribution Plan"). The Fund has not adopted a
Distribution Plan with respect to its Class A1, Class I or Class R5 shares. In
approving the Distribution Plan, the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust as defined in the 1940
Act and have no direct or indirect financial interest in the operation of the
Distribution Plan or any agreements relating to the Distribution Plan
("Distribution Plan Qualified Trustees"), concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders.
The Distribution Plan is designed to promote sales of shares and minimize redemptions, as well as to assist in the servicing and maintenance of shareholder accounts. Increasing a Fund's net assets through sales of shares, or minimizing reductions in net assets by minimizing redemptions, may help reduce a Fund's expense ratio by spreading the Fund's fixed costs over a larger base and may reduce the potential adverse effect of selling a Fund's portfolio securities to meet redemptions. There is, however, no assurance that the net assets of the Fund will increase or not be reduced, or that other benefits will be realized as a result of the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its continuance is specifically approved at least annually by vote of both the Trustees and a majority of the Distribution Plan Qualified Trustees. The Distribution Plan also requires that the Fund and MFD each provide the Trustees, and that the Trustees review, at least quarterly, a written report of the amounts expended (and purposes therefor) under the Distribution Plan. The Distribution Plan may be terminated at any time by vote of a majority of the Distribution Plan Qualified Trustees or by a Majority Shareholder Vote of the shares of the class to which the Distribution Plan relates ("Designated Class"). The Distribution Plan may not be amended to increase materially the amount of permitted distribution expenses without the approval of a majority of the shares of the Designated Class of the Fund, or may not be materially amended in any case without a vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The distribution and service fees paid to MFD equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
-------------------------------------------------------------------------------
MAXIMUM TOTAL
MAXIMUM MAXIMUM SERVICE DISTRIBUTION AND
CLASS DISTRIBUTION FEE FEE SERVICE FEE
-------------------------------------------------------------------------------
Class A 0.10% 0.25% 0.35%
-------------------------------------------------------------------------------
Class B 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class B1 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class C 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class 529A 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class 529B 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class 529C 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class R 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R1 0.50% 0.25% 0.75%
-------------------------------------------------------------------------------
Class R2 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R3 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R4 0.00% 0.25% 0.25%
-------------------------------------------------------------------------------
Class W 0.10% 0.00% 0.10%
-------------------------------------------------------------------------------
Class J 0.25% 0.70%/0.75% 0.95%/1.00%
-------------------------------------------------------------------------------
Service Class 0.25% 0.00% 0.25%
-------------------------------------------------------------------------------
|
In certain circumstances, the fees described above may not be implemented, are being waived, or do not apply to certain MFS Funds. Current distribution and service fees for each Fund are reflected under the captions "Expense Summary" and "Description of Share Classes -- Distribution and Service Fees" in the Prospectus.
SERVICE FEES
The Distribution Plan provides that the Fund may pay MFD a service fee based on the average daily net assets attributable to the Designated Class, (i.e., Class A, Class B, Class B1, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, or Class J shares, as appropriate) annually. Class W shares do not pay a service fee. MFD may, at its discretion, retain all or a portion of such payments or pay all or a portion of such payments to financial intermediaries. Service fees compensate MFD and/or financial intermediaries for shareholder servicing and account maintenance activities, including, but not limited to, shareholder recordkeeping (including assisting in establishing and maintaining customer accounts and records), transaction processing (including assisting with purchase, redemption and exchange requests), shareholder reporting, arranging for bank wires, monitoring dividend payments from the Funds on behalf of customers, forwarding certain shareholder communications from the Funds to customers, corresponding with shareholders and customers regarding the Funds (including receiving and responding to inquiries and answering questions regarding the Funds), and aiding in maintaining the investment of their respective customers in the Funds. Financial intermediaries may from time to time be required to meet certain criteria in order to receive service fees.
DISTRIBUTION FEES
The Distribution Plan provides that the Fund may pay MFD a distribution fee based on the average daily net assets attributable to the Designated Class as partial consideration for distribution services performed and expenses incurred in the performance of MFD's obligations under its distribution agreement with the Fund. Distribution fees compensate MFD and/or financial intermediaries for their expenses in connection with the distribution of Fund shares, including, but not limited to, commissions to financial intermediaries, printing prospectuses and reports used for sales purposes, the preparation and printing of sales literature, personnel, travel, office expense and equipment, payments made to wholesalers employed by MFD (employees may receive additional compensation if they meet certain targets for sales of one or more MFS Funds), and other distribution-related expenses. The amount of the distribution fee paid by the Fund with respect to each class differs under the Distribution Plan, as does the use by MFD of such distribution fees. While the amount of compensation received by MFD in the form of distribution fees during any year may be more or less than the expenses incurred by MFD under its distribution agreement with the Fund, the Fund is not liable to MFD for any losses MFD may incur in performing services under its Distribution Agreement with the Fund.
In addition, with respect to Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Emerging Growth Fund, MFS High Income Fund, MFS Total Return Fund, MFS Research Fund, MFS Strategic Income Fund, and MFS Bond Fund, to the extent that the annualized aggregate service and distribution fees paid under the Distribution Plan do not exceed 0.35% of Class A shares' average daily net assets, the Fund is permitted to pay such distribution-related expenses or other distribution-related expenses.
FINANCIAL INTERMEDIARY COMPENSATION
MFD and/or its affiliates may pay commissions, Rule 12b-1 distribution and service fees, 529 administrative services fees, retirement plan administrative and service fees, shareholder servicing fees, and other payments to financial intermediaries that sell Fund shares as described in Appendix D of this Part II.
INVESTMENT STRATEGIES, RISKS AND RESTRICTIONS
Set forth in Appendix E of this Part II is a description of investment strategies which the MFS Funds may generally use in pursuing their investment objectives and investment policies to the extent such strategies are consistent with their investment objectives and investment policies, and a description of the risks associated with these investment strategies. Set forth in Appendix F of this Part II is a description of investment restrictions to which the Fund is subject.
NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is determined each day during which the New York Stock Exchange is open for trading (see "Determination of Net Asset Value" below for a list of days that the Exchange is closed).
For this purpose, the net income attributable to shares of a money market fund (from the time of the immediately preceding determination thereof) shall consist of (i) all interest income accrued on the portfolio assets of the money market fund less (ii) all actual and accrued expenses of the money market fund determined in accordance with generally accepted accounting principles. Interest income shall include discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income is determined, the net asset value per share (i.e., the value of the net assets of the money market fund divided by the number of shares outstanding) is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment, representing the reinvestment of dividend income, is reflected by an increase in the number of shares in the shareholder's account.
It is expected that the shares of the money market fund will have a positive net income at the time of each determination thereof. If for any reason the net income determined at any time is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the money market fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to each such account. If and to the extent that such negative amount exceeds such declared dividends at the end of the month (or during the month in the case of an account liquidated in its entirety), the money market fund could reduce the number of its outstanding shares by treating each shareholder of the money market fund as having contributed to its capital that number of full and fractional shares of the money market fund in the account of such shareholder which represents its proportion of such excess. Each shareholder of the money market fund will be deemed to have agreed to such contribution in these circumstances by his or her investment in the money market fund. This procedure would permit the net asset value per share of the money market fund to be maintained at a constant $1.00 per share.
In addition, the money market funds intend to distribute net realized short- and long-term capital gains, if any, at least annually.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute to its shareholders all or substantially all of its net investment income. The net investment income of these Funds consists of non-capital gain income less expenses. In addition, these Funds intend to distribute net realized short- and long-term capital gains, if any, at least annually. Shareholders will be informed of the tax consequences of such distributions, including whether any portion represents a return of capital, after the end of each calendar year.
TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important federal
(and, where noted, state) income tax consequences affecting the Fund and its
shareholders. The discussion is very general, and therefore prospective
investors are urged to consult their tax advisers about the impact an investment
in the Fund may have on their own tax situations.
TAX TREATMENT OF THE FUND
Federal Taxes -- The Fund (even if it is a Fund in a Trust with multiple series) is treated as a separate entity for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has elected (or in the case of a new Fund, intends to elect) to be, and intends to qualify to be treated each year as, a "regulated investment company" under Subchapter M of the Code.
In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in "qualified publicly traded partnerships" (as defined below);
(b) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid-generally, taxable ordinary income and the excess, if any, of the net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year; and
(c) diversify its holdings so that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested (x) in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or businesses or (y) in the securities of one or more qualified publicly traded partnerships (as defined below).
In the case of the Fund's investment in loan participations, the Fund shall treat both the financial intermediary and the issuer of the loan participation as an issuer for the purposes of meeting the diversification requirement described in paragraph (c).
In general, for purposes of the 90% income requirement described in paragraph
(a) above, income derived from a partnership will be treated as qualifying
income only to the extent such income is attributable to items of income of the
partnership which would be qualifying income if realized by the regulated
investment company. However, 100% of the net income derived from an interest in
a "qualified publicly traded partnership" (which is defined as any partnership
(i) whose interests are traded on an established securities market or whose
interests are readily traded on a secondary market or the substantial equivalent
thereof and (ii) that derives less than 90% of its income from the qualifying
income described in paragraph (a)(i) above) will be treated as qualifying
income. In addition, although in general the passive loss rules of the Code do
not apply to regulated investment companies, such rules do apply to a regulated
investment company with respect to items attributable to an interest in a
qualified publicly traded partnership. Finally, for purposes of paragraph (c)
above, the term "outstanding voting securities of such issuer" will include
the equity securities of a qualified publicly traded partnership.
As a regulated investment company, the Fund will not be subject to any federal income or excise taxes on its net investment income and net realized capital gains that it distributes to shareholders in accordance with the timing requirements imposed by the Code. The Fund's foreign-source income, if any, may be subject to foreign withholding taxes. If the Fund failed to qualify as a "regulated investment company" in any year, it would incur a regular federal corporate income tax on all of its taxable income, whether or not distributed, and Fund distributions would generally be taxable as dividend income to the shareholders.
If the Fund fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or later if the Fund is permitted so to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders by the Fund in January of a year generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November, or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
Massachusetts Taxes -- As long as it qualifies as a regulated investment company under the Code, the Fund will not be required to pay Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
Tax Treatment of Distributions -- Subject to the special rules discussed below for Municipal Funds, shareholders of the Fund normally will have to pay federal income tax and any state or local income taxes on the dividends and "Capital Gain Dividends" (as defined below) they receive from the Fund. Except as described below, any distributions from ordinary income or from net short-term capital gains are taxable to shareholders as ordinary income for federal income tax purposes whether paid in cash or reinvested in additional shares.
For taxable years beginning before January 1, 2011, "qualified dividend income" received by an individual will be taxed at the rates applicable to long-term capital gains. In order for some portion of the dividends received by a Fund shareholder to be qualified dividend income, the Fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to the Fund's shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (1) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such date), (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) if the recipient elects to have the dividend income treated as investment interest, or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (b) treated as a passive foreign investment company. Payments in lieu of dividends, such as payments pursuant to securities lending arrangements, also do not qualify to be treated as qualified dividend income.
In general, a distribution of investment income designated by the Fund as derived from qualified dividend income will be treated as qualified dividend income by a shareholder taxed as an individual provided the shareholder meets the holding period and other requirements described above with respect to the Fund's shares. In any event, if the qualified dividend income received by the Fund during any taxable year is 95% or more of its gross income for that taxable year, then 100% of the Fund's dividends (other than Capital Gain Dividends), will be eligible to be treated as qualified dividend income. For this purpose, in the case of a sale or other disposition of the Fund of stock or securities, the only gain included in the term "gross income" is the excess of net short-term capital gain from such sales or dispositions over the net long-term capital loss from such sales or dispositions.
Properly designated distributions of net capital gain (i.e., the excess of net long-term capital gain over the net short-term capital loss) ("Capital Gains Dividends"), whether paid in cash or reinvested in additional shares, are taxable to shareholders as long-term capital gains for federal income tax purposes without regard to the length of time the shareholders have held their shares.
Long-term capital gain rates applicable to individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
Any Fund dividend that is declared in October, November, or December of any calendar year, payable to shareholders of record in such a month and paid during the following January, will be treated as if received by the shareholders on December 31 of the year in which the dividend is declared. The Fund will notify shareholders regarding the federal tax status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the Fund on a daily basis, will have the effect of reducing the per share net asset value of Fund shares by the amount of the distribution. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Capital Loss Carryovers-- Distributions from capital gains are generally made after applying any available capital loss carryovers. The amounts and expiration dates of any capital loss carryovers available to the Fund are shown in the notes to the financial statements for the Fund.
Dividends-Received Deduction-- If the Fund receives dividend income from U.S. corporations, a portion of the Fund's ordinary income dividends is normally eligible for the dividends-received deduction for corporations if the recipient otherwise qualifies for that deduction with respect to its holding of Fund shares. Availability of the deduction for particular corporate shareholders is subject to certain limitations, and deducted amounts may be subject to the alternative minimum tax or result in certain basis adjustments.
Disposition of Shares-- In general, any gain or loss realized upon a disposition of Fund shares by a shareholder that holds such shares as a capital asset will be treated as a long-term capital gain or loss if the shares have been held for more than 12 months and otherwise as a short-term capital gain or loss. However, any loss realized upon a disposition of Fund shares held for six months or less will be treated as a long-term capital loss to the extent of any Capital Gain Dividends made with respect to those shares.
Shares Purchased Through Tax-Qualified Plans -- Distributions by the Fund to
retirement plans that qualify for tax-exempt treatment under federal income tax
laws will not be taxable. Special tax rules apply to investments through such
plans. You should consult your tax adviser to determine the suitability of the
Fund as an investment through such a plan and the tax treatment of distributions
(including distributions of amounts attributable to an investment in the Fund)
from such a plan.
U.S. Taxation of Non-U.S. Persons -- Capital Gain Dividends and exempt-interest
dividends, if any, will not be subject to withholding of federal income tax.
However, distributions properly designated as exempt-interest dividends may be
subject to backup withholding, as discussed below. In general, dividends other
than Capital Gain Dividends and exempt-interest dividends, if any, paid by the
Fund to a shareholder that is not a "U.S. person" within the meaning of the
Code (such shareholder, a "Non-U.S. Person") are subject to withholding of U.S
federal income tax at a rate of 30% (or lower applicable treaty rate) even if
they are derived from income or gains (such as portfolio interest, short-term
capital gains, or foreign-source dividend and interest income) that, if paid to
a Non-U.S. Person directly, would not be subject to withholding. However,
effective for taxable years of the Fund beginning after December 31, 2004, and
before January 1, 2008, the Fund will not be required to withhold any amounts
with respect to (i) distributions (other than distributions to a Non-U.S. Person
(w) that has not provided a satisfactory statement that the beneficial owner is
not a U.S. person, (x) to the extent that the dividend is attributable to
certain interest on an obligation if the Non-U.S. Person is the issuer or is a
10% shareholder of the issuer, (y) that is within certain foreign countries that
have inadequate information exchange with the United States, or (z) to the
extent the dividend is attributable to interest paid by a person that is a
related person of the Non-U.S. Person and the Non-U.S. Person is a controlled
foreign corporation) from U.S.-source interest income that would not be subject
to U.S. federal income tax if earned directly by an individual Non-U.S. Person
(an "interest-related dividend"), and (ii) distributions (other than
distributions to an individual Non-U.S. Person who is present in the United
States for a period or periods aggregating 183 days or more during the year of
the distribution) of net short-term capital gains in excess of net long-term
capital losses (a "short-term capital gain dividend"), in each such case to
the extent such distributions are properly designated by the Fund. This
provision will first apply to the Fund (1) with respect to its direct portfolio
investments (if any) in its taxable year beginning after December 31, 2004, and,
(2) with respect to its investments in underlying Funds (if any), with respect
to designated distributions from such underlying Funds in their taxable years
beginning after December 31, 2004, that are received by the Fund in its taxable
year beginning after December 31, 2004. Depending on the circumstances, the Fund
may make such designations with respect to all, some or none of its potentially
eligible dividends and/or treat such dividends, in whole or in part, as
ineligible for this exemption for withholding. The Fund does not currently
intend to, but may in certain circumstances, designate distributions as
interest-related dividends or as short-term capital gain dividends except with
respect to Research Bond Fund J shares. In order to qualify for this exemption
from withholding, a foreign person will need to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN or substitute Form). In the case of
shares held through an intermediary, the intermediary may withhold even if the
Fund makes a designation with respect to a payment. Foreign persons should
contact their intermediaries with respect to the application of these rules to
their accounts.
If a beneficial holder who is a Non-U.S. Person has a trade or business in the United States, and the dividends are effectively connected with the conduct by the beneficial holder of a trade or business in the United States, the dividend will be subject to U.S. federal net income taxation at regular income tax rates.
In general, special tax rules apply to distributions that a "qualified investment entity" (a "QIE") pays to foreign shareholders that are attributable to gain from the Fund's sale or exchange of "U.S. real property interests" (a "USRPI Distribution"). A Fund will be a QIE if it is both (i) a regulated investment company and (ii) a "U.S. real property holding corporation" (determined without regard to certain exceptions, described below, for 5% holders of publicly traded classes of stock and for interests in domestically-controlled regulated investment companies and real estate investment trusts ("REITs")). Under the Code, a "U.S. real property holding corporation" is any corporation that holds (or held during the previous five-year period) "U.S. real property interests" ("USRPIs") (defined as U.S. real property and interests (other than solely as a creditor) in "U.S. real property holding corporations") with an aggregate fair market value equal to 50% or more of the fair market value of the corporation's real property assets and other trade-or-business assets. A USRPI does not include (i) any class of stock of a corporation that is traded on an established securities market with respect to a person who holds 5% or less of such class of stock at all times during the previous five-year period and (ii) a regulated investment company's interests in domestically controlled REITs and other regulated investment companies.
For taxable years beginning on or after January 1, 2006, where a foreign shareholder has owned more than 5% of a class of shares of a Fund that is a QIE during the one-year period preceding the date of the USRPI Distribution, the Fund will be required to withhold 35% of any USRPI Distribution and the foreign shareholder will have an obligation to file a U.S. tax return and pay tax. For all other foreign shareholders of a Fund that is a QIE, a USRPI Distribution will be treated as ordinary income (notwithstanding any designation by the Fund that such distribution is a Capital Gain Dividend) and the Fund will be required to withhold 30% (or lower applicable treaty rate) of such distribution. If a Fund that is a QIE makes a distribution to its foreign shareholders that is attributable to a USRPI Distribution received by the Fund from a "lower-tier" REIT or regulated investment company that is a QIE, that distribution will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the "lower-tier" REIT or regulated investment company.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend and certain other conditions are met, or (iii) the shares are USRPIs or the Capital Gain Dividends are USRPI Distributions.
Foreign shareholders in the Fund should consult their tax advisers with respect to the potential application of the above rules.
Backup Withholding -- The Fund is also required in certain circumstances to apply backup withholding at the rate of 28% on taxable dividends, including Capital Gain Dividends, redemption proceeds (except for redemptions by money market funds), and certain other payments that are paid to any non-corporate shareholder (including a Non-U.S. Person) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor residents of the United States. The back-up withholding rules also apply to distributions that are properly designated as exempt-interest dividends.
Foreign Income Taxation of a Non-U.S. Person -- Distributions received from the Fund by a Non-U.S. Person may also be subject to tax under the laws of their own jurisdictions.
State and Local Income Taxes: U.S. Government Securities -- Dividends paid by the Fund that are derived from interest on obligations of the U.S. Government and certain of its agencies and instrumentalities (but generally not distributions of capital gains realized upon the disposition of such obligations) may be exempt from state and local income taxes. The Fund generally intends to advise shareholders of the extent, if any, to which its dividends 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.
Certain Investments -- Any investment in zero coupon bonds, deferred interest bonds, payment-in-kind bonds, certain inflation-adjusted debt instruments, certain stripped securities, and certain securities purchased at a market discount (including certain high yield debt obligations) will cause the Fund to recognize income prior to the receipt of cash payments with respect to those securities. To distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund's investments in REIT equity securities may also require the Fund to accrue and distribute income not yet received and may at other times result in the Fund's receipt of cash in excess of the REIT's earnings. If the Fund distributes such amounts, such distribution could constitute a return of capital to Fund shareholders for federal income tax purposes. Income from REIT securities generally will not be eligible for treatment as qualified dividend income. Any investment in residual interests of a Collateralized Mortgage Obligation (a "CMO") that has elected to be treated as a real estate mortgage investment conduit (a "REMIC") can create complex tax problems, especially if the Fund has state or local governments or other tax-exempt organizations as shareholders. Under current law, the Fund serves to block unrelated business taxable income ("UBTI") from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if either: (1) the Fund invests in REITs that hold residual interests in REMICs; or (2) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). If a charitable remainder trust (as defined in Code Section 664) realizes any UBTI for a taxable year, it will lose its tax-exempt status for the year.
Options, Futures Contracts, and Forward Contracts -- The Fund's transactions in options, futures contracts, forward contracts, short sales, and swaps and related transactions will be subject to special tax rules that may affect the amount, timing, and character of Fund income and distributions to shareholders. For example, certain positions held by the Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out on that day), and any gain or loss associated with the positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by the Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," and may be subject to special tax rules that would cause deferral of Fund losses, adjustments in the holding periods of Fund securities, and conversion of short-term into long-term capital losses. Certain tax elections exist for straddles that may alter the effects with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund will limit its activities in options, futures contracts, forward contracts, short sales, and swaps and related transactions to the extent necessary to meet the diversification requirements of Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to foreign investments by the Fund. Foreign exchange gains and losses realized by the Fund may be treated as ordinary income and loss. Use of foreign currencies for non-hedging purposes and investment by the Fund in certain "passive foreign investment companies" may be limited in order to avoid a tax on the Fund. The Fund may elect to mark to market certain investments in "passive foreign investment companies" on the last day of each year. This election may cause the Fund to recognize income prior to the receipt of cash payments with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund.
Foreign Income Taxes -- Investment income received by the Fund and gains with respect to foreign securities may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of tax or an exemption from tax on such income; the Fund intends to qualify for treaty reduced rates where available. It is not possible, however, to determine the Fund's effective rate of foreign tax in advance, since the amount of the Fund's assets to be invested within various countries is not known.
If more than 50% of the total assets of a Fund are represented by direct investments in foreign stock and securities at the close of its taxable year, the Fund may elect to "pass through" to its shareholders foreign income taxes paid by it. If the Fund so elects, shareholders will be required to treat their pro rata portions of the foreign income taxes paid by the Fund as part of the amounts distributed to them by it and thus includable in their gross income for federal income tax purposes. Shareholders who do not itemize deductions would (subject to such limitations) be able to claim a credit but not a deduction. No deduction will be permitted to individuals in computing their alternative minimum tax liability. If the Fund is not eligible, or does not elect, to "pass through" to its shareholders foreign income taxes it has paid, shareholders will not be able to claim any deduction or credit for any part of the foreign taxes paid by the Fund. In addition, the Fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the Fund's recognition of ordinary income and may affect the timing, amount, or character of the Fund's distributions.
Tax Shelter Reporting -- Under Treasury regulations, if a shareholder recognizes a loss with respect to the Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Underlying Funds -- If the Fund invests all of its assets in shares of underlying Funds, its distributable income and gains will normally consist entirely of distributions from the underlying Funds' income and gains and gains and losses on the dispositions of shares of underlying Funds. To the extent that an underlying Fund realizes net losses on its investments for a given taxable year, the Fund will not be able to recognize its share of those losses (so as to offset distributions of net income or capital gains from other underlying Funds) until it disposes of shares of the underlying Fund. Moreover, even when the Fund does make such a disposition, a portion of its loss may be recognized as a long-term capital loss, which will not be treated as favorably for federal income tax purposes as a short-term capital loss or an ordinary deduction. In particular, the Fund will not be able to offset any capital losses from its dispositions of underlying Fund shares against its ordinary income, which includes distributions of any net short-term capital gains realized by an underlying Fund. In addition, in certain circumstances, the "wash sale" rules under Section 1091 of the Code may apply to a Fund's sales of underlying Fund shares that have generated losses. A wash sale occurs if shares of an underlying Fund are sold by the Fund at a loss and the Fund acquires additional shares of that same underlying Fund thirty days before or after the date of the sale. The wash sale rules could defer losses of the Fund on sales of underlying Fund shares (to the extent such sales are wash sales) for extended (and, in certain cases, potentially indefinite) periods of time. As a result of the foregoing rules, and certain other special rules, it is possible that the amounts of net investment income and net capital gains that the Fund will be required to distribute to shareholders will be greater than such amounts would have been had the Fund invested directly in the securities held by the underlying Funds, rather than investing in shares of the underlying Funds. For similar reasons, the character of distributions from a Fund (e.g., capital gains as compared to ordinary income, eligibility for the dividends-received deduction, etc.) will not necessarily be the same as it would have been had the Fund invested directly in the securities held by the underlying Funds.
If the Fund received dividends from an underlying Fund that qualifies as a regulated investment company, and the underlying Fund designates such dividends as "qualified dividend income," then the Fund is permitted in turn to designate a portion of its distributions as "qualified dividend income" as well, provided the Fund meets holding period and other requirements with respect to shares of the underlying Fund.
Depending on the Fund's percentage ownership in an underlying Fund before and after a redemption of shares of such underlying Fund, such a redemption may cause the Fund to be treated as receiving a dividend on the full amount of the distribution instead of receiving capital gain income on the shares of the underlying Fund. This would be the case where the Fund holds a significant interest in an underlying Fund and redeems only a small portion of such interest. It is possible that such a dividend will qualify as "qualified dividend income;" otherwise, it will be taxable as ordinary income.
The fact that a Fund achieves its investment objectives by investing in underlying Funds will generally not adversely affect the Fund's ability to pass on to foreign shareholders the full benefit of the interest-related dividends and short-term capital gain dividends that it receives from its underlying investments in the Funds, except possibly to the extent that (1) interest-related dividends received by the Fund are offset by deductions allocable to the Fund's qualified interest income or (2) short-term capital gain dividends received by the Fund are offset by the Fund's net short- or long-term capital losses, in which case the amount of a distribution from the Fund to a foreign shareholder that is properly designated as either an interest-related dividend or a short-term capital gain dividend, respectively, may be less than the amount that such shareholder would have received had they invested directly in the underlying Funds. Furthermore, if the Fund is a QIE and invests in an underlying Fund that is a QIE, a distribution to a foreign shareholder that is attributable to a USRPI Distribution received by the Fund will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the underlying Fund.
Under the current law, a Fund of Funds cannot pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying Fund. A Fund is permitted to elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and securities at the close of its taxable year. Foreign securities held indirectly through an underlying Fund do not contribute to this 50% threshold.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of Funds whose objective is to invest primarily in obligations that pay interest that is exempt from federal income tax ("Municipal Funds").
Tax-Exempt Distributions -- The portion of a Municipal Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends will increase a corporate shareholder's alternative minimum tax. Except when the Fund provides actual monthly percentage breakdowns, the percentage of income designated as tax-exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Taxable Distributions -- A Municipal Fund may also earn some income that is taxable as ordinary income (including interest from any obligations that lose their federal tax exemption and, subject to a de minimis exception, when a bond purchased at a price less than its stated redemption price at maturity (a so-called "market discount bond") matures or is disposed of by the Municipal Fund) and may recognize capital gains and losses as a result of the disposition of securities and from certain options and futures transactions. Shareholders normally will have to pay federal income tax on the non-exempt interest dividends and capital gain distributions they receive from the Fund, whether paid in cash or reinvested in additional shares. However, such Funds do not expect that the non-tax-exempt portion of their net investment income, if any, will be substantial. Because Municipal Funds expect to earn primarily tax-exempt interest income, it is expected that dividends from such Funds will not qualify for the dividends-received deduction for corporations and will not be treated as "qualified dividend income" taxable to non-corporate shareholders at reduced rates.
Consequences of Distributions by a Municipal Fund: Effect of Accrued Tax-Exempt Income -- Shareholders redeeming shares after tax-exempt income has been accrued but not yet declared as a dividend should be aware that a portion of the proceeds realized upon redemption of the shares will reflect the existence of such accrued tax-exempt income and that this portion 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 redemption. For this reason, if a shareholder wishes to redeem shares of a Municipal Fund that does not declare dividends on a daily basis, the shareholder may wish to consider whether he or she could obtain a better tax result by redeeming immediately after the Fund declares dividends representing substantially all the ordinary income (including tax-exempt income) accrued for that period.
Certain Additional Information for Municipal Fund Shareholders -- Interest on indebtedness incurred by shareholders to purchase or carry Municipal Fund shares will not be deductible for federal income tax purposes. Exempt-interest dividends are taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal income tax. You should consult your tax adviser to determine what effect, if any, an investment in a Fund may have on the federal taxation of your benefits. Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by private activity bonds should consult their tax advisers before purchasing Fund shares.
Consequences of Redeeming Shares -- Any loss realized on a redemption of Municipal Fund shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received with respect to those shares. If not disallowed, any such loss will be treated as a long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares.
State and Local Income Taxes: Municipal Obligations -- The exemption of exempt-interest dividends for federal income tax purposes does not necessarily result in exemption under the income tax laws of any state or local taxing authority. Some states do exempt from tax that portion of an exempt interest dividend that represents interest received by a regulated investment company on its holdings of securities issued by that state and its political subdivisions and instrumentalities. Therefore, the Fund will report annually to its shareholders the percentage of interest income earned by it during the preceding year on Municipal Bonds and will indicate, on a state-by-state basis only, the source of such income.
SPECIAL CONSIDERATIONS FOR 529 SHARE CLASSES
The following special consideration applies specifically to the ownership of a Fund' 529 share classes through a tuition program that qualifies under Section 529 of the Code.
The 529 share classes are an investment option under one or more tuition programs designed to qualify under Section 529 of the Code so that earnings on investments are not subject to federal income tax (to either a contributor to the tuition program or a designated beneficiary) until the earnings are withdrawn. Withdrawals of earnings that are used to pay "qualified higher education expenses" are tax-free for federal income tax purposes. State and local taxes may still apply. These tax benefits are not available to 529 shares that are not owned through a qualifying Section 529 tuition program.
Withdrawals of earnings that are not used for the designated beneficiary's qualified higher education expenses generally are subject not only to federal income tax but also to a 10% penalty tax unless such amounts are transferred within sixty (60) days to another tuition program for the same designated beneficiary (only one such transfer may be made in any twelve (12) month period) or another designated beneficiary who is a member of the family of the designated beneficiary with respect to which the distribution was made and certain other conditions are satisfied. The 10% penalty tax will not apply to withdrawals made under certain circumstances, including certain withdrawals made after the designated beneficiary dies, becomes disabled, or receives a scholarship or other tax-free payment for educational expenses that does not exceed the amount of the distribution. Withdrawals attributable to contributions to the tuition program (including the portion of any rollover from another tuition program that is attributable to contributions to that program) are not subject to tax.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
For the purposes of this section, all references to the "Adviser" shall include
the Sub-Adviser with respect to MFS Diversified Income Fund and MFS Sector
Rotational Fund.
Specific decisions to purchase or sell securities for the Funds are made by persons affiliated with the Adviser. Any such person may serve other clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
In connection with the selection of broker/dealers and the placing of Fund
portfolio transactions, the Adviser seeks to achieve for the Funds the best
overall price and execution available from responsible brokerage firms, taking
account of all factors it deems relevant, including by way of illustration:
price; the size of the transaction; the nature of the market of the security;
the amount of the commission; the timing and impact of the transaction taking
into account market prices and trends; the reputation, experience and financial
stability of the broker/dealer involved; the willingness of the broker/dealer to
commit capital; the need for anonymity in the market; and the quality of
services rendered by the broker/dealer in that and other transactions.
In the case of securities traded in the over-the-counter market, portfolio transactions may be effected either on an agency basis, which involves the payment of negotiated brokerage commissions to the broker/dealer, including electronic communication networks, or on a principal basis at net prices without commissions, but which include compensation to the broker/dealer in the form of a mark-up or mark-down, depending on where the Adviser believes best execution is available. In the case of securities purchased from underwriters, the cost of such securities generally includes a fixed underwriting commission or concession. From time to time, soliciting dealer fees are available to the Adviser on tender or exchange offers. Such soliciting or dealer fees are, in effect, recaptured by the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended ("Section 28(e)"), the Adviser may cause the Funds to pay a broker/dealer which provides "brokerage and research services" (as defined by the Securities Exchange Act of 1934, as amended) to the Adviser an amount of commission for effecting a securities transaction for the Funds in excess of the amount other broker/dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the effecting broker/dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Funds and its other clients. "Commissions," as interpreted by the SEC, include fees paid to brokers for trades conducted on an agency basis, and certain mark-ups, markdowns, commission equivalents and other fees received by dealers in riskless principal transactions placed in the over-the-counter market.
The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement) or required in connection therewith by applicable rules. In determining whether a service or product qualifies as "brokerage and research services," the Adviser evaluates whether the service or product provides lawful and appropriate assistance to the Adviser in carrying out its investment decision-making responsibilities. It is often not possible to place a dollar value on the brokerage and research services the Adviser received from brokers. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions is based primarily on the professional opinions of the persons responsible for the placement and review of such transactions.
Broker/dealers may be willing to furnish statistical, research and other factual information or services ("Research"), for example, investment research reports; access to analysts; execution systems and trading analytics; reports or databases containing corporate, fundamental, and technical analyses; portfolio modeling strategies; and economic research services, such as publications, chart services, and advice from economists concerning macroeconomics information, and analytical investment information about particular corporations to the Adviser for no consideration other than brokerage or underwriting commissions. Such broker/dealers may be involved from time to time in executing, clearing or settling securities transactions on behalf of the Funds ("Executing Brokers"), or may have entered into agreements with one or more Executing Brokers pursuant to which they are responsible for performing one or more functions, the performance of which has been identified by the SEC as being sufficient to constitute effecting securities transactions within the meaning of Section 28(e) as interpreted by the SEC ("Effecting Brokers"). In reliance on this interpretation the Adviser expects to enter into Commission Sharing Agreements with Executing Brokers which will provide for the Executing Brokers to pay a portion of the Commissions paid by the Funds for securities transactions to Effecting Brokers. In addition to effecting securities transactions on behalf of the Funds pursuant to a Commission Sharing Agreement, the Effecting Brokers will also provide Research for the benefit of the Adviser. If a government agency with regulatory authority over the affairs of the Adviser or its subsidiaries, or a court of competent jurisdiction, were to determine that an Effecting Broker is not effecting a securities transaction within the meaning of Section 28(e), the Adviser believes that such Research should be considered as Research provided by the relevant Executing Broker and permitted by Section 28(e), provided that the relationship with such Executing Broker is otherwise consistent with the requirement for Research under Section 28(e). In such circumstances the Adviser will in effect be paying a greater commission in order to obtain third party research. The Adviser may use brokerage commissions from the Funds' portfolio transactions to acquire Research, subject to the procedures and limitations described in this discussion.
The advisory fee paid by each of the Funds to the Adviser is not reduced as a consequence of the Adviser's receipt of Research. To the extent the Funds' portfolio transactions are used to obtain Research, the brokerage commissions paid by the Funds might exceed those that might otherwise be paid for execution only. The Research received may be useful and of value to the Adviser in serving both the Funds and other clients of the Adviser; accordingly, not all of the Research provided by brokers through which the Funds effect securities transactions may be used by the Adviser in connection with the Funds. The Adviser would, through the use of the Research, avoid the additional expenses that would be incurred if it attempted to develop comparable information through its own staff.
From time to time, the Adviser prepares a list of broker/dealer firms that have been deemed by the Adviser to provide valuable Research as determined periodically by the investment staff ("Research Firms"), together with a suggested non-binding amount of brokerage commissions ("non-binding target") to be allocated to each Research Firm, subject to certain requirements. These Research Firms may include Executing Brokers and Effecting Brokers. In instances when the Adviser allocates commissions to Research Firms that are effecting trades within the meaning of Section 28(e) on behalf of client accounts, such trades will be executed in accordance with the Adviser's obligation to seek best execution for its client accounts. Neither the Adviser nor the Funds have an obligation to any Research Firm if the amount of brokerage commissions paid to the Research Firm is less than the applicable non-binding target. The Adviser reserves the right to pay cash to the Research Firm from its own resources in an amount the Adviser determines in its discretion.
If the Adviser determines that any service or product has a mixed use (i.e., it also serves functions that do not assist the investment decision-making or trading process), the Adviser will allocate the costs of such service or product accordingly in its reasonable discretion. The Adviser will allocate brokerage commissions to Research Firms only for the portion of the service or product that the Adviser determines assists it in the investment decision-making or trading process and will pay for the remaining value of the product or service in cash.
In effecting portfolio transactions on behalf of the Funds and the Adviser's other clients, the Adviser from time to time may instruct the broker/dealer that executes a transaction to allocate, or "step out," a portion of such transaction to another broker/dealer. The broker/dealer to which the Adviser has "stepped out" would then settle and complete the designated portion of the transaction, and the executing broker/dealer would settle and complete the remaining portion of the transaction that has not been "stepped out." Each broker/dealer may receive a commission or brokerage fee with respect to that portion of the transaction that it settles and completes.
In certain instances there may be securities that are suitable for the Funds' portfolios as well as for one or more of the other clients of the Adviser or of any subsidiary of the Adviser (or that the Adviser believes should no longer be held by the Funds' portfolios or by other clients of the Adviser or any subsidiary of the Adviser). 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. Transactions for each client are generally effected independently unless the Adviser determines to purchase or sell the same securities for several clients at approximately the same time. The Adviser may, but is not required to, aggregate together purchases and sales for several clients and will allocate the trades in a fair and equitable manner, across participating clients. The Adviser has adopted policies that are reasonably designed to ensure that when two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. Among other things, these policies prohibit allocations of equity initial public offerings, equity limited offerings or fixed income new issues to, among others: (1) Private Portfolio Management accounts; (2) funds or other accounts the beneficial owners of which are principally the Adviser's officers and employees of the Trust or Trustees which are not being offered to the public; and (3) any accounts owned beneficially solely by the Adviser or any direct or indirect subsidiary of the Adviser. However, these policies do not prohibit allocations to funds or other accounts owned beneficially by Sun Life of Canada (U.S.) Financial Services Holdings, Inc., or Sun Life Financial Inc., or their affiliates other than the Adviser and its direct and indirect subsidiaries. In addition, accounts in which the Adviser or any of its direct or indirect subsidiaries is the sole beneficial owner generally will be allocated investment opportunities (other than with respect to equity initial public offerings, equity limited offerings or fixed income new issues) on the same basis as Funds or other clients of the Adviser when the account has been established and seeded by the Adviser or the subsidiary with a limited amount of assets for the purpose of establishing a performance record to enable the Adviser or the subsidiary to offer the account's investment style to unaffiliated third parties.
It is recognized that in some cases this system could have a detrimental effect on the price or availability of a security as far as the Funds are concerned. In other cases, however, the Adviser believes that such practices may produce increased investment opportunities for the Funds.
DISCLOSURE OF PORTFOLIO HOLDINGS
Each Fund has established a policy governing the disclosure of its portfolio
holdings that is reasonably designed to protect the confidentiality of the
Fund's non-public portfolio holdings and prevent inappropriate selective
disclosure of such holdings. The Fund's Board of Trustees has approved this
policy and will be asked to approve any material amendments to this policy.
Exceptions to this policy may be authorized by MFS' general counsel or a senior
member of the MFS legal department acting under the supervision of MFS' general
counsel (an "Authorized Person").
Neither MFS nor the Fund nor, if applicable, a sub-adviser, will receive any compensation or other consideration in connection with its disclosure of Fund portfolio holdings.
PUBLIC DISCLOSURE OF PORTFOLIO HOLDINGS
In addition to the public disclosure of Fund portfolio holdings through required SEC quarterly filings, a Fund may make its portfolio holdings publicly available on the MFS Web site in such scope and form and with such frequency as MFS may reasonably determine.
The following information is generally available to you on the MFS Web site (MFS.COM):
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APPROXIMATE DATE OF POSTING
INFORMATION TO WEB SITE
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Fund's full securities holdings 24 days after month end
as of each month's end
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Fund's top 10 securities holdings
as of each month's end 14 days after month end
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If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for fund's that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the Fund or MFS may suspend the posting of this information or modify the elements of this Web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the Fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
Not all registered investment companies that are advised by MFS publicly disclose portfolio holdings in the form or on the schedule described above, and registered investment companies that are sub-advised by MFS or its affiliates may be subject to different portfolio holdings disclosure policies that may permit public disclosure of portfolio holdings information in different forms and at different times. In addition, separate account and unregistered product clients of MFS or its affiliates have access to their portfolio holdings, and prospective clients have access to representative portfolio holdings. These clients and prospective clients are not subject to the Fund's portfolio holdings disclosure policies. Some of these registered investment companies, sub-advised Funds, separate accounts, and unregistered products, all advised or sub-advised by MFS or its affiliates, have substantially similar or identical investment objectives and strategies to certain Funds. They therefore have potentially substantially similar, and in certain cases nearly identical, portfolio holdings as those Funds.
A Fund's portfolio holdings are considered to be publicly disclosed: (a) upon the disclosure of the portfolio holdings in a publicly available, routine filing with the SEC that is required to include the information; (b) the day after the Fund makes such information available on its Web site (assuming that it discloses in its prospectus that such information is available on its Web site); or (c) at such additional times and on such additional basis as determined by the SEC or its staff.
DISCLOSURE OF NON-PUBLIC PORTFOLIO HOLDINGS
A Fund may, in certain cases, disclose to third parties its portfolio holdings which have not been made publicly available. Disclosure of non-public portfolio holdings to third parties may only be made if an Authorized Person determines that such disclosure is not impermissible under applicable law or regulation. In the case of sub-advisers, as applicable, this determination may be made by a senior member of the sub-adviser's legal or compliance departments (a "Sub-Adviser Authorized Person"). In addition, the third party receiving the non-public portfolio holdings may, at the discretion of an Authorized Person, be required to agree in writing to keep the information confidential and/or agree not to trade directly or indirectly based on the information. Such agreements may not be required in circumstances such as where portfolio securities are disclosed to brokers to obtain bids/prices or in interviews with the media. MFS will seek to monitor a recipient's use of non-public portfolio holdings provided under these agreements and, when appropriate, use its best efforts to enforce the terms of these agreements. The restrictions and obligations described in this paragraph do not apply to non-public portfolio holdings provided to MFS or its affiliates.
In addition, to the extent that an Authorized Person determines that there is a potential conflict with respect to the disclosure of information that is not publicly available between the interests of a Fund's shareholders, on the one hand, and MFS, MFD or an affiliated person of MFS, MFD, or the Fund, on the other hand, the Authorized Person must inform MFS' conflicts officer of such potential conflict, and MFS' conflicts officer shall determine whether, in light of the potential conflict, disclosure is reasonable under the circumstances, and shall report such potential conflict of interest determinations to the Fund's Independent Chief Compliance Officer and the Board of Trustees of the Fund. MFS also reports to the Board of Trustees of the Fund regarding the disclosure of information regarding the Fund that is not publicly available.
Subject to compliance with the standards set forth in the previous two paragraphs, non-public portfolio holdings may be disclosed in the following circumstances:
Employees of MFS or MFD or, if applicable, a sub-adviser, (collectively "Fund representatives") disclose non-public portfolio holdings in connection with the day-to-day operations and management of the Fund. Full portfolio holdings are disclosed to a Fund's custodians, independent registered accounting firm, financial printers, regulatory authorities, and stock exchanges and other listing organizations. Portfolio holdings are disclosed to a Fund's pricing service vendors and broker/dealers when requesting bids for, or price quotations on, securities, and to other persons (including independent contractors) who provide systems or software support in connection with Fund operations, including accounting, compliance support, and pricing. Portfolio holdings may also be disclosed to persons assisting a Fund in the voting of proxies or in connection with litigation relating to Fund portfolio holdings. In connection with managing the Funds, MFS or, if applicable, a sub-adviser, may use analytical systems provided by third parties who may have access to Fund portfolio holdings.
Non-public portfolio holdings may be disclosed in connection with other activities, such as to participants in in-kind purchases and redemptions of Fund shares, to service providers facilitating the distribution or analysis of portfolio holdings, once the information is public, and in other circumstances not described above. All such disclosures are subject to compliance with the applicable disclosure standards.
In addition, subject to such disclosure not being impermissible under applicable law or regulation, Fund representatives may disclose Fund portfolio holdings and related information, which may be based on non-public portfolio holdings, under the following circumstances (among others):
Fund representatives may provide oral or written information ("portfolio commentary") about a Fund, including, but not limited to, how the Fund's investments are divided among various sectors, industries, countries, value and growth stocks, small, mid, and large-cap stocks, among stocks, bonds, currencies and cash, types of bonds, bond maturities, bond coupons, and bond credit quality ratings. This portfolio commentary may also include information on how these various weightings and factors contributed to Fund performance. Fund representatives may also express their views orally or in writing on one or more of a Fund's portfolio holdings or may state that a Fund has recently purchased or sold one or more holdings.
Fund representatives may also provide oral or written information ("statistical information") about various financial characteristics of a Fund or its underlying portfolio securities including, but not limited to, alpha, beta, coefficient of determination, duration, maturity, information ratio, Sharpe ratio, earnings growth, payout ratio, price/book value, projected earnings growth, return on equity, standard deviation, tracking error, weighted average quality, market capitalization, percent debt to equity, price to cash flow, dividend yield or growth, default rate, portfolio turnover, and risk and style characteristics.
The portfolio commentary and statistical information may be provided to members of the press, shareholders in the Fund, persons considering investing in the Fund, or representatives of such shareholders or potential shareholders, such as fiduciaries of a 401(k) plan or a trust and their advisers, and the content and nature of the information provided to each of these persons may differ.
ONGOING ARRANGEMENTS TO MAKE NON-PUBLIC PORTFOLIO HOLDINGS AVAILABLE
With authorization from an Authorized Person or, as applicable, a Sub-Adviser Authorized Person, consistent with "Disclosure of Non-Public Portfolio Holdings" above, Fund representatives may disclose non-public Fund portfolio holdings to the recipients identified on Appendix G to this SAI Part II, or permit the recipients identified in Appendix G to this SAI Part II to have access to non-public Fund portfolio holdings, on an on-going basis.
This list of recipients in Appendix G to this SAI Part II is current as of May 31, 2007, and any additions, modifications, or deletions to this list that have occurred since May 31, 2007, are not reflected. The portfolio holdings of the Fund which are provided to these recipients, or to which these recipients have access, may be the Fund's current portfolio holdings. As a condition to receiving or being provided access to non-public Fund portfolio holdings, the recipients listed in Appendix G to this SAI Part II must agree, or otherwise have an independent duty, to maintain this information in confidence.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the New York Stock Exchange (the "Exchange") is open for trading.
(As of the date of this SAI, the Exchange is open for trading every weekday
except in an emergency and for the following holidays (or the days on which they
are observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day, and
Christmas Day.) This determination is made once each day as of the close of
regular trading on the Exchange (generally, 4 p.m., Eastern time) (the
"valuation time") 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 Fund shares outstanding for that class. In
accordance with regulations for regulated investment companies and except for
money market funds, changes in portfolio holdings and number of shares
outstanding are generally reflected in a Fund's net asset value the next
business day after such change.
MONEY MARKET FUNDS
Money market instruments are valued at amortized cost, which approximates market value. Amortized cost involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its current market value. Each money market fund's use of amortized cost is subject to the Fund's compliance with Rule 2a-7 under the Investment Company Act of 1940. The amortized cost value of an instrument can be different from the market value of an instrument.
The Board of Trustees for each money market fund has established procedures designed to stabilize its net asset value per share at $1.00 and has delegated to the Adviser the responsibility for the implementation and administration of such procedures. Under the procedures, the adviser is responsible for monitoring and notifying the Board of Trustees of circumstances where the net asset value calculated by using market valuations may deviate from the $1.00 per share calculated using amortized cost and might result in a material dilution or other unfair result to investors or existing shareholders. Under such circumstances, the Board may take such corrective action, if any, as it deems appropriate to eliminate or reduce, to the extent reasonably practicable, any such dilution or unfair results. Such corrective action could include selling portfolio instruments prior to maturity to realize capital gains or losses; shortening average portfolio maturity; withholding dividends; calculating net asset value by using available market quotations; and such other measures as the Trustees may deem appropriate.
NON-MONEY MARKET FUNDS
Open-end investment companies are generally valued at their net asset value per share. The underlying investments of open-end investment companies managed by the Adviser are valued as described below.
Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded. For securities held short for which there were no sales reported that day, the position is generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded.
Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by an independent pricing service.
Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value.
Exchange-traded options are generally valued at the last sale or official closing price as provided by an independent pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by an independent pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from an independent source.
Futures contracts are generally valued at last posted settlement price as provided by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by an independent pricing service on the market on which such futures contracts are primarily traded.
Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by an independent pricing service for proximate time periods.
Swaps are generally valued at valuations provided by an independent pricing service.
Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker/dealer bid quotation.
Values obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by an independent pricing service.
SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available certain programs designed to enable shareholders to add to or withdraw from their investment with applicable sales charges reduced or waived. These programs are generally described in the prospectus and additional details regarding certain of these programs are set forth below. These programs or waivers may be changed or discontinued by the Fund at any time without notice. Some of these programs and waivers may not be available to you if your shares are held through certain types of accounts, such as certain retirement accounts and 529 plans, or certain accounts that you maintain with your financial intermediary. You or your financial intermediary must inform MFSC of your intention to invest in the Fund under one of the programs below upon purchasing Fund shares. You can provide this information in your account application or through a separate document provided by your financial intermediary.
LETTER OF INTENT. Out of the shareholder's initial purchase (or subsequent purchases if necessary), 5% of the dollar amount specified in the Letter of Intent application shall be held in escrow by MFSC in the form of shares registered in the shareholder's name. All distributions on escrowed shares will be paid to the shareholder or to the shareholder's 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 minimum investment amount is not completed, MFSC will redeem an appropriate number of the escrowed shares in order to pay the higher sales charge level for the amount actually purchased. Shares remaining after any such redemption will be released by MFSC. By completing and signing the Account Application or separate Letter of Intent application, the shareholder irrevocably appoints MFSC his or her attorney to surrender for redemption any or all escrowed shares with full power of substitution in the premises.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). To initiate this service, shares having an aggregate value of at least $5,000 must be held on deposit by, or certificates for such shares must be deposited with, MFSC. MFSC may charge the account for services rendered and expenses incurred beyond those normally assumed by the Fund with respect to the redemption of shares. No charge is currently assessed against the account, but one could be instituted by MFSC on 60 days' notice in writing to the shareholder in the event that the Fund ceases to assume the cost of these services. The Fund may terminate any SWP for an account if the value of the account falls below $5,000 as a result of share redemptions (other than as a result of a SWP). Any SWP may be terminated at any time by either the shareholder or the Fund.
GROUP PURCHASES. A bona fide group and all its members may be treated at MFD's discretion as a single purchaser and, under the Right of Accumulation (but not the Letter of Intent), obtain quantity sales charge discounts on the purchase of Class A, Class A1, or 529A shares if the group (1) gives its endorsement or authorization to the investment program so that it may be used by the financial intermediary to facilitate solicitation of the membership, thus effecting economies of sales effort; (2) 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 financial intermediary, 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.
EXCHANGE PRIVILEGE
MONEY MARKET FUNDS
If you exchange your shares out of MFS Cash Reserve Fund, MFS Government Money Market Fund, or MFS Money Market Fund into Class A or Class 529A shares of any other MFS Fund, you will pay the initial sales charge, if applicable, if you have not already paid this charge on these shares. You will not pay the charge if:
o the shares exchanged from either Fund were acquired by an exchange from any other MFS Fund;
o the shares exchanged from either Fund were acquired by automatic investment of dividends from any other MFS Fund; or
o the shares being exchanged would have, at the time of purchase, been eligible for purchase at net asset value had you invested directly in the MFS Fund into which the exchange is being made.
MFS FIXED FUND. Class A, Class A1, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund held by certain qualified retirement plans may be exchanged for units of participation of the MFS Fixed Fund (the "Units"), and Units may be exchanged for Class A, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund (if the share purchase eligibility for these share classes is met). With respect to exchanges between Class C shares subject to a CDSC and Units, a shareholder will only be eligible to make the exchange if the CDSC would have been waived had the Class C shares been redeemed. With respect to exchanges between Class A and Class A1 shares and Units, shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares or Units will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged Fund and the original purchase date of the shares subject to the CDSC. In the event that a shareholder initially purchases Units and then exchanges into Class A shares subject to an initial sales charge of a MFS Fund, the initial sales charge shall be due upon such exchange, but will not be imposed with respect to any subsequent exchanges between such Class A and Class A1 shares and Units with respect to shares on which the initial sales charge has already been paid.
TELEPHONE EXCHANGES. No more than ten exchanges may be made in any one exchange request by telephone.
DESCRIPTION OF SHARES, VOTING RIGHTS, AND LIABILITIES
The Trust's Declaration of Trust, as amended or amended and restated from time
to time, permits the Trust's Board of Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) of each
series, 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, and to divide such shares into classes. The Board of Trustees
has reserved the right to create and issue additional series and classes of
shares and to classify or reclassify outstanding shares.
Each shareholder of the Fund is entitled to one vote for each dollar of net asset value (number of shares of the Fund owned times net asset value per share) of the Fund, on each matter on which the shareholder is entitled to vote. Each fractional dollar amount is entitled to a proportionate fractional vote. Except when a larger vote is required by applicable law, a majority of the voting power of the shares voted in person or by proxy on a matter will decide that matter and a plurality of the voting power of the shares voted in person or by proxy will elect a Trustee. Shareholders of all series of the Trust generally will vote together on all matters except when a particular matter affects only shareholders of a particular class or series or when applicable law requires shareholders to vote separately by series or class.
Except in limited circumstances, the Trustees may, without any shareholder vote, amend or otherwise supplement the Trust's Declaration of Trust. Each Trust except MFS Series Trust XII, or any series or class thereof, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets if authorized (either at a meeting or by written consent) by a Majority Shareholder Vote of the class, series, or trust, as applicable. MFS Series Trust XII, or any series or class of MFS Series Trust XII, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets without any shareholder vote to the extent permitted by law. Each Trust, or any series or class, may reincorporate or reorganize (but not with another operating entity) without any shareholder vote. The Trust, any series of the Trust, or any class of any series, may be terminated at any time by a vote of 1) a Majority Shareholder Vote, or 2) by the Trustees by written notice to the shareholders of that series or class.
The Trustees may cause a shareholder's shares to be redeemed for any reason under terms set by the Trustees, including, but not limited to, 1) to protect the tax status of a Fund, 2) the failure of a shareholder to provide a tax identification number if required to do so, 3) the failure of a shareholder to pay when due for the purchase of shares issued to the shareholder, 4) in order to eliminate accounts whose values are less than a minimum amount established by the Trustees, 5) the failure of a shareholder to meet or maintain the qualifications for ownership of a particular class of shares, and 6) to eliminate ownership of shares by a particular shareholder when the Trustees determine that the particular shareholder's ownership is not in the best interests of the other shareholders of the applicable Fund (for example, in the case of an alleged market timer). The exercise of the above powers is subject to any applicable provisions under the 1940 Act or the rules adopted thereunder.
Under the Declaration of Trust, the Fund may convert to a master/feeder structure or a fund of funds structure without shareholder approval. In a master/feeder structure, a Fund invests all of its assets in another investment company with similar investment objectives and policies. In a Fund of Funds structure, a Fund invests all or a portion of its assets in multiple investment companies.
The Trust is an entity 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 Trust also maintains insurance for the protection of the Trust and its shareholders and the Trustees, officers, employees, and agents of the Trust covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust, and that the Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust or other agreement with a Trustee protects a Trustee against any liability to which he or she would otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
The Trust's Declaration of Trust provides that shareholders may not bring suit on behalf of the fund without first requesting that the Trustees bring such suit unless there would be irreparable injury to the Fund or if a majority of the Trustees (or a majority of Trustees on any committee established to consider the merits of such action) have a personal financial interest in the action. Trustees are not considered to have a personal financial interest by virtue of being compensated for their services as Trustees or as trustees of Funds with the same or an affiliated investment adviser or distributor.
The Trust's Declaration of Trust provides that by becoming a shareholder of the Fund, each shareholder shall be expressly held to have assented to and agreed to be bound by the provisions of the Declaration of Trust.
PART II - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND
BACKGROUND
The Trustees and officers of the Trust, as of July 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(S) TRUSTEE/OFFICER DURING THE PAST FIVE YEARS
Robert J. Trustee April 2005; Massachusetts Financial
Manning(3) December 2004 - Services Company, Chief
(born 10/20/63) March 2005 Executive Officer,
(Advisory President, Chief
Trustee); Investment Officer and
February - Director
December 2004
(Trustee)
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Robert C. Pozen(3) Trustee April 2005; Massachusetts Financial
(born 8/8/46) December 2004 Services Company, Chairman
-March 2005 (since February 2004); MIT
(Advisory Sloan School (education),
Trustee); Senior Lecturer (since
February - 2006); Secretary of
December 2004 Economic Affairs, The
(Trustee) Commonwealth of
Massachusetts (January
2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to
December 2001); Fidelity
Management & Research
Company (investment
adviser), President (March
1997 to July 2001); Bell
Canada Enterprises
(telecommunications),
Director; Medtronic, Inc.
(medical technology),
Director; Telesat
(satellite
communications), Director
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INDEPENDENT TRUSTEES
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J. Atwood Ives Trustee and February 1992 Private investor; Eastern
Chair of Enterprises (diversified
(born 5/1/36) Trustees services company),
Chairman, Trustee and
Chief Executive Officer
(until November 2000)
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Robert E. Butler(4) Trustee January 2006 Consultant - regulatory
and compliance matters
(born 11/29/41) (since July 2002);
PricewaterhouseCoopers LLP
(professional services
firm), Partner (November
2000 until June 2002)
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Lawrence H. Cohn, Trustee August 1993 Brigham and Women's
M.D. Hospital, Chief of Cardiac
(born 3/11/37) Surgery (until 2005);
Harvard Medical School,
Professor of Cardiac
Surgery; Physician
Director of Medical Device
Technology for Partners
HealthCare
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David H. Gunning Trustee January 2004 Retired; Cleveland-Cliffs
Inc. (mining products and
(born 5/30/42) service provider), Vice
Chairman/Director (until
May 2007); Portman Limited
(mining), Director (since
2005); Encinitos Ventures
(private investment
company), Principal (1997
to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director
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William R. Gutow Trustee December 1993 Private investor and real
(born 9/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman; Atlantic
Coast Tan (tanning
salons), Vice Chairman
(since 2002)
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Michael Hegarty Trustee December 2004 Retired; AXA Financial
(financial services and
(born 12/21/44) insurance), Vice Chairman
and Chief Operating
Officer (until May 2001);
The Equitable Life
Assurance Society
(insurance), President and
Chief Operating Officer
(until May 2001)
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Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 6/23/35) (attorneys), Partner
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J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 9/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing
General Partner (since
1993); Cambridge
Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
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Laurie J. Thomsen Trustee March 2005 New Profit, Inc. (venture
(born 8/5/57) philanthropy), Partner
(since 2006); Private
investor; Prism Venture
Partners (venture
capital), Co-founder and
General Partner (until
June 2004); The Travelers
Companies (commercial
property liability
insurance), Director
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Robert W. Uek Trustee January 2006 Retired (since 1999);
(born 5/18/41) PricewaterhouseCoopers LLP
(professional services
firm), Partner (until
1999); Consultant to
investment company
industry (since 2000); TT
International Funds
(mutual fund complex),
Trustee (2000 until 2005);
Hillview Investment Trust
II Funds (mutual fund
complex), Trustee (2000
until 2005)
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Maria F. Dwyer(3) President November 2005 Massachusetts Financial
(born 12/1/58) Services Company,
Executive Vice President
and Chief Regulatory
Officer (since March 2004)
and Chief Compliance
Officer (since December
2006); Fidelity Management
& Research Company, Vice
President (prior to March
2004); Fidelity Group of
Funds, President and
Treasurer (prior to March
2004)
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Tracy Atkinson(3) Treasurer September 2005 Massachusetts Financial
Services Company, Senior
(born 12/30/64) Vice President (since
September 2004);
PricewaterhouseCoopers
LLP, Partner (prior to
September 2004)
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Christopher R. Assistant July 2005 Massachusetts Financial
Bohane(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 1/18/74) Clerk Counsel (since April
2003); Kirkpatrick &
Lockhart LLP (law firm),
Associate (prior to April
2003)
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Ethan D. Corey(3) Assistant July 2005 Massachusetts Financial
Secretary and Services Company, Special
(born 11/21/63) Assistant Counsel (since December
Clerk 2004); Dechert LLP (law
firm), Counsel (prior to
December 2004)
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David L. Assistant July 2005 Massachusetts Financial
DiLorenzo(3) Treasurer Services Company, Vice
President (since June
(born 8/10/68) 2005); JP Morgan Investor
Services, Vice President
(prior to June 2005)
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Mark D. Fischer(3) Assistant July 2005 Massachusetts Financial
Treasurer Services Company, Vice
(born 10/27/70) President (since May
2005); JP Morgan
Investment Management
Company, Vice President
(prior to May 2005)
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Brian E. Assistant May 2006 Massachusetts Financial
Langenfeld(3) Secretary and Services Company,
Assistant Assistant Vice President
(born 3/7/73) Clerk and Counsel (since May
2006); John Hancock
Advisers, LLC, Assistant
Vice President and Counsel
(May 2005 to April 2006);
John Hancock Advisers,
LLC, Attorney and
Assistant Secretary (prior
to May 2005)
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Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial
(born 11/13/57) Treasurer Services Company, Senior
Vice President
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Susan S. Newton(3) Assistant May 2005 Massachusetts Financial
Secretary and Services Company, Senior
(born 3/7/50) Assistant Vice President and
Clerk Associate General Counsel
(since April 2005); John
Hancock Advisers, LLC,
Senior Vice President,
Secretary and Chief Legal
Officer (prior to April
2005); John Hancock Group
of Funds, Senior Vice
President, Secretary and
Chief Legal Officer (prior
to April 2005)
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Susan A. Assistant July 2005 Massachusetts Financial
Pereira(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 11/5/70) Clerk Counsel (since June 2004);
Bingham McCutchen LLP (law
firm), Associate (prior to
June 2004)
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Mark N. Secretary and January 2006 Massachusetts Financial
Polebaum(3) Clerk Services Company,
Executive Vice President,
(born 5/1/52) General Counsel and
Secretary (since January
2006); Wilmer Cutler
Pickering Hale and Dorr
LLP (law firm), Partner
(prior to January 2006)
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Frank L. Tarantino Independent June 2004 Tarantino LLC (provider of
Chief compliance services),
(born 3/7/44) Compliance Principal (since June
Officer 2004); CRA Business
Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (prior to March
2003)
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James O. Yost(3) Assistant September 1990 Massachusetts Financial
(born 06/12/60) Treasurer Services Company, Senior
Vice President
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(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each
Trustee has served continuously since appointment unless indicated
otherwise.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of the trust within the meaning of the Investment
Company Act of 1940 (referred to as the 1940 Act), which is the principal
federal law governing investment companies like the fund, as a result of
position with MFS. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
(4) In 2004 and 2005, Mr. Butler provided consulting services to the
independent compliance consultant retained by MFS pursuant to its
settlement with the SEC concerning market timing and related matters. The
terms of that settlement required that compensation and expenses related to
the independent compliance consultant be borne exclusively by MFS and,
therefore, MFS paid Mr. Butler for the services he rendered to the
independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a
total of $351,119.29.
The Trust held a shareholders' meeting in 2005 to elect Trustees, and will hold a shareholders' meeting at least once every five years thereafter, to elect Trustees. Each Trustee (except Messrs. Butler and Uek) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of July 1, 2007, the Trustees served as board members of 97 funds within the MFS Family of Funds.
PART II - APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
MARCH 1, 2007
Massachusetts Financial Services Company, MFS Institutional Advisors, Inc. and MFS' other investment adviser subsidiaries (collectively, "MFS") have adopted proxy voting policies and procedures, as set forth below ("MFS Proxy Voting Policies and Procedures"), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the registered investment companies sponsored by MFS, other than the MFS Union Standard Equity Fund (the "MFS Funds"). References to "clients" in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.
The MFS Proxy Voting Policies and Procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
A. VOTING GUIDELINES
1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST
MFS' policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS' clients, and not in the interests of any other party or in MFS' corporate interests, including interests such as the distribution of MFS Fund shares, administration of 401(k) plans, and institutional relationships.
MFS periodically reviews matters that are presented for shareholder vote by either management or shareholders of public companies. Based on the overall principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote. In all cases, MFS will exercise its discretion in voting on these matters in accordance with this overall principle. In other words, the underlying guidelines are simply that - guidelines. Proxy items of significance are often considered on a case-by-case basis, in light of all relevant facts and circumstances, and in certain cases MFS may vote proxies in a manner different from these guidelines.
As a general matter, MFS maintains a consistent voting position on similar proxy proposals with respect to various issuers. In addition, MFS generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts. However, MFS recognizes that there are gradations in certain types of proposals that might result in different voting positions being taken with respect to different proxy statements. There also may be situations involving matters presented for shareholder vote that are not governed by the guidelines. Some items that otherwise would be acceptable will be voted against the proponent when it is seeking extremely broad flexibility without offering a valid explanation. MFS reserves the right to override the guidelines with respect to a particular shareholder vote when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients.
From time to time, MFS receives comments on these guidelines as well as regarding particular voting issues from its clients. These comments are carefully considered by MFS when it reviews these guidelines each year and revises them as appropriate.
These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its affiliates that are likely to arise in connection with the voting of proxies on behalf of MFS' clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and E below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Voting Committee is responsible for monitoring and reporting with respect to such potential material conflicts of interest.
2. MFS' POLICY ON SPECIFIC ISSUES
ELECTION OF DIRECTORS
MFS believes that good governance should be based on a board with at least a simple majority of directors who are "independent" of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of "independent" directors. While MFS generally supports the board's nominees in uncontested elections, we will withhold our vote for, or vote against, as applicable, a nominee to a board of a U.S. issuer if, as a result of such nominee being elected to the board, the board would be comprised of a majority of members who are not "independent" or, alternatively, the compensation, nominating or audit committees would include members who are not "independent."
MFS will also withhold its vote for, or vote against, as applicable, a nominee to a board if we can determine that he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason stated in the proxy materials. In addition, MFS will withhold its vote for, or vote against, as applicable, all nominees standing for re-election to a board if we can determine: (1) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (2) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. Responsive action would include the rescission of the "poison pill"(without a broad reservation to reinstate the "poison pill" in the event of a hostile tender offer), or assurance in the proxy materials that the terms of the "poison pill" would be put to a binding shareholder vote within the next five to seven years.
MFS will also withhold its vote for, or vote against, as applicable, a nominee (other than a nominee who serves as the issuer's Chief Executive Officer) standing for re-election if such nominee participated (as a director or committee member) in the approval of a senior executive compensation package MFS deems to be "excessive." In the event that MFS determines that an issuer has adopted an "excessive" executive compensation package, MFS will withhold its vote for, or vote against, as applicable, the re-election of the issuer's Chief Executive Officer as director regardless of whether the Chief Executive Officer participated in the approval of the package. MFS will determine whether a senior executive compensation package is excessive on a case by case basis. Examples of "excessive" executive compensation packages include packages that contain egregious employment contract terms or pension payouts, backdated stock options, overly generous hiring bonuses for chief executive officers or packages which include excessive perks.
MFS evaluates a contested election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management's track record, the qualifications of the nominees for both slates and an evaluation of what each side is offering shareholders.
MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company's bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) ("Majority Vote Proposals").
MFS considers voting against Majority Vote Proposals if the company has adopted, or has proposed to adopt in the proxy statement, formal corporate governance principles that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast.
MFS believes that a company's election policy should address the specific circumstances at that company. MFS considers whether a company's election policy articulates the following elements to address each director nominee who fails to receive an affirmative majority of votes cast in an election:
o Establish guidelines for the process by which the company determines the status of nominees who fail to receive an affirmative majority of votes cast and disclose the guidelines in the annual proxy statement;
o Guidelines should include a reasonable timetable for resolution of the nominee's status and a requirement that the resolution be disclosed together with the reasons for the resolution;
o Vest management of the process in the company's independent directors, other than the nominee in question; and
o Outline the range of remedies that the independent directors may consider concerning the nominee.
CLASSIFIED BOARDS
MFS opposes proposals to classify a board (e.g., a board in which only one-third of board members are elected each year). MFS supports proposals to declassify a board.
NON-SALARY COMPENSATION PROGRAMS
MFS votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give "free rides" on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted.
MFS also opposes stock option programs that allow the board or the compensation committee, without shareholder approval, to reprice underwater options or to automatically replenish shares (i.e., evergreen plans). MFS will consider on a case-by-case basis proposals to exchange existing options for newly issued options (taking into account such factors as whether there is a reasonable value-for-value exchange).
MFS opposes stock option programs and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or could result in excessive dilution to other shareholders. As a general guideline, MFS votes against restricted stock plans, stock option, non-employee director, omnibus stock plans and any other stock plan if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS may accept a higher percentage (up to 20%) in the case of startup or small companies which cannot afford to pay large salaries to executives, or in the case where MFS, based upon the issuer's public disclosures, believes that the issuer has been responsible with respect to its recent compensation practices, including the mix of the issuance of restricted stock and options.
EXPENSING OF STOCK OPTIONS
MFS supports shareholder proposals to expense stock options because we believe that the expensing of options presents a more accurate picture of the company's financial results to investors. We also believe that companies are likely to be more disciplined when granting options if the value of stock options were treated as an expense item on the company's income statements.
EXECUTIVE COMPENSATION
MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. Therefore, except as provided in paragraph 2 above with respect to "excessive compensation" and the election of directors, MFS opposes shareholder proposals that seek to set restrictions on executive compensation. MFS also opposes shareholder requests for disclosure on executive compensation beyond regulatory requirements because we believe that current regulatory requirements for disclosure of executive compensation are appropriate and that additional disclosure is often unwarranted and costly. Although we support linking executive stock option grants to a company's performance, MFS opposes shareholder proposals that mandate a link of performance-based options to a specific industry or peer group stock index. MFS believes that compensation committees should retain the flexibility to propose the appropriate index or other criteria by which performance-based options should be measured.
MFS supports reasonably crafted shareholder proposals that (i) require the issuer to adopt a policy to recover the portion of performance-based bonuses and awards paid to senior executives that were not earned based upon a significant negative restatement of earnings unless the company already has adopted a clearly satisfactory policy on the matter, or (ii) expressly prohibit any future backdating of stock options.
EMPLOYEE STOCK PURCHASE PLANS
MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution.
"GOLDEN PARACHUTES"
From time to time, shareholders of companies have submitted proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer's annual compensation that is not determined in MFS' judgment to be excessive.
ANTI-TAKEOVER MEASURES
In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from "poison pills" and "shark repellents" to super-majority requirements.
MFS will vote for proposals to rescind existing "poison pills" and
proposals that would require shareholder approval to adopt prospective "poison
pills." Nevertheless, MFS will consider supporting the adoption of a
prospective "poison pill" or the continuation of an existing "poison pill" if we
can determine that the following two conditions are met: (1) the "poison pill"
allows MFS clients to hold an aggregate position of up to 15% of a company's
total voting securities (and of any class of voting securities); and (2) either
(a) the "poison pill" has a term of not longer than five years, provided that
MFS will consider voting in favor of the "poison pill" if the term does not
exceed seven years and the "poison pill" is linked to a business strategy or
purpose that MFS believes is likely to result in greater value for shareholders;
or (b) the terms of the "poison pill" allow MFS clients the opportunity to
accept a fairly structured and attractively priced tender offer (e.g., a
"chewable poison pill" that automatically dissolves in the event of an all cash,
all shares tender offer at a premium price).
MFS will consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer.
REINCORPORATION AND REORGANIZATION PROPOSALS
When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. While MFS generally votes in favor of management proposals that it believes are in the best long-term economic interests of its clients, MFS may oppose such a measure if, for example, the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers.
ISSUANCE OF STOCK
There are many legitimate reasons for the issuance of stock. Nevertheless, as noted above under "Non-Salary Compensation Programs," when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g. by approximately 15% or more), MFS generally votes against the plan. In addition, MFS votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a "blank check") because the unexplained authorization could work as a potential anti-takeover device. MFS may also vote against the authorization or issuance of common or preferred stock if MFS determines that the requested authorization is not warranted.
REPURCHASE PROGRAMS
MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders.
CONFIDENTIAL VOTING
MFS votes in favor of proposals to ensure that shareholder voting results are kept confidential. For example, MFS supports proposals that would prevent management from having access to shareholder voting information that is compiled by an independent proxy tabulation firm.
CUMULATIVE VOTING
MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS' clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company's nominating committee, which (for U.S. listed companies) must be comprised solely of "independent" directors.
WRITTEN CONSENT AND SPECIAL MEETINGS
Because the shareholder right to act by written consent (without calling a formal meeting of shareholders) can be a powerful tool for shareholders, MFS generally opposes proposals that would prevent shareholders from taking action without a formal meeting or would take away a shareholder's right to call a special meeting of company shareholders.
INDEPENDENT AUDITORS
MFS believes that the appointment of auditors for U.S. issuers is best left to the board of directors of the company and therefore supports the ratification of the board's selection of an auditor for the company. Some shareholder groups have submitted proposals to limit the non-audit activities of a company's audit firm or prohibit any non-audit services by a company's auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company's auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company's auditor for specific pieces of non-audit work in the limited situations permitted under current law.
OTHER CORPORATE GOVERNANCE, CORPORATE RESPONSIBILITY AND SOCIAL ISSUES
There are many groups advocating social change or changes to corporate governance or corporate responsibility standards, and many have chosen the publicly-held corporation as a vehicle for advancing their agenda. Generally, MFS votes with management on such proposals unless MFS can determine that the benefit to shareholders will outweigh any costs or disruptions to the business if the proposal were adopted. Common among the shareholder proposals that MFS generally votes against are proposals requiring the company to use corporate resources to further a particular social objective outside the business of the company, to refrain from investing or conducting business in certain countries, to adhere to some list of goals or principles (e.g., environmental standards), to disclose political contributions made by the issuer, to separate the Chairman and Chief Executive Officer positions, or to promulgate special reports on various activities or proposals for which no discernible shareholder economic advantage is evident.
The laws of various states may regulate how the interests of certain clients subject to those laws (e.g., state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients.
FOREIGN ISSUERS
Many of the items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted in favor) for foreign issuers include the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; and (v) approval of share repurchase programs.
MFS generally supports the election of a director nominee standing for re-election in uncontested elections unless it can be determined that (1) he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason given in the proxy materials; (2) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (3) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. MFS will also withhold its vote for, or vote against, as applicable, a director nominee standing for re-election of an issuer that has adopted an excessive compensation package for its senior executives as described above in the section entitled "Voting Guidelines-MFS' Policy on Specific Issues-Election of Directors."
MFS generally supports the election of auditors, but may determine to vote against the election of a statutory auditor in certain markets if MFS reasonably believes that the statutory auditor is not truly independent. MFS will evaluate all other items on proxies for foreign companies in the context of the guidelines described above, but will generally vote against an item if there is not sufficient information disclosed in order to make an informed voting decision.
In accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting ("share blocking"). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior to the meeting (e.g., one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the "block" restriction lifted early (e.g., in some countries shares generally can be "unblocked" up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer's transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY VOTING COMMITTEE
The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The MFS Proxy Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable;
b. Determines whether any potential material conflicts of interest exist with respect to instances in which (i) MFS seeks to override these MFS Proxy Voting Policies and Procedures and (ii) votes on ballot items not clearly governed by these MFS Proxy Voting Policies and Procedures; and
c. Considers special proxy issues as they may arise from time to time.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its affiliates that could arise in connection with the voting of proxies on behalf of MFS' clients. Any significant attempt to influence MFS' voting on a particular proxy matter should be reported to the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, or (ii) matters presented for vote are not governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy Voting Committee, or delegees, will follow these procedures:
a. Compare the name of the issuer of such proxy against a list of significant current and potential (i) distributors of MFS Fund shares, (ii) retirement plans administered by MFS or its affiliate MFS Retirement Services, Inc. ("RSI"), and (iii) MFS institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee;
c. If the name of the issuer appears on the MFS Significant Client List, then the MFS Proxy Voting Committee will be apprised of that fact and each member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS' clients, and not in MFS' corporate interests; and
d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer's relationship to MFS, the analysis of the matters submitted for proxy vote, the votes as to be cast and the reasons why the MFS Proxy Voting Committee determined that the votes were cast in the best long-term economic interests of MFS' clients, and not in MFS' corporate interests. A copy of the foregoing documentation will be provided to MFS' Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS' distribution, institutional business units and RSI. The MFS Significant Client List will be reviewed and updated periodically, as appropriate.
3. GATHERING PROXIES
Most proxies received by MFS and its clients originate at Automatic Data Processing Corp. ("ADP") although a few proxies are transmitted to investors by corporate issuers through their custodians or depositories. ADP and issuers send proxies and related material directly to the record holders of the shares beneficially owned by MFS' clients, usually to the client's custodian or, less commonly, to the client itself. This material will include proxy cards, reflecting the shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy statements with the issuer's explanation of the items to be voted upon.
MFS, on behalf of itself and the Funds, has entered into an agreement with an independent proxy administration firm, Institutional Shareholder Services, Inc. (the "Proxy Administrator"), pursuant to which the Proxy Administrator performs various proxy vote related administrative services, such as vote processing and recordkeeping functions for MFS' Funds and institutional client accounts. The Proxy Administrator receives proxy statements and proxy cards directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator's system by an MFS holdings datafeed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for all upcoming shareholders' meetings are available on-line to certain MFS employees and the MFS Proxy Voting Committee.
4. ANALYZING PROXIES
Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator at the prior direction of MFS automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by the MFS Proxy Voting Committee. With respect to proxy matters that require the particular exercise of discretion or judgment, MFS considers and votes on those proxy matters. MFS receives research from ISS which it may take into account in deciding how to vote. In addition, MFS expects to rely on ISS to identify circumstances in which a board may have approved excessive executive compensation. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have little or no involvement in specific votes taken by MFS. This is designed to promote consistency in the application of MFS' voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g., corporate actions, such as mergers and acquisitions), a representative of the MFS Proxy Voting Committee may consult with or seek recommendations from portfolio managers or analysts.(1) However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted.
(1) From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst is not available to provide a recommendation on a merger or acquisition proposal. If such a recommendation cannot be obtained prior to the cut-off date of the shareholder meeting, certain members of the MFS Proxy Voting Committee may determine to abstain from voting.
As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients. Any such override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies.
5. VOTING PROXIES
In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy Voting Committee to monitor the proxy voting process. When proxy materials for clients are received, they are forwarded to the Proxy Administrator and are input into the Proxy Administrator's system. Through an interface with the portfolio holdings database of MFS, the Proxy Administrator matches a list of all MFS Funds and clients who hold shares of a company's stock and the number of shares held on the record date with the Proxy Administrator's listing of any upcoming shareholder's meeting of that company.
When the Proxy Administrator's system "tickler" shows that the voting cut-off date of a shareholders' meeting is approaching, a Proxy Administrator representative checks that the vote for MFS Funds and clients holding that security has been recorded in the computer system. If a proxy card has not been received from the client's custodian, the Proxy Administrator calls the custodian requesting that the materials be forwarded immediately. If it is not possible to receive the proxy card from the custodian in time to be voted at the meeting, MFS may instruct the custodian to cast the vote in the manner specified and to mail the proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy cards completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator's system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company's proxy issues, are retained as required by applicable law.
E. REPORTS
MFS FUNDS
MFS will report the results of its voting to the Board of Trustees,
Board of Directors and Board of Managers of the MFS Funds. These reports will
include: (i) a summary of how votes were cast; (ii) a review of situations where
MFS did not vote in accordance with the guidelines and the rationale therefore;
(iii) a review of the procedures used by MFS to identify material conflicts of
interest; and (iv) a review of these policies and the guidelines and, as
necessary or appropriate, any proposed modifications thereto to reflect new
developments in corporate governance and other issues. Based on these reviews,
the Trustees, Directors and Managers of the MFS Funds will consider possible
modifications to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party other than the client or its representatives (unless required by applicable law) because we consider that information to be confidential and proprietary to the client.
MFS UNION STANDARD EQUITY FUND
INSTITUTIONAL SHAREHOLDERS SERVICES TAFT-HARTLEY ADVISORY SERVICES
PROXY VOTING GUIDELINES AND PROCEDURES
The Taft-Hartley Advisory Services Voting Policy is based upon the AFL-CIO Proxy Voting Guidelines, which comply with all the fiduciary standards delineated by the U.S. Department of Labor.
INTRODUCTION
Taft-Hartley client accounts are governed by the Employee Retirement Income Security Act (ERISA). ERISA sets forth the tenets under which pension fund assets must be managed and invested. Proxy voting rights have been declared by the Department of Labor to be valuable plan assets and therefore must be exercised in accordance with the fiduciary duties of loyalty and prudence. The duty of loyalty requires that the voting fiduciary exercise proxy voting authority solely in the economic interest of participants and plan beneficiaries. The duty of prudence requires that decisions be made based on financial criteria and that a clear process exists for evaluating proxy issues.
The Taft-Hartley Advisory Services voting policy was carefully crafted to meet those requirements by promoting long-term shareholder value, emphasizing the "economic best interests" of plan participants and beneficiaries. Taft-Hartley Advisory Services will assess the short-term and long-term impact of a vote and will promote a position that is consistent with the long-term economic best interests of plan members embodied in the principle of a "worker-owner view of value."
Our guidelines address a broad range of issues, including election of directors, executive compensation, proxy contests, auditor ratification, and tender offer defenses - all significant voting items that affect long-term shareholder value. In addition, these guidelines delve deeper into workplace issues that may have an impact on corporate performance, including:
o Corporate policies that affect job security and wage levels;
o Corporate policies that affect local economic development and stability;
o Corporate responsibility to employees and communities; and
o Workplace safety and health issues.
All votes will be reviewed on a case-by-case basis, and no issues will be considered strictly routine. Each issue will be considered in the context of the company under review. In other words, proxy voting guidelines are just that - guidelines. When company-specific factors are taken into account, every proxy voting decision becomes a case-by-case decision. Keeping in mind the concept that no issue is considered "routine", outlined in the following pages are general voting parameters for various types of proxy voting issues (when there are no company-specific reasons for voting to the contrary).
I) BOARD OF DIRECTORS PROPOSALS
Electing directors is the single most important stock ownership right that shareholders can exercise. The board of directors is responsible for holding management accountable to performance standards on behalf of the shareholders. Taft-Hartley Advisory Services holds directors to a high standard when voting on their election, qualifications, and compensation.
Votes on entire board of directors take into account factors that include:
o Company performance relative to its peers;
o Lack of independence of the full board and key board committees (fully
independent audit, compensation, and nominating committees);
o Board diversity;
o Executive compensation-related (excessive salaries/bonuses/pensions, stock
option repricing, misallocation of corporate funds, etc.);
o Failure of board to respond to majority shareholder votes;
o Poor long-term corporate performance record relative to peer, S&P 500 or
Russell 3000 Indices.
Votes on individual director nominees are made on a case-by-case basis, taking into account factors that include:
o Poor attendance;
o Lack of a board that is at least two-thirds (67 percent) independent;
Independence of the key board committees (audit, compensation, and
nominating);
o Performance of the key board committees;
o Failure to establish key board committees; and
o Interlocking and excessive directorships.
NON-INDEPENDENT CHAIRMAN: A principal function of the board is to monitor management, and a fundamental responsibility of the chairman is to monitor the company's CEO. This duty is obviously compromised when the chairman is the CEO. Approximately 60 percent of companies in both the S&P 500 and Russell 3000 have joint chairman and CEO positions. A McKinsey survey of board members at 500 U.S. companies found that nearly 70 percent of directors polled said a CEO should not run the board. As executive compensation is heavily correlated to the managerial power relationship in the boardroom, the separation of the CEO and chairman positions is a critical step in curtailing excessive pay. Indeed, a number of academic studies have demonstrated that executive compensation is twenty to forty percent higher if the CEO is also the chairman of the board. We WITHHOLD votes from non-independent directors who serve as board chairs, and vote FOR proposals calling for non-executive directors who are not former CEOs or senior-level executives to serve as chairman.
INDEPENDENT DIRECTORS: Taft-Hartley Advisory Services believes that a board independent of management is of critical value to safeguard a company and its shareholders. Board independence helps ensure that directors carry out their duties in an objective manner and without manager interference to select, monitor, and compensate management. We will cast votes in a manner consistent with supporting and reinforcing this philosophy. Independence is evaluated upon factors including: past or current employment with the company or its subsidiaries; the provision of consulting services; familial relationships; board interlocks; and service with a non-profit that receives contributions from the company. We vote FOR proposals that request that the board comprise of a two-thirds majority of independent directors, and/or its audit, compensation, and nominating committees be comprised wholly of independent directors. We WITHHOLD votes from non-independent director nominees on boards that are not at least two-thirds (67 percent) independent.
BOARD STRUCTURE: Taft-Hartley Advisory Services supports the principle that all directors should be accountable to shareholder vote on an annual basis. A classified board is a board divided into separate classes (typically three), with only one class of nominees coming up to vote at the annual meeting each year. As a result, shareholders are only able to vote a single director approximately once every three years. A classified board makes it difficult to change control of the board through a proxy contest because typically only one-third of the seats will be at stake. The ultimate result is that classified boards can entrench management and preclude most takeover bids or proxy contests. Good corporate governance practice supports annually elected boards. We vote AGAINST classified boards when the issue comes up for vote.
BOARD AND COMMITTEE SIZE: While there is no hard and fast rule among institutional investors as to what may be an optimal size board, Taft-Hartley Advisory Services believes there is an acceptable range which companies should strive to meet and not exceed. A board that is too large may function inefficiently. Conversely, a board that is too small may allow the CEO to exert disproportionate influence or may stretch the time requirements of individual directors too thin. Given that the preponderance of boards in the U.S. range between five and fifteen directors, we believe this is a useful benchmark for evaluating such proposals. We vote AGAINST any proposal seeking to amend the company's board size to fewer than five seats or more than fifteen seats. On a CASE-BY-CASE basis, we consider WITHHOLDS or other action at companies that have fewer than five directors and more than 15 directors on their board.
FINANCIAL PERFORMANCE TEST FOR BOARDS: Taft-Hartley Advisory Services believes that long-term financial performance should be considered when determining vote recommendations with regard to directors in uncontested elections. When evaluating whether to withhold votes against director nominees, we will look at the company's response to the ongoing performance issues, and consider several factors, including performance improvement in the current year, changes in management or board composition, recent transactions at the company, overall governance practices, particularly any recent changes, and the financial health of the company.
PROPOSALS ON BOARD INCLUSIVENESS: Taft-Hartley Advisory Services votes FOR shareholder proposals asking a company to make efforts to seek more women and minority group members for service on the board. A more diverse group of directors benefits shareholders and the company.
MAJORITY THRESHOLD VOTING REQUIREMENT FOR DIRECTOR ELECTIONS: Taft-Hartley fiduciaries believe shareholders should have a greater voice in regard to the election of directors and view majority threshold voting as a viable alternative to the current deficiencies of the plurality system in the U.S. Shareholders have expressed strong support for resolutions on majority threshold voting. Taft-Hartley Advisory Services supports proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors, provided the proposal includes a carve-out for a plurality voting standard in contested director elections.
CUMULATIVE VOTING: Under a cumulative voting scheme, shareholders are permitted to have one vote per share for each director to be elected and may apportion these votes among the director candidates in any manner they wish. This voting method allows minority shareholders to influence the outcome of director contests by "cumulating" their votes for one nominee, thereby creating a measure of independence from management control. Taft-Hartley Advisory Services votes FOR proposals to allow cumulative voting and votes AGAINST proposals to eliminate it.
POISON PILLS: Shareholder rights plans, more commonly known as poison pills, are warrants issued to shareholders allowing them to purchase shares from the company at a price far below market value when a certain ownership threshold has been reached, thereby effectively preventing a takeover. Poison pills can entrench management and give the board veto power over takeover bids, thereby altering the balance of power between shareholders and management. While we evaluate poison pills on a case-by-case basis depending on a company's particular set of circumstances, Taft-Hartley Advisory Services generally votes FOR proposals to submit a company's poison pill to shareholder vote and/or eliminate or redeem poison pills. We WITHHOLD votes from boards where a dead-hand poison pill provision is in place. From a shareholder perspective, there is no justification for a dead-hand provision.
II) CAPITAL STRUCTURE
INCREASE AUTHORIZED COMMON STOCK: Corporations seek shareholder approval to increase their supply of common stock for a variety of business reasons. We vote FOR proposals to increase authorized common stock when management has provided a specific justification for the increase, evaluating proposals on a case-by-case basis. We believe that an increase of up to 50 percent is enough to allow a company to meet its capital needs. We vote AGAINST proposals to increase an authorization by more than 50 percent unless management provides compelling reasons for the increase.
DUAL CLASS STRUCTURES: Taft-Hartley Advisory Services does not support dual share class structures. Incumbent management can use a dual class structure to gain unequal voting rights. A separate class of shares with superior voting rights can allow management to concentrate its power and insulate itself from the majority of its shareholders. An additional drawback is the added cost and complication of maintaining the two class system. We will vote FOR a one share, one vote capital structure, and we will vote AGAINST the creation or continuation of dual class structures.
III) RATIFYING AUDITORS
Ratifying auditors is no longer a routine procedure. Accounting scandals at companies such as Enron and WorldCom underscore the need to ensure auditor independence in the face of selling consulting services to audit clients. A study by Richard Frankel, Marilyn Johnson, and Karen Nelson found that the ratio of non-audit fees to total fees paid is negatively associated with stock market returns on the filing date, indicating that investors associate non-audit fees "with lower quality audits and, by implication, lower quality earnings." This study also found that companies that pay high non-audit fees are more likely to engage in earnings management.
Auditors are the backbone upon which a company's financial health is measured, and auditor independence is essential for rendering objective opinions upon which investors then rely. When an auditor is paid more in consulting fees than for auditing, its relationship with the company is left open to conflicts of interest. Because accounting scandals evaporate shareholder value, any proposal to ratify auditors is examined for potential conflicts of interest, with particular attention to the fees paid to the auditor, as well as whether the ratification of auditors has been put up for shareholder vote. Failure by a company to present its selection of auditors for shareholder ratification should be discouraged as it undermines good governance and disenfranchises shareholders.
We vote AGAINST ratification of a company's auditor if it receives more than one-quarter of its total fees for consulting and WITHHOLD votes from Audit Committee members when auditor ratification is not included on the proxy ballot and/or when consulting fees exceed audit fees. We support shareholder proposals to ensure auditor independence and effect mandatory auditor ratification.
IV) MERGERS, ACQUISITIONS, AND TRANSACTIONS
Taft-Hartley Advisory Services votes for corporate transactions that take the high road to competitiveness and company growth. Taft-Hartley Advisory Services believes that structuring merging companies to build long-term relationships with a stable and quality work force and preserving good jobs creates long-term company value. We oppose corporate transactions which indiscriminately layoff workers and shed valuable competitive resources.
Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis, taking into account the following factors:
o Impact on shareholder value;
o Changes in corporate governance and their impact on shareholder rights;
o Fairness opinion (or lack thereof);
o Offer price (cost vs. premium);
o Form and mix of payment (i.e. stock, cash, debt, etc.);
o Change-in-control payments to executive officers;
o Perspective of ownership (target vs. acquirer) in the deal;
o Fundamental value drivers behind the deal;
o Anticipated financial and operating benefits realizable through
combined synergies;
o Financial viability of the combined companies as a single entity;
o What are the potential legal or environmental liability risks associated
with the target firm?;
o Impact on community stakeholders and employees in both workforces;
o How will the merger adversely affect employee benefits like pensions and
health care?
REINCORPORATION: Taft-Hartley Advisory Services reviews proposals to change a company's state of incorporation on a case-by-case basis. We vote FOR proposals to reincorporate in another state when the company has provided satisfactory business reasons and there is no significant reduction in shareholder rights. We vote AGAINST proposals to reincorporate that reduce shareholder rights. In cases of offshore reincorporations to tax havens, among other factors, we evaluate the effect upon any and all legal recourse of shareholders in a new jurisdiction, potential harm to company brands and image, and any actual, qualified economic benefit.
V) EXECUTIVE COMPENSATION
STOCK OPTION PLANS: Taft-Hartley Advisory Services supports compensating executives at a reasonable rate and believes that executive compensation should be strongly correlated to performance. Stock option and other forms of compensation should be performance-based with an eye toward improving shareholder value. Well-designed stock option plans align the interests of executives and shareholders by providing that executives benefit when stock prices rise as the company-- and shareholders-- prosper together.
Many plans sponsored by management provide goals so easily attained that executives can realize massive rewards even though shareholder value is not necessarily created. Stock options that are awarded selectively and excessively can dilute shareholders' share value and voting power. In general, Taft-Hartley Advisory Services supports plans that are offered at fair terms to executives who satisfy well-defined performance goals. We evaluate option plans on a case-by-case basis, taking into consideration factors including: offer price, dilution to outstanding share value, dilution to share voting power, stock option expensing, annual burn rate, executive concentration ratios, pay-for-performance and the presence of any repricing provisions. We support plans that retain tax deductibility through the use of performance goals and oppose plans whose award size exceeds the tax deduction limit.
Taft-Hartley Advisory Services votes FOR option plans that provide legitimately challenging performance targets that truly motivate executives in the pursuit of excellent performance. Likewise, we vote AGAINST plans that offer unreasonable benefits to executives that are not available to any other shareholders.
POOR COMPENSATION PRACTICES: Poor disclosure, the absence or non-transparency of disclosure and poor plan design of compensation payouts lead to excessive executive compensation practices that are detrimental to shareholders. Poorly designed plans or those lacking in transparency can be reflective of a poorly performing compensation committee or board. Taft-Hartley Advisory Services will consider WITHHOLDING votes from compensation committee members and/or the CEO on a CASE-BY-CASE basis if the company has poor compensation practices. In addition, we may consider recommending a WITHHOLD from the entire board if the whole board was involved in and contributed to egregious compensation.
PROPOSALS TO LIMIT EXECUTIVE AND DIRECTOR PAY: Taft-Hartley Advisory Services votes FOR shareholder proposals that seek additional disclosure of executive and director pay information. We vote FOR shareholder proposals that seek to eliminate outside directors' retirement benefits. We review on a case-by-case basis all other shareholder proposals that seek to limit executive and director pay. This includes shareholder proposals that seek to link executive compensation to customer, employee, or stakeholder satisfaction.
GOLDEN PARACHUTES: golden parachutes are designed to protect the senior level employees of a corporation in the event of a change-in-control. Under most golden parachute agreements, senior level management employees receive a lump sum pay-out triggered by a change-in-control at usually two to three times base salary. These severance agreements grant extremely generous benefits to well-paid executives and most often offer no value to shareholders. Taft-Hartley Advisory Services votes FOR shareholder proposals to have all golden parachute agreements submitted for shareholder ratification, and we generally vote AGAINST all proposals to ratify golden parachutes.
OPTIONS BACKDATING: Options backdating has serious implications and has resulted in financial restatements, delisting of companies, and/or the termination of executives or directors. When options backdating has taken place, Taft-Hartley Advisory Services may consider WITHHOLDING votes from the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. We adopt a CASE-BY-CASE approach to the options backdating issue to differentiate companies that had sloppy administration vs. those that had committed fraud, as well as those companies that have since taken corrective action. Instances in which companies have committed fraud are more disconcerting, and Taft-Hartley Advisory Services will look to them to adopt formal policies to ensure that such practices will not re-occur in the future.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS): Taft-Hartley Advisory Services generally votes FOR ESOPs which allow a company's employees to acquire stock in the company at a slight discount. Such plans help link employees' self-interest to the interests of the shareholders, thereby benefiting the company, its customers, and shareholders and creating long-term company value.
VI) SOCIAL AND ENVIRONMENTAL ISSUES Increasingly, shareholders are presenting proposals related to company environmental practices, workplace practices, social issues and sustainability goals. Taft-Hartley Advisory Services provides specific narrative explanations for votes on these types of shareholder proposals. Taft-Hartley Advisory Services evaluates shareholder proposals on a case-by-case basis to determine if they are in the best economic interests of the plan participants and beneficiaries. Taft-Hartley Advisory Services' clients select investment strategies and criteria for their portfolios. Taft-Hartley Advisory Services views its responsibility to protect plan beneficiary economic interests through the use of the proxy. To meet this obligation, Taft-Hartley Advisory Services votes consistent with the economic best interests of the participants and beneficiaries to create "high road" shareholder and economic value.
In most cases, Taft-Hartley Advisory Services supports proposals that request management to report to shareholders information and practices that would help in evaluating the company's operations. In order to be able to intelligently monitor their investments, shareholders often need information best provided by the company itself. Taft-Hartley Advisory Services supports proposals that seek management compliance with shareholder interests to ensure that shareholders are fully informed about actions harmful to society with special attention to the company's legal and ethical obligations, impact on company profitability, and the potential negative publicity for disreputable practices.
CERES PRINCIPLES: The CERES Principles, formulated by the Coalition of Environmentally Responsible Economies, require signing companies to address environmental issues, including protection of the biosphere, sustainable use of natural resources, reduction and disposal of wastes, energy conservation, and employee and community risk reduction. Evidence suggests that environmentally conscious companies may realize long-term savings by implementing programs to pollute less and conserve resources while realizing good public relations and new marketing opportunities. Moreover, the reports that are required of signing companies provide shareholders with more information concerning topics they may deem relevant to their company's financial well-being.
Many companies have voluntarily adopted these principles and proven that environmental sensitivity makes good business sense. Taft-Hartley Advisory Services supports proposals that improve a company's public image, reduce exposure to liabilities, and establish standards so that environmentally responsible companies and markets are not at a competitive financial disadvantage. Taft-Hartley Advisory Services votes FOR the adoption of the CERES Principles and FOR reporting to shareholders on environmental issues.
CORPORATE CONDUCT, HUMAN RIGHTS, AND LABOR CODES: Taft-Hartley Advisory Services generally supports proposals that call for the adoption and/or enforcement of clear principles or codes of conduct relating to countries in which there are systematic violations of human rights. These conditions include the use of slave, child, or prison labor, undemocratically elected governments, widespread reports by human rights advocates, fervent pro-democracy protests, and/or economic sanctions and boycotts.
Many proposals refer to the seven core conventions, commonly referred to as the "Declaration on Fundamental Principles and Rights At Work," ratified by the International Labor Organization (ILO). The seven conventions fall under four broad categories: i) Right to organize and bargain collectively; ii) Non-discrimination in employment; iii) Abolition of forced labor; and iv) End of child labor. Each of the 180 member nations of the ILO body are bound to respect and promote these rights to the best of their abilities. Taft-Hartley Advisory Services supports the principles and codes of conduct relating to company investment in countries with patterns of human rights abuses (Northern Ireland, Columbia, Burma, former Soviet Union, and China). Taft-Hartley Advisory Services votes FOR proposals to implement and report on ILO codes of conduct.
PART II - APPENDIX C
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which the initial sales charge (ISC) and/or the CDSC is waived for the MFS funds' share classes. Some of the following information will not apply to certain funds, depending on which classes of shares are offered by the funds. In order to qualify for a sales charge waiver, you must advise MFS that you are eligible for the waiver at the time of purchase and/or redemption. The funds, MFS, and their affiliates reserve the right to eliminate, modify, and add waivers at any time at their discretion.
In addition, transfers, rollovers or other transactions from one account to the same class of the same fund of another account otherwise subject to a CDSC or an ISC will not be charged a CDSC or ISC so long as each account is held in your name or for your benefit (either individually or collectively) by MFSC or an affiliate. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the fund in the first account and the original purchase date of the shares subject to the CDSC.
As used in this Appendix C, the term "ESP" includes employer sponsored plans, the term "SRO" includes salary reduction only plans, and the term "ERISA" refers to the Employment Retirement Income Security Act of 1974, as amended.
In this appendix, all references to Class A Shares shall apply to Class A1 Shares and all references to Class B Shares shall apply to Class B1 Shares.
RETIREMENT PLANS:
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SALES CHARGE WAIVED
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WAIVER CATEGORY CLASS A CLASS A CLASS B CLASS C
ISC CDSC CDSC CDSC
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1. WAIVERS FOR SERVICED PLANS
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o To the extent that redemption proceeds are used V V V
to pay expenses (or certain participant expenses)
of the 401(a) or ESP Plan (e.g., participant
account fees).
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o Shares purchased or redeemed representing V V V V
transfers from, or transfers to, plan investments
other than the MFS funds.
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o Shares acquired pursuant to repayments by V V V V
retirement plan participants of loans from 401(a)
or ESP Plans.
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o By a retirement plan which established an account V
with MFSC on or after July 1, 1996, but before
January 1, 2003 (provided that the plan
establishment paperwork is received by MFSC in good
order on or before December 31, 2002).
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o Transfers from a single account maintained for a V V V
401(a) Plan to multiple accounts maintained by MFSC
on behalf of individual participants of such Plan.
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o All Serviced Plans. V V
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o Transfers due to the eligibility of a Serviced V V V V
Plan to move its investment into a new share class
under certain eligibility criteria established from
time to time by MFD (sales charges waived may vary
depending upon the criteria established by MFD).
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o Transfer or rollover to MFS Prototype IRA from a V V V V
Serviced Plan.
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o Reinvestment of Redemption Proceeds from Class B V V
Shares:
o Shares acquired by a retirement plan whose
account application was received by MFD on or
prior to March 30, 2001 where the purchase
represents the immediate reinvestment of
proceeds from the plan's redemption of its
Class B shares of the MFS funds and is equal to
or exceeds $500,000, either alone or in
aggregate with the current market value of the
plan's existing Class A shares; or
o Shares acquired by a retirement plan whose
account application was received by MFD on or
after April 2, 2001 and before December 31,
2002 where the purchase represents the
immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the
MFS funds and is equal to or exceeds
$1,000,000, either alone or in aggregate with
current market value of the plan's existing
Class A shares.
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2. WAIVERS FOR NON- SERVICED PLANS ("TA PLANS")
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A. 401(A) PLANS AND ESP PLANS
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o Where the retirement plan and/or sponsoring V V
organization demonstrates to the satisfaction of,
and certifies to, MFSC that the retirement plan (or
multiple plans maintained by the same plan sponsor)
has, at the time of certification or will have
pursuant to a purchase order placed with the
certification, a market value of $500,000 or more
(applies only when the certification was received
by MFSC on or prior to March 30, 2001) or
$1,000,000 or more (applies only when the
certification is received by MFSC on or after April
2, 2001), invested in shares of any class or
classes of the MFS funds and aggregate assets of at
least $10 million; provided, however, that the CDSC
will not be waived (i.e., it will be imposed) (a)
with respect to plans which establish an account
with MFSC on or after November 1, 1997, in the
event that the plan makes a complete redemption of
all of its shares in the MFS Family of funds, or
(b) with respect to plans which establish an
account with MFSC prior to November 1, 1997, in the
event that there is a change in law or regulations
which result in a material adverse change to the
tax advantaged nature of the plan, or in the event
that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated
under ERISA or is liquidated or dissolved; or (iii)
is acquired by, merged into, or consolidated with
any other entity.
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o Investment in Class A shares by certain V(1)
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1997 and December 31, 1999;
o The plan records are maintained on a pooled
basis by MFSC; and
o The sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of
purchase, the employer has at least 200
eligible employees and the plan has aggregate
assets of at least $2,000,000.
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3. WAIVERS FOR BOTH SERVICED PLANS AND TA PLANS
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A. BENEFIT RESPONSIVE WAIVERS
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o Distributions made from an IRA or a 403(b) SRO V V V
pursuant to Section 72(t) of the Internal Revenue
Code of 1986, as amended.
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o Death, disability or retirement of 401(a) or ESP V V V
Plan participant, or death or disability of IRA
owner, SRO Plan Participant or SAR-SEP Plan
Participant.
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o Eligible participant distributions, such as V V V
distributions due to death, disability, financial
hardship, retirement and termination of employment
from Serviced Plans and nonqualified deferred
compensation plans (excluding, however, a
termination of a plan).
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o Loan from 401(a) or ESP Plan. V V V
-----------------------------------------------------------------------------------------------------
o Financial hardship (as defined in Treasury V V V
Regulation Section 1.401(k)-l(d)(2), as amended
from time to time) for 401(a) Plans and ESP Plans.
-----------------------------------------------------------------------------------------------------
o Termination of employment of 401(a) or ESP Plan V V V
participant (excluding, however, a termination of
the Plan).
-----------------------------------------------------------------------------------------------------
o Tax-free return of excess 401(a) Plan, ESP Plan V V V
or IRA contributions.
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o Distributions from a 401(a) or ESP Plan that has V V V
invested its assets in one or more of the MFS funds
for more than 10 years from the later to occur of
(i) January 1, 1993 or (ii) the date such 401(a) or
ESP Plan first invests its assets in one or more of
the MFS funds. The sales charges will be waived in
the case of a redemption of all of the 401(a) or
ESP Plan's shares in all MFS funds (i.e., all the
assets of the 401(a) or ESP Plan invested in the
MFS funds are withdrawn), unless immediately prior
to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS funds
(excluding the reinvestment of distributions)
during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets
in the MFS funds, in which case the sales charges
will not be waived.
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o Distributions made on or after the IRA owner, ESP V
participant, SRO Plan participant or 401(a) Plan
participant has attained the age of 591/2 years old.
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o Certain involuntary redemptions and redemptions V V V
in connection with certain automatic withdrawals
from a 401(a) Plan.
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o Distributions made on or after the IRA owner or V V V
the 401(a), ESP, SRO or SAR-SEP Plan participant,
as applicable, has attained the age of 701/2 years
old, but only with respect to the minimum
distribution under Code rules.
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o Investments in Class A shares by certain V(1)
retirement plans subject to ERISA, if, prior to
July 1, 1996,
o The plan had established an account with MFSC;
and
o The sponsoring organization had demonstrated to
the satisfaction of MFD that either:
o The employer had at least 25 employees; or
o The total purchases by the retirement plan of
Class A shares of the MFS funds would be in the
amount of at least $250,000 within a reasonable
period of time, as determined by MFD in its
sole discretion.
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o Investments in Class A shares by certain V(1 )
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1996 and March 30, 2001;
o The plan has, at the time of purchase, either
alone or in aggregate with other plans
maintained by the same plan sponsor, a market
value of $500,000 or more invested in shares of
any class or classes of the MFS funds; and
o The retirement plans will qualify under this
category only if the plans or their sponsoring
organization informs MFSC prior to the
purchases that the plans have a market value of
$500,000 or more invested in shares of any
class or classes of the MFS funds; MFSC has no
obligation independently to determine whether
such plans qualify under this category.
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B. CERTAIN TRANSFERS OF REGISTRATION
-----------------------------------------------------------------------------------------------------
o Transfers to an IRA rollover account where any V V V
sales charges with respect to the shares being
reregistered would have been waived had they been
redeemed.
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C. ADMINISTRATIVE SERVICE ARRANGEMENTS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan is, at that time, a V V
party to a retirement plan recordkeeping or
administrative services agreement with MFD or one
of its affiliates pursuant to which certain of
those services are provided by Benefit Services
Corporation or any successor service provider
designated by MFD.
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o Where the retirement plan has established an V V
account with MFSC on or after January 1, 2000, and
is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement
with MFD or one of its affiliates pursuant to which
such services are provided with respect to at least
$10 million in plan assets.
-----------------------------------------------------------------------------------------------------
o Shares acquired by retirement plans or trust V V
accounts whose financial intermediaries have
entered into an administrative services agreement
with MFD or one of its affiliates to perform
certain administrative services, subject to certain
operational and minimum size requirements specified
from time to time by MFD or one or more of its
affiliates.
-----------------------------------------------------------------------------------------------------
1 Purchases of Class A shares are not subject to an initial sales charge; however, a
CDSC of 1% will be deducted from redemption proceeds if the redemption is made within
12 months of purchase.
|
WAIVERS FOR 529 TUITION PROGRAMS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS 529A CLASS 529B CLASS 529C
ISC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. CERTAIN SPONSORED PLANS
---------------------------------------------------------------------------------------------------------
o Shares acquired on behalf of a group, association or V V V
employer sponsored plan, pursuant to guidelines created by
MFD from time to time.
---------------------------------------------------------------------------------------------------------
B. INVESTMENT PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS
A, CLASS B AND CLASS C SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases of Class V V V
529A shares, and the CDSC imposed on certain redemptions
of Class A, Class B and Class C shares, are waived where
Class 529A, Class 529B and Class 529C shares are acquired
following the reinvestment of the proceeds of a redemption
of Class A, Class B and Class C shares, respectively, of
the same fund; provided however, that any applicable CDSC
liability on the Class B or Class C shares redeemed will
carry over to the Class 529B or Class 529C shares acquired
and for purposes of calculating the CDSC, the length of
time you have owned your Class 529B or Class 529C shares
will be measured from the date of original purchase of the
Class B or Class C shares redeemed.
---------------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by 529 tuition programs whose sponsors V
or administrators have entered into an administrative
services agreement with MFD or one of its affiliates to
perform certain administrative or investment advisory
services subject to certain operational and minimum size
requirements specified from time to time by MFD or one or
more of its affiliates.
---------------------------------------------------------------------------------------------------------
D. QUALIFIED HIGHER EDUCATION EXPENSES
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the redemption proceeds are used V V
to pay for qualified higher education expenses, which may
include tuition, fees, books, supplies, equipment and room
and board (see the program description for further
information on qualified higher education expenses);
however the CDSC will not be waived for redemptions where
the proceeds are transferred or rolled over to another
tuition program.
---------------------------------------------------------------------------------------------------------
E. SCHOLARSHIP
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the account beneficiary has V V
received a scholarship, up to the amount of the
scholarship.
---------------------------------------------------------------------------------------------------------
F. DEATH OF 529 PLAN BENEFICIARY
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the death of the 529 plan V V
account beneficiary if the shares were held solely for the
benefit of the deceased individual.
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GENERAL WAIVERS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
CLASS A/529A CLASS A CLASS B/529B CLASS C/529C
WAIVER CATEGORY ISC CDSC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. DIVIDEND REINVESTMENT
---------------------------------------------------------------------------------------------------------
o Shares acquired through dividend or capital V V V V
gain reinvestment.
---------------------------------------------------------------------------------------------------------
o Shares acquired by automatic reinvestment of V V V V
distributions of dividends and capital gains of
any fund in the MFS funds pursuant to the
Distribution Investment Program.
---------------------------------------------------------------------------------------------------------
B. AFFILIATES OF A MFS FUND/CERTAIN FINANCIAL
ADVISERS
---------------------------------------------------------------------------------------------------------
o Shares acquired by officers, eligible V V V V
directors, employees (including former
employees) and agents of MFS, Sun Life, or any
of their subsidiary companies.
---------------------------------------------------------------------------------------------------------
o Shares acquired by trustees and retired V V V V
trustees of any investment company for which
MFD serves as distributor.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees, directors, V V V V
partners, officers and trustees of any
subadviser to any MFS fund.
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain family members of V V V V
any such individual identified above and their
spouses (or legal equivalent under applicable
state law), and certain trusts, pension,
profit-sharing or other retirement plans for
the sole benefit of such persons, provided the
shares are not resold except to the MFS fund
which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees or registered V V V V
representatives (including former employees) of
financial intermediaries or an employee's
spouse (or legal equivalent under applicable
state law) or employee's children under the age
of 21. For employees or registered
representatives of financial intermediaries who
established an account with MFS prior to May 1,
2006, shares acquired by certain family
members of employees or registered
representatives of financial intermediaries and
their spouses (or legal equivalent under
applicable state law), and certain trusts,
pension, profit-sharing or other retirement
plans for the sole benefit of such persons,
provided the shares are not resold except to
the MFS Fund which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by institutional clients of V V V V
MFS or MFS Institutional Advisors, Inc.
---------------------------------------------------------------------------------------------------------
C. INVOLUNTARY REDEMPTIONS
---------------------------------------------------------------------------------------------------------
o Shares redeemed at a MFS fund's direction due V V V
to the small size of a shareholder's account.
---------------------------------------------------------------------------------------------------------
D. BANK TRUST DEPARTMENTS AND LAW FIRMS
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain bank trust V V
departments or law firms acting as trustee or
manager for trust accounts which have entered
into an administrative services agreement with
MFD and are acquiring such shares for the
benefit of their trust account clients.
---------------------------------------------------------------------------------------------------------
E. INVESTMENT OF PROCEEDS FROM CERTAIN
REDEMPTIONS OF CLASS I SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases V V
of Class A or Class 529A shares and the
contingent deferred sales charge imposed on
certain redemptions of Class A shares, are
waived with respect to Class A or Class 529A
shares acquired of any of the MFS funds through
the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS
funds.
---------------------------------------------------------------------------------------------------------
F. SYSTEMATIC WITHDRAWALS
---------------------------------------------------------------------------------------------------------
o Systematic withdrawals with respect to up to V V
10% per year of the account value (with respect
to Class B and Class 529B shares, determined at
the time of your first withdrawal under the
plan(s) or January 1, 2007, whichever is later
and reset annually thereafter and with respect
to Class C and Class 529 C shares, determined
at the time the plan is established).
---------------------------------------------------------------------------------------------------------
G. DEATH OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on the account of the death V V V
of the account owner (e.g., shares redeemed by
the estate or any transferee of the shares from
the estate) if the shares were held solely in
the deceased individual's name, or for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
H. DISABILITY OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the disability V V
of the account owner if shares are held either
solely or jointly in the disabled individual's
name in a living trust for the benefit of the
disabled individual (in which case a disability
certification form is required to be submitted
to MFSC), or shares redeemed on account of the
disability of the 529 account beneficiary.
---------------------------------------------------------------------------------------------------------
I. WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by investments through V V
certain dealers (including registered
investment advisers and financial planners)
which have established certain operational
arrangements with MFD which include a
requirement that such shares be sold for the
sole benefit of clients participating in a
"wrap" account, mutual fund "supermarket"
account or a similar program under which such
clients pay a fee to such dealer.
---------------------------------------------------------------------------------------------------------
J. INSURANCE COMPANY SEPARATE ACCOUNTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by insurance company separate V V
accounts.
---------------------------------------------------------------------------------------------------------
K. NO COMMISSIONS PAID
---------------------------------------------------------------------------------------------------------
o Shares redeemed where MFD has not paid an up
front commission with respect to the sale of
the shares, provided that such arrangement V V V
meets certain conditions established by MFD
from time to time.
---------------------------------------------------------------------------------------------------------
L. MISCELLANEOUS
---------------------------------------------------------------------------------------------------------
o In connection with settlements reached V
between certain broker/dealers and the NASD,
SEC, and/or other regulatory bodies regarding
sales of Class B and Class C shares in excess
of certain dollar thresholds, the funds will,
at times, permit shareholders who are clients
of these firms to redeem Class B and Class C
shares of the fund and concurrently purchase
Class A shares without paying an initial sales
charge.
---------------------------------------------------------------------------------------------------------
|
PART II - APPENDIX D
FINANCIAL INTERMEDIARY COMPENSATION
Financial intermediaries receive various forms of compensation in connection
with the sale of shares of a Fund and/or the servicing of shareholder accounts.
Financial intermediaries may receive such compensation (i) in the form of
upfront commissions and ongoing asset-based compensation paid by MFD based on
sales charges received and expected to be received by MFD from shareholders, and
Rule 12b-1 ("Distribution Plan") distribution and service payments received by
MFD from the Funds, (ii) in the form of 529 administrative services payments,
retirement plan administrative and service payments, and shareholder servicing
payments paid by MFD and/or one or more of its affiliates (for purposes of this
section only, collectively, "MFD") based on the receipt of such payments by MFD
from the Funds, and (iii) in the form of payments paid from MFD's own additional
resources. In addition, financial intermediaries may benefit from payments made
to other entities for consulting, research, or analytical services.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. The amount of compensation that MFD pays to a financial intermediary can be significant. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular Fund or share class or to recommend MFS Funds instead of other funds that do not pay such compensation or that pay lower amounts of compensation. For calendar year 2006, gross sales of MFS Funds through financial intermediaries who received such compensation from MFD represented 74% of total gross sales of MFS Funds.
Financial intermediaries may charge you additional fees and/or commissions. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries may categorize and disclose these arrangements differently than MFD does. Financial intermediaries that sell Fund shares may also act as a broker or dealer in connection with a MFS Fund's purchase or sale of portfolio securities. However, the Funds and MFS do not consider financial intermediaries' sale of shares of a MFS Fund as a factor when choosing brokers or dealers to effect portfolio transactions for the MFS Funds.
COMMISSIONS AND DISTRIBUTION PLAN PAYMENTS
Class A, Class A1, Class 529A, and Class J Shares - General Provisions
For purchases of Class A, Class A1, Class 529A and Class J shares subject to an initial sales charge, MFD generally pays a portion of the initial sales charge to financial intermediaries as an upfront commission of up to the following amounts:
EQUITY/ASSET ALLOCATION/TOTAL RETURN FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 5.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 4.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
SHORT-TERM BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 2.25%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 2.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 1.75%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 1.50%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.25%
-------------------------------------------------------------------------------
|
The difference between the total amount invested and the sum of (a) the net proceeds to the Funds and (b) the financial intermediary commission, is the amount of the initial sales charge retained by MFD. Because of rounding in the computation of offering price, the portion of the sales charge retained by MFD may vary and the total sales charge may be more or less than the sales charge calculated using the sales charge expressed as a percentage of the offering price or as a percentage of the net amount invested as listed in the Prospectus. From time to time, MFD may pay financial intermediaries up to 100% of the applicable initial sales charge of Class A, Class A1, Class 529A and Class J shares of certain specified Funds sold by financial intermediaries during a specified sales period. In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares. Also, at the discretion of MFD, MFD may pay certain financial intermediaries some or all of the Distribution Plan distribution fee payments of up to 0.10% annually of the average daily net assets of the class with respect to such shares.
Class 529A-Specific Provisions
Except as noted below, for purchases of Class 529A shares not subject to an initial sales charge on or after April 1, 2007, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $10,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $10,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class 529A shares not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class 529A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares not subject to an initial sales charge, MFD may pay financial intermediaries an upfront commission of up to the following:
--------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
--------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
--------------------------------------------------------------------------------
Over $25,000,000 0.25%
--------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares by employer sponsored or payroll deduction 529 plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class A and Class A1-Specific Provisions Effective For Purchases on or After April 1, 2007
Except as noted below, for purchases of Class A and Class A1 shares not subject to an initial sales charge on or after April 1, 2007, by retirement plans (other than Serviced Plans and plans for which Heritage Trust serves as a trustee) that are held by MFSC at the plan or omnibus level ("Investment-Only Retirement Plans"), MFD will generally pay financial intermediaries no upfront commission, but financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases of Class A and Class A1 shares by Investment-Only Retirement Plans not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
Except as noted below, for purchases of Class A and Class A1 shares on or after April 1, 2007, by accounts other than Investment-Only Retirement Plans and Serviced Plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $10,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $10,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 (or with respect to purchases pursuant to a letter of intent signed prior to April 1, 2007) of Class A and Class A1 shares not subject to an initial sales charge other than by Serviced Plans, MFD may pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established prior to April 1, 2001 (including sales to plans for which account establishment paperwork was received in good order by MFD on or prior to March 31, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $2,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $2,000,000 to $3,000,000 plus 0.80%
-------------------------------------------------------------------------------
Over $3,000,000 to $50,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $50,000,000 0.25%
-------------------------------------------------------------------------------
|
Except for Serviced Plans described below, for purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's new investment in Class A and Class A1 shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over a 12-month period (commencing from the date of the first such purchase).
In the case of Serviced Plans whose account establishment paperwork was received in good order after December 31, 1999, purchases prior to April 1, 2007 will be aggregated as described above but the cumulative purchase amount will not be re-set after the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established on or after April 1, 2001 (including, sales to plans for which account establishment paperwork was received in good order by MFD on or after April 1, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class A shares and Class A1, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase except for purchases by Serviced Plans that trade through Princeton Retirement Group for which financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class B, Class B1 and Class 529B Shares
Except as noted below, for purchases of Class B, Class B1 and Class 529B shares, MFD will generally pay an upfront commission to financial intermediaries of up to 3.75% of the amount purchased through such financial intermediaries. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B, Class B1 and Class 529B shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan for which account establishment paperwork was received in good order by MFD between July 1, 1996 and December 31, 1998, MFD will generally pay an upfront commission to financial intermediaries equal to 2.75% of the amount of Class B and Class B1 shares purchased through such financial intermediary. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B and Class B1 shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan which established its account with MFSC between January 1, 1999, and December 31, 2002 (i.e., plan establishment paperwork is received by MFSC in good order by December 31, 2002) and certain other retirement plans as determined by MFD from time to time, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee). This commission structure is not available with respect to a plan with a pre-existing account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper Plus product.
Class C and Class 529C Shares
Except as noted below, for purchases of Class C and Class 529C shares, MFD will generally pay an upfront commission to financial intermediaries of up to 1% of the amount of Class C and Class 529C shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan distribution fee payment of up to 0.75% and some or all of the Distribution Plan service fee payment of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class C shares by Serviced Plans established between January 1, 2003 and March 31, 2005 (i.e., plan establishment paperwork is received by MFSC in good order on or after January 1, 2003), MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee).
For purchases of Class C shares by an Alliance Plan, MFD will pay upfront commissions or asset-based compensation to financial intermediaries under either option discussed above, at the financial intermediary's discretion.
Class R, Class R1, Class R2, Class R3 and Class R4 Shares
Except as noted below, for purchases of the following R share classes, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to the following rates annually of the average daily net assets of the Funds attributable to plan assets (of which up to 0.25% consists of the Distribution Plan service fee), as follows:
------------------------------------------------------------------------------- Class Annual Rate ------------------------------------------------------------------------------- Class R1 0.75% ------------------------------------------------------------------------------- Class R, Class R2, Class R3 0.50% ------------------------------------------------------------------------------- Class R4 0.25% ------------------------------------------------------------------------------- |
In addition, MFD may pay financial intermediaries who sell Class R4 shares an upfront commission of up to 0.25% of up to $25 million of a Serviced Plan's initial investment. MFD generally will not pay financial intermediaries receiving this upfront commission an upfront commission with respect to any subsequent sale of Class R4 shares (subject to MFD waiving this limitation from time to time).
For purchases of Class R shares prior to April 1, 2007 by a Serviced Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class R shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class R shares prior to April 1, 2007 by an Alliance Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to 0.60% of the amount of Class R shares purchased through such financial intermediary.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
529 ADMINISTRATIVE SERVICES FEES, RETIREMENT PLAN ADMINISTRATIVE AND SERVICES FEES, AND SHAREHOLDER SERVICING PAYMENTS
Financial intermediaries may receive all or a portion of the following payments: 529 administrative services fees as described in "Management of the Fund - Program Manager"; retirement plan administrative and service fees as described in "Management of the Fund - Administrator"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
OTHER MFD PAYMENTS
Financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS Funds, to cooperate with MFD's promotional efforts, and/or in recognition of their marketing, administrative services, and/or processing support. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary, and the quality of the overall relationship with the financial intermediary.
MFD may make marketing support and/or administrative services payments to financial intermediaries that sell Fund shares or provide services to MFD, the Funds or shareholders of the Funds through the financial intermediary's retail distribution channel and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition to the opportunity to participate in a financial intermediary's retail distribution channel or program, payments may include one or more of the following: business planning assistance; educating financial intermediary personnel about the various MFS Funds; assistance with Fund shareholder financial planning; placement on the financial intermediary's preferred or recommended fund list; access to sales representatives and management representatives of the financial intermediary; administrative and account maintenance services.; participant or shareholder record-keeping; reporting or transaction processing; program administration; fund/investment selection and monitoring; enrollment; and education. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
MFD may make payments to certain financial intermediaries that sell Fund shares to help offset the financial intermediaries' costs associated with client account maintenance support, statement preparation, and transaction processing. The types of payments that MFD may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a financial intermediary, payment of networking fees of up to $6 per shareholder account maintained on certain mutual fund trading systems, or one-time payments for ancillary services such as setting up funds on a financial intermediary's mutual fund trading system.
NASD Member Broker/Dealers Receiving Such Payments from MFD's Own Additional Resources
Set forth below is a list of the member firms of the NASD to which MFD expects as of June 4, 2007 to make such payments from its own additional resources with respect to the Funds. Payments may also be made to affiliates of these firms. Any additions, modifications, or deletions to the broker/dealers identified in this list that have occurred since June 4, 2007 are not reflected. In addition to member firms of the NASD, MFD also makes such payments to other financial intermediaries that sell or provide services to the Funds and shareholders, such as banks, insurance companies, and plan administrators. These firms are not included in this list and may include affiliates of MFD. You should ask your financial intermediary if it receives such payments from MFD.
INTERMEDIARY FIRM NAME: INTERMEDIARY FIRM NAME: 401(K) Investment Services, Inc. Linsco/Private Ledger Corp. AG Edwards & Sons, Inc. Merrill Lynch, Pierce, Fenner & Smith Inc. ADP Broker-Dealer, Inc. Metlife Securities Inc. AIG Financial Advisors, Inc. Mid-Atlantic Securities, Inc. Ameriprise Financial Services, Inc. Morgan Stanley DW Inc. American General Securities Incorporated MSCS Financial Services, LLC Bear, Stearns Securities Corp Multi Financial Services, Inc. Becker & Suffern, LTD. Northwestern Mutual Investment Services Charles Schwab & Co., Inc. Paychex Securities Corporation Chase Investment Services Corp. Piper Jaffray & Co. Citigroup Global Markets Inc. Primevest Financial Services, Inc. Clark Securities, Inc. Princor Financial Services Corporation Commonwealth Financial Network Prudential Investment Management Services LLC CUNA Brokerage Services, Inc. Raymond James & Associates, Inc. Fidelity Brokerage Services LLC Raymond James Financial Services, Inc. Financial Network Investment Corp. RBC Dain Rauscher Inc. H.D. Vest Investment Services State Street Global Markets, LLC Hewitt Financial Services LLC SunTrust Investment Services, Inc. ICMA - RC Services, LLC UBS Financial Services Inc. IFMG Securities, Inc. Wachovia Securities, LLC ING Financial Partners, Inc. Wells Fargo Investments LLC Legg Mason Investor Services, LLC |
From time to time, MFD, from MFD's own additional resources, may make additional payments to financial intermediaries that sell or provide services in connection with the sale of MFS Fund shares or the servicing of shareholder accounts. Such payments by MFD may include payment or reimbursement to, or on behalf of, financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and events, and other sponsored events, and travel expenses, including lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting, retention, and due diligence trips. Other compensation may be offered, including goodwill payments relating to servicing, to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. MFD makes payments for entertainment events it deems appropriate, subject to MFD's policies and applicable law. These payments may vary depending upon the nature of the event.
PART II - APPENDIX E
INVESTMENT STRATEGIES AND RISKS
In addition to the principal investment strategies and the principal risks described in the prospectus, your Fund may employ other investment practices and may be subject to other risks, which are described below. Because the following is a combined description of the investment strategies and risks for all MFS Funds, certain matters described herein may not apply to your Fund.
ASSET-BACKED SECURITIES. Asset-backed securities are securities that represent a participation in, or are secured by and payable from, pools of underlying assets such as debt securities, bank loans, motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (i.e., credit card) agreements and other receivables. These underlying assets are securitized through the use of trusts and special purpose entities. Payment of interest and repayment of principal on asset-backed securities may be largely dependent upon the cash flows generated by the underlying assets backing the securities and, in certain cases, may be supported by letters of credit, surety bonds, or other credit enhancements.
Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate, as a result of the pass-through of prepayments of principal on the underlying assets. The rate of principal payments on asset-backed securities is related to the rate of principal payments on the underlying asset pool and related to the priority of payment of the security with respect to the asset pool. The occurrence of prepayments is a function of several factors, such as the level of interest rates, general economic conditions, the location, and age of the underlying obligations, asset default and recovery rates, and other social and demographic conditions. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, asset-backed securities may have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
The credit quality of asset-backed securities depends primarily on the quality of the underlying assets, the level of credit enhancement, if any, provided for the securities, and the credit quality of the credit-support provider, if any. The value of asset-backed securities may be affected by the various factors described above and other factors, such as changes in interest rates, the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets, or the entities providing the credit enhancement. Because asset-backed securities may not have the benefit of a security interest in the underlying assets that is comparable to a mortgage, asset-backed securities present certain additional risks that are not present with mortgage-backed securities.
BORROWING. If the Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage and may cause a Fund to liquidate investments when it would not otherwise do so. Money borrowed will be subject to interest charges and may be subject to other fees or requirements which would increase the cost of borrowing above the stated interest rate.
COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, or other securities that may be converted into or exchanged for (by the holder or by the issuer) shares of stock (or cash or other securities of equivalent value) of the same or a different issuer at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at prices above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
COUNTRY LOCATION. The issuer of a security or other investment is generally
deemed to be economically tied to a particular country if: (a) the security or
other investment is issued or guaranteed by the government of that country or
any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; (e) the issuer has 50% or more of its assets in that
country; (f) the issuer is included in an index which is representative of that
country; or (g) the issuer is exposed to the economic fortunes and risks of that
country.
DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs, EDRs, or GDRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and may be offered privately in the United States and are generally designed for use in securities markets outside the U.S. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders.
With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and financial information to the depositary receipt holders at the underlying issuer's request.
Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
EMERGING MARKETS. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign markets. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; the risk that a judgment against a foreign government may be unenforceable; and greater price volatility, less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, depository receipts for those securities, securities of investment companies, and other similar interests in an issuer.
FOREIGN CURRENCIES. Foreign securities may be denominated in foreign currencies and international currency units and foreign currencies may be purchased directly. Accordingly, the weakening of these currencies and units against the U.S. dollar would result in a decline in the value of securities denominated in that currency or the value of the currency itself.
While holding currencies permits an investor to take advantage of favorable movements in the applicable exchange rate, this strategy also exposes the investor to risk of loss if exchange rates move in a direction adverse to the investor's position. Such losses could reduce any profits or increase any losses sustained by the investor from the sale or redemption of securities and could reduce the dollar value of interest or dividend payments received.
Some foreign countries have managed currencies, which are not free floating against the U.S. dollar. Managed currencies can experience a steep devaluation relative to the U.S. dollar.
In addition, there is risk that certain foreign countries may restrict the free conversion of their currencies into other currencies. Further, certain currencies may not be internationally traded.
Foreign currency transactions can be made on a spot (i.e., cash) or forward basis (i.e., by entering into forward contracts to purchase or sell foreign currencies). Although foreign exchange dealers generally do not charge a fee for such conversions, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency at one rate, while offering a lesser rate of exchange should the counterparty desire to resell that currency to the dealer. Forward contracts are customized transactions that require a specific amount of a currency to be delivered at a specific exchange rate on a specific date or range of dates in the future. Forward contracts are generally traded in an interbank market directly between currency traders (usually large commercial banks) and their customers. The parties to a forward contract may agree to offset or terminate the contract before its maturity, or may hold the contract to maturity and complete the contemplated currency exchange.
A "settlement hedge" or "transaction hedge" attempts to protect against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. Forward contracts to purchase or sell a foreign currency may also be used in anticipation of future purchases or sales of securities denominated in foreign currency, even if the specific investments have not yet been selected.
Forward contracts can be used to hedge against a decline in the value of existing investments denominated in foreign currency. For example, if an investor owned securities denominated in pounds sterling, the investor could enter into a forward contract to sell pounds sterling in return for U.S. dollars to hedge against possible declines in the pound's value. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. An investor could also hedge the position by selling another currency expected to perform similarly to the pound sterling. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Forward contracts can also be used to shift investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if a Fund had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases.
Swap agreements, indexed securities, hybrid securities and options and futures contracts relating to foreign currencies can be used for the same purposes.
Successful use of currency management strategies will depend on MFS' skill in analyzing currency values. Currency management strategies may increase the volatility of a Fund's returns and could result in significant losses to a Fund if currencies do not perform as MFS anticipates. For example, if a currency's value rose at a time when MFS had hedged a Fund by selling that currency in exchange for dollars, a Fund would not participate in the currency's appreciation. If MFS hedges currency exposure through proxy hedges, a Fund could realize currency losses from both the hedge and the security position if the two currencies do not move in tandem. Similarly, if MFS increases a Fund's exposure to a foreign currency and that currency's value declines, a Fund will realize a loss. There is no assurance that MFS' use of currency management strategies will be advantageous to a Fund or that it will hedge at appropriate times.
FOREIGN MARKETS. Foreign securities and foreign currencies, as well as any securities issued by U.S. entities with substantial foreign operations, may involve significant risks in addition to the risks inherent in U.S. investments. Foreign investments involve risks relating to local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars, or other government intervention. The debt instruments of foreign governments and their agencies and instrumentalities may or may not be supported by the full faith and credit of the foreign government. Additionally, governmental issuers of foreign debt securities may be unwilling to pay interest and repay principal when due and may require that the conditions for payment be renegotiated. In addition, the value of securities denominated in foreign currencies and of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar.
Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading, settlement and custodial practices (including those involving securities settlement where Fund assets may be released prior to receipt of payment) are often less developed than those in U.S. markets, and may result in increased risk or substantial delays in the event of a failed trade or the insolvency of, or breach of duty by, a foreign broker-dealer, securities depository, or foreign subcustodian. In addition, the costs associated with foreign investments, including withholding taxes, brokerage commissions, and custodial costs, are generally higher than with U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers. Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated. Regulatory enforcement may be influenced by economic or political concerns, and investors may have difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions.
FUTURES CONTRACTS. A futures contract is a standardized agreement between two parties to buy or sell in the future a specific quantity of an asset, currency, interest rate, index, instrument or other indicator at a specific price and time. The value of a futures contract typically fluctuates in correlation with the increase or decrease in the value of the underlying indicator. The buyer of a futures contract enters into an agreement to purchase the underlying indicator on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying indicator on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying indicator or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. In the case of physically settled futures, it may not be possible to liquidate or close out the futures contract at any particular time or at an acceptable price. Other financial futures contracts (such as those relating to interest rates, foreign currencies and securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying indicator unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market."
The risk of loss in trading futures contracts can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. Thus, a purchase or sale of a futures contract may result in unlimited losses. In the event of adverse price movements, an investor would continue to be required to make daily cash payments to maintain its required margin. In addition, on the settlement date, an investor may be required to make delivery of the indicators underlying the futures positions it holds.
An investor could suffer losses if it is unable to close out a futures contract because of an illiquid secondary market. Futures contracts may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures position, and an investor would remain obligated to meet margin requirements until the position is closed. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment.
An investor could lose margin payments it has deposited with its futures commission merchant (FCM), if, for example, the FCM breaches its agreement with the investor or becomes insolvent or goes into bankruptcy. In that event, the investor may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the investor.
If MFS attempts to use a futures contract as a hedge against, or as a substitute for, a portfolio investment, the futures position may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Pursuant to a claim of exemption filed with the Commodity Futures Trading Commission (CFTC) on behalf of the MFS Funds that are permitted by their investment objectives and policies to use futures and options on futures contracts, each such MFS Fund is not deemed to be a "commodity pool" or "commodity pool operator" under the Commodity Exchange Act and is not subject to registration or regulation as such under the Commodity Exchange Act.
HYBRID INSTRUMENTS. Hybrid instruments are generally considered derivatives and combine the elements of swaps, futures contracts, or options with those of debt, preferred equity or a depository instrument. A hybrid instrument may be a debt instrument, preferred stock, warrant, convertible security, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, commodities, indexes, economic factors or other measures, including interest rates, currency exchange rates, or commodities or securities indices, or other indicators (collectively, "indicators").
The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, swaps, options, futures and currencies. An investment in a hybrid instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published benchmark. The risks of a particular hybrid instrument will depend upon the terms of the instrument, but may include the possibility of significant changes in the benchmark(s) or the prices of the underlying indicators to which the instrument is linked. Such risks generally depend upon factors unrelated to the operations or credit quality of the issuer of the hybrid instrument, which may not be foreseen by the purchaser, such as economic and political events, the supply and demand of the underlying indicators and interest rate movements. Hybrid instruments may be highly volatile.
Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular hybrid instrument, changes in a benchmark, underlying asset or indicator may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument. Also, the prices of the hybrid instrument and the benchmark, underlying asset or indicator may not move in the same direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, hybrid instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain). The latter scenario may result if "leverage" is used to structure the hybrid instrument. Leverage risk occurs when the hybrid instrument is structured so that a given change in a benchmark or underlying indicator is multiplied to produce a greater value change in the hybrid instrument, thereby magnifying the risk of loss as well as the potential for gain.
If MFS attempts to use a hybrid instrument as a hedge against, or as a substitute for, a portfolio investment, the hybrid instrument may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving hybrid instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Hybrid instruments may also carry liquidity risk since the instruments are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt instruments. Under certain conditions, the redemption value of such an investment could be zero. In addition, because the purchase and sale of hybrid investments could take place in an over-the-counter market without the guarantee of a central clearing organization, or in a transaction between the Fund and the issuer of the hybrid instrument, hybrid instruments are subject to the creditworthiness of the issuer of the hybrid instrument, and their values may decline substantially if the issuer's creditworthiness deteriorates. Hybrid instruments also may not be subject to regulation by the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.
INFLATION-INDEXED BONDS. Inflation-indexed bonds are debt instruments whose principal value is adjusted periodically according to a rate of inflation (usually a consumer price index). Two structures are most common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the inflation accruals as part of a semiannual coupon.
U.S. Treasury Inflation Protected Securities (TIPS) currently are issued with maturities of five, ten, or thirty years, although it is possible that securities with other maturities will be issued in the future. The principal amount of TIPS adjusts for inflation, although the inflation-adjusted principal is not paid until maturity. Semi-annual coupon payments are determined as a fixed percentage of the inflation-adjusted principal at the time the payment is made.
If the rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. At maturity, TIPS are redeemed at the greater of their inflation-adjusted principal or at the par amount at original issue. If an inflation-indexed bond does not provide a guarantee of principal at maturity, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. For example, if inflation were to rise at a faster rate than nominal interest rates, real interest rates would likely decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates would likely rise, leading to a decrease in value of inflation-indexed bonds.
While these securities, if held to maturity, are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If nominal interest rates rise due to reasons other than inflation (for example, due to an expansion of non-inflationary economic activity), investors in these securities may not be protected to the extent that the increase in rates is not reflected in the bond's inflation measure.
The inflation adjustment of TIPS is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of price changes in the cost of living, made up of components such as housing, food, transportation, and energy. There can be no assurance that the CPI-U will accurately measure the real rate of inflation in the prices of goods and services.
INVERSE FLOATING RATE OBLIGATIONS. Inverse floating rate obligations have variable interest rates that typically move in the opposite direction from movements in prevailing interest rates, most often short-term rates. Accordingly, the value of inverse floating rate obligations or other obligations or certificates structured to have similar features generally moves in the opposite direction as interest rates. The value of an inverse floating rate instrument can be considerably more volatile than the value of other debt instruments of comparable maturity and quality. Inverse floating rate obligations incorporate varying degrees of leverage. Generally, greater leverage results in greater price volatility for any given change in interest rates. Inverse floating rate obligations may be subject to legal or contractual restrictions on resale and therefore may be less liquid than other types of securities.
LENDING OF PORTFOLIO SECURITIES. Portfolio securities will be lent to qualified investors such as member firms of the New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the Federal Reserve System, and would be required to be secured by collateral in cash, an irrevocable letter of credit, or U.S. Government securities maintained on a current basis at an amount at least equal to the market value of the securities loaned. When one party lends portfolio securities to another party, the lender has the right to call the loan and obtain the securities loaned at any time on customary industry settlement notice (which will not usually exceed five business days). For the duration of a loan, the borrower pays the lender an amount equal to any interest or dividends received on the securities loaned. The lender also receives a fee from the borrower or compensation from the investment of the collateral, less a fee paid to the borrower (if the collateral is in the form of cash). The lender does not, however, have the right to vote any securities having voting rights during the existence of the loan, but it can 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. A Fund's performance will continue to reflect changes in the value of the securities loaned and will also reflect the receipt of interest, through investment of cash collateral by the Fund or a fee. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, the lender could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If the lender is not able to recover the securities loaned, the lender may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased.
LOANS AND OTHER DIRECT INDEBTEDNESS. Loans and other direct indebtedness are interests in amounts owed by corporations, governmental or other borrowers to lenders or lending syndicates (loans and loan participations), to suppliers of goods and services (trade claims and other receivables), or to other parties. Some loans may be unsecured in part or in full. Loans may be in default at the time of purchase. Loans that are fully secured should protect the purchaser to a greater extent than unsecured loans in the event of nonpayment of scheduled interest or principal. However, there can be no assurance that the liquidation of collateral acquired in connection with the default of a secured loan would satisfy the borrower's obligation, or that such collateral could be liquidated.
Loans generally are made to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs or other corporate activities. Such loans typically are originated, negotiated and structured by a syndicate of lenders represented by an agent lender that has negotiated and structured the loan and that is responsible for collecting interest and principal payments and other amounts due on behalf of all of the lenders in the syndicate, and for enforcing the lenders' rights against the borrower. Typically, the agent is given broad discretion in monitoring the borrower's performance and is obligated to use the same care it would use in the management of its own property. Upon an event of default, the agent typically will enforce the loan agreement after instruction from the lenders. The borrower compensates the agent for these services. This compensation may include special fees paid when the loan is structured or funded and other fees paid on a continuing basis. The typical practice of an agent or a lender to rely exclusively or primarily on reports from the borrower involves a risk of fraud by the borrower.
If an agent becomes insolvent, or has a receiver, conservator or similar official appointed for it by an appropriate authority, or if it becomes a debtor in a bankruptcy proceeding, the agent's appointment may be terminated, and a successor agent typically may be appointed by the lenders. If an appropriate authority determines that assets held by the agent for the benefit of lenders or purchasers of loans are subject to the claims of the agent's general or secured creditors, then such lenders or purchasers might incur certain costs and delays in realizing payment on a loan or suffer a loss of principal and/or interest. Furthermore, in the event of the borrower's bankruptcy or insolvency, the borrower's obligation to repay a loan may be subject to certain defenses that the borrower can assert as a result of improper conduct by the agent.
Loans may be acquired by participating directly in a lending syndicate as a lender. Alternatively, loans or an interest in loans may be acquired by novation, by assignment or by participation from members of the lending syndicate or from other participants. In a novation or an assignment, the acquirer assumes all of the rights of the lender in the loan or of the participant in the participants' portion of the loan and, in the case of a novation or an assignment from a member of the lending syndicate, becomes a party of record with respect to the loan. In a participation, the acquirer purchases a portion of the lender's or the participants' interest in the loan, but has no direct contractual relationship with the borrower. An investment in a loan by participation gives rise to several risks. The acquirer must rely on another party not only for the enforcement of the acquirer's rights against the borrower, but also for the receipt and processing of principal, interest or other payments due under the loan and may be subject to the credit risk of the other party in addition to the borrower. The acquirer may be subject to delays, expenses, and risks that are greater than those that would be involved if the acquirer could enforce its rights directly against the borrower. In addition, under the terms of a participation agreement, the acquirer may be regarded as a creditor of the seller of the participation interest (rather than of the borrower), so that the acquirer also may be subject to the risk that such seller could become insolvent. A participation agreement also may limit the rights of the acquirer to vote on changes that may be made to the underlying loan agreement, such as waiving a breach of a covenant.
Direct indebtedness includes trade or other claims against companies, which generally represent monies owed by such companies to suppliers of goods or services. Such claims may be purchased when such companies are in default.
The ability to receive payments of principal and interest on loans and other direct indebtedness will depend primarily on the financial condition of the borrower. Because an acquirer may be required to rely on another party to collect and to pass on to it amounts payable with respect to the loan or other direct indebtedness and to enforce the acquirer's rights under the loan or other direct indebtedness, an insolvency, bankruptcy or reorganization of such other party may delay or prevent the acquirer from receiving such amounts. The highly leveraged nature of many loans and other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions.
Revolving credit facilities and other standby financing commitments obligate the purchaser to fund additional cash on a certain date or on demand. A revolving credit facility differs from other types of financing commitments in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit facility. These commitments may have the effect of requiring a purchaser to increase its investment in a company at a time when the purchaser 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).
Floating rate loans generally are subject to legal or contractual restrictions on resale. Floating rate loans currently are not listed on any securities exchange or automatic quotation system. As a result, no active market may exist for some floating rate loans, and to the extent a secondary market exists for other floating rate loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Additionally, the supply of floating rate loans may be limited from time to time due to a lack of sellers in the market for existing floating rate loans or to the number of new floating rate loans currently being issued. As a result, the floating rate loans available for purchase may be of lower quality or may have a higher price.
With respect to its management of investments in bank loans, MFS will normally seek to avoid receiving material, non-public information ("MNPI") about the issuers of bank loans being considered for acquisition by the Fund or held in the Fund's portfolio. In many instances, borrowers may offer to furnish MNPI to prospective investors, and to holders, of the issuer's loans. MFS' decision not to receive MNPI may place MFS at a disadvantage relative to other investors in loans (which could have an adverse effect on the price the Fund pays or receives when buying or selling loans). Also, in instances where holders of loans are asked to grant amendments, waivers or consent, MFS' ability to assess their significance or desirability may be adversely affected. For these and other reasons, it is possible that MFS' decision not to receive MNPI under normal circumstances could adversely affect the Fund's investment performance.
Notwithstanding its intention generally not to receive MNPI with respect to its management of investments in loans, MFS may from time to time come into possession of MNPI about the issuers of loans that may be held in the Fund's portfolio. Possession of such information may in some instances occur despite MFS' efforts to avoid such possession, but in other instances MFS may choose to receive such information (for example, in connection with participation in a creditors' committee with respect to a financially distressed issuer). As, and to the extent, required by applicable law, MFS' ability to trade in these loans for the account of the Fund could potentially be limited by its possession of such information. Such limitations on MFS' ability to trade could have an adverse effect on the Fund by, for example, preventing the Fund from selling a loan that is experiencing a material decline in value. In some instances, these trading restrictions could continue in effect for a substantial period of time.
LOWER QUALITY DEBT INSTRUMENTS. Lower quality debt instruments are considered speculative with respect to the issuer's continuing ability to meet principal and interest payments and, while generally expected to provide greater income than investments in higher quality debt instruments, will involve greater risk of principal and income (including the possibility of default or bankruptcy of the issuers of such instruments) and may involve greater volatility of price (especially during periods of economic uncertainty or change) than higher quality debt instruments. In addition, because yields vary over time, no specific level of income can ever be assured. These lower quality debt instruments generally tend to reflect economic changes (and the outlook for economic growth), short-term corporate and industry developments and the market's perception of their credit quality to a greater extent than higher quality debt instruments, which react primarily to fluctuations in the general level of interest rates (although these lower quality debt instruments are also affected by changes in interest rates). In the past, economic downturns or an increase in interest rates have, under certain circumstances, resulted in a higher incidence of default by the issuers of these instruments and may do so in the future, especially in the case of highly leveraged issuers. The prices for these instruments may be affected by legislative and regulatory developments. The market for these lower quality debt instruments may be less liquid than the market for investment grade debt instruments. Furthermore, the liquidity of these lower quality debt instruments may be affected by the market's perception of their credit quality.
Instruments in the lowest tier of investment-grade debt instruments, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade securities.
See Appendix H for a description of bond ratings.
MONEY MARKET INSTRUMENTS. Money market instruments, or short-term debt instruments, consist of obligations such as commercial paper, bank obligations (e.g., certificates of deposit and bankers' acceptances), repurchase agreements, and various government obligations, such as Treasury bills. Money market instruments may be structured to be, or may employ a trust or other form so that they are, eligible investments for money market funds. For example, put features can be used to modify the maturity of a security or interest rate adjustment features can be used to enhance price stability. If a structure fails to function as intended, adverse tax or investment consequences may result. Neither the Internal Revenue Service (IRS) nor any other regulatory authority has ruled definitively on certain legal issues presented by certain structured securities. Future tax or other regulatory determinations could adversely affect the value, liquidity, or tax treatment of the income received from these securities. Commercial paper is a money market instrument issued by banks or companies to raise money for short-term purposes. Unlike some other debt obligations, commercial paper is typically unsecured. Commercial paper may be issued as an asset-backed security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that represent direct or indirect participation in, or are collateralized by and payable from, mortgage loans secured by real property or instruments derived from such loans. Mortgage-backed securities include various types of securities such as pass-throughs, stripped mortgage-backed securities, and collateralized mortgage obligations. There are a wide variety of mortgage types underlying these securities, including mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
Generally, mortgage-backed securities represent interests in pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association (GNMA), by government-related organizations, such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), as well as by private issuers, such as commercial banks, savings and loan institutions and mortgage bankers. Government mortgage-backed securities are backed by the full faith and credit of the United States as to payment of principal and interest. GNMA, the principal U.S. guarantor of these securities, is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Government-related mortgage-backed securities are not backed by the full faith and credit of the United States. Issuers of government-related mortgage-backed securities include FNMA and FHLMC. FNMA is a congressionally chartered corporation owned entirely by private stockholders, and is subject to general regulation by the Secretary of Housing and Urban Development. Private mortgage-backed securities may be less liquid than government or government-related mortgage-backed securities.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. FHLMC is a stockholder-owned government-sponsored enterprise established by Congress. Participation certificates representing interests in mortgages from FHLMC's national portfolio are guaranteed as to the timely payment of interest and principal by FHLMC. Private mortgage-backed securities represent interest in pass-through pools consisting principally of conventional residential mortgage loans created by non-government issuers, such as commercial banks and savings and loan associations and private mortgage insurance companies. Private, government, or government-related entities may create mortgage loan pools offering pass-through investments in addition to those described above. Interests in pools of mortgage-related securities differ from other forms of debt instruments, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities typically provide a monthly payment which consists of both interest and principal payments. In effect, these payments generally are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs incurred.
Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. Prepayments of principal by mortgagors or mortgage foreclosures shorten the term of the mortgage pool underlying the mortgage-backed security. The occurrence of prepayments is a function of several factors, including interest rates, general economic conditions, the location of the mortgaged property, the age of the mortgage or other underlying obligations, and other social and demographic conditions. Because prepayment rates of individual mortgage pools vary widely, the average life of a particular pool is difficult to predict. A Fund's ability to maintain positions in mortgage-backed securities is affected by the reductions in the principal amount of such securities resulting from prepayments. The values of mortgage-backed securities vary with changes in market interest rates generally and the differentials in yields among various kinds of U.S. government securities, mortgage-backed securities, and asset-backed securities. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgages supporting a mortgage-backed security. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase thereby shortening the average life of such a pool. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, mortgage-backed securities typically have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
Collateralized mortgage obligations (CMOs) are mortgage-backed securities that are collateralized by whole loan mortgages or mortgage pass-through securities. The bonds issued in a CMO transaction are divided into groups, and each group of bonds is referred to as a "tranche." Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the CMO bondholders. The bonds issued under a traditional CMO structure are retired sequentially as opposed to the pro-rata return of principal found in traditional pass-through obligations. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds. Under a CMO structure, the repayment of principal among the different tranches is prioritized in accordance with the terms of the particular CMO issuance. The "fastest-pay" tranches of bonds, as specified in the prospectus for the issuance, would initially receive all principal payments. When those tranches of bonds are retired, the next tranche, or tranches, in the sequence, as specified in the prospectus, receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate, and long final maturities, as well as varied expected average lives and risk characteristics. In recent years, new types of CMO tranches have evolved. These include floating rate CMOs, parallel pay CMOs planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these new structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-backed securities.
A primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) will affect the yield, average life, and price of CMOs. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other securities.
Stripped mortgage-backed securities (SMBSs) are derivative multi-class mortgage-backed securities. SMBSs may be issued by agencies or instrumentalities of the U.S. 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 entities formed or sponsored by any of the foregoing. SMBSs may be less liquid than other types of mortgage-backed securities.
SMBSs are usually structured with two classes that receive different proportions of the interest and principal distributions on 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 price and yield-to-maturity on an IO class 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 a Fund's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to recoup some or all of its initial investment in these securities, even if the security is in one of the highest rating categories. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. In mortgage "dollar roll" transactions, the investor sells mortgage-backed securities for delivery in the future and simultaneously contracts to repurchase substantially similar securities on a specified future date. During the roll period, the investor foregoes principal and interest paid on the mortgage-backed securities. The lost interest is compensated by the difference between the current sales price and the lower price for the future purchase (often referred to as the "drop") as well as by the interest earned on, and gains from, the investment of the cash proceeds of the initial sale. A commitment fee may also be received for participation in such transaction.
If the income and capital gains from the investment of the cash from the initial sale do not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will result in a lower return than would have been realized without the use of the dollar rolls. Dollar roll transactions involve the risk that the market value of the securities that are required to be purchased in the future may decline below the agreed upon repurchase price of those securities. If the party to whom the securities are sold becomes insolvent, the right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the investor's ability to correctly predict interest rates and prepayments.
A dollar roll can be viewed as a borrowing. If a Fund makes additional investments while a dollar roll is outstanding, this may be considered a form of leverage.
MUNICIPAL INSTRUMENTS. Debt instruments issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies or instrumentalities, are known as "municipal instruments." Generally, interest received on municipal instruments is exempt from federal income tax. The tax-exempt nature of the interest on a municipal instrument is generally the subject of a bond counsel opinion delivered in connection with the issuance of the instrument. There is no assurance that the IRS will agree with bond counsel's opinion that such interest is tax-exempt or that the interest payments on such municipal instruments will continue to be tax exempt for the life of the municipal instrument. Issuers or other parties generally enter into covenants requiring continuing compliance with federal tax requirements to preserve the tax-free status of interest payments over the life of the municipal instrument. If at any time the covenants are not complied with, or if the IRS otherwise determines that the issuer did not comply with relevant tax requirements, interest payments from a municipal instrument could become federally taxable, possibly retroactively to the date the municipal instrument was issued and an investor may need to file an amended income tax return. Certain types of structured securities are designed so that tax exempt interest from municipal instruments held by the underlying entity will pass through to the holders of the structured security. There is no assurance that the IRS will agree that such interest is tax exempt.
The value of municipal instruments can be affected by changes in their actual or perceived credit quality. The credit quality of municipal instruments can be affected by, among other things, the financial condition of the issuer or guarantor, the issuer's future borrowing plans and sources of revenue, the economic feasibility of the revenue bond project or general borrowing purpose, political or economic developments in the region where the instrument is issued and the liquidity of the security. Municipal instruments generally trade in the over-the-counter market.
General obligation bonds are backed by the issuer's pledge of its full faith and credit and taxing power for the repayment of principal and the payment of interest. Issuers of general obligation bonds include states, counties, cities, towns, and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads, and water and sewer systems. The rate of taxes that can be levied for the payment of debt service on these bonds may be limited. Additionally, there may be limits as to the rate or amount of special assessments or taxes that can be levied to meet these obligations.
Some general obligation bonds are backed by both a pledge of a specific revenue source, such as a special assessment or tax and an issuer's pledge of its full faith and credit and taxing power. Debt service from these general obligation bonds is typically paid first from the specific revenue source and second, if the specific revenue source is insufficient, from the general taxing power.
Revenue bonds are generally backed by the net revenues derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source, such as a state's or local government's proportionate share of the payments from the Tobacco Master Settlement Agreement. Revenue bonds are issued to finance a wide variety of capital projects. Examples include electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Industrial development bonds, a type of revenue bond, are issued by or on behalf of public authorities to raise money to finance various privately operated facilities for a variety of purposes, including economic development, solid waste disposal, transportation, and pollution control. Although the principal security for revenue bonds is typically the revenues of the specific facility, project, company or system, many revenue bonds are secured by additional collateral in the form of a mortgage on the real estate comprising a specific facility, project or system, a lien on receivables and personal property, as well as the pledge of various reserve funds available to fund debt service, working capital, capital expenditures or other needs. Net revenues and other security pledged may be insufficient to pay principal and interest due which will cause the price of the bonds to decline. In some cases, revenue bonds issued by an authority are backed by a revenue stream unrelated to the issuer, such as a hotel occupancy tax, a sales tax, or a special assessment. In these cases, the ability of the authority to pay debt service is solely dependent on the revenue stream generated by the special tax. Furthermore, the taxes supporting such issues may be subject to legal limitations as to rate or amount.
Municipal insurance policies typically insure, subject to the satisfaction of the policy conditions, timely and scheduled payment of all principal and interest due on the underlying municipal instruments. The insurance may be obtained by either (i) the issuer at the time the municipal instrument is issued, commonly referred to as primary market insurance or (ii) another party after the municipal instrument has been issued, commonly referred to as secondary market insurance. The financial strength of the companies issuing the bond insurance can vary.
In general, municipal insurance does not insure any risk other than nonpayment.
Municipal insurance does not insure against market fluctuations which affect the
price of a security. In addition, a municipal insurance policy will not insure
(i) the payment of regularly scheduled debt service payments until maturity if
an issuer redeems the municipal bonds prior to maturity in accordance with the
call provisions of the municipal instrument; (ii) over the loss of prepayment or
other acceleration payment which at any time may become due in respect of any
instrument, (except for a mandatory sinking fund redemption; (iii) the payment
of a prepayment or acceleration premium; or (iv) nonpayment of principal or
interest caused by negligence or bankruptcy of the paying agent. A municipal
insurance policy often reserves to the insurer the exclusive right to accelerate
the instruments upon a payment default.
Because a significant portion of the municipal instruments issued and outstanding are insured by a small number of insurance companies, an event involving one or more of these insurance companies could have a significant adverse effect on the value of the securities insured by that insurance company and on the municipal market as a whole.
Education. In general, there are two types of education-related bonds: (i) those issued to finance projects for public and private colleges and universities, charter schools and private schools, and (ii) those representing pooled interests in student loans. Bonds issued to supply educational institutions with funding are subject to many risks, including the risks of unanticipated revenue decline, primarily the result of decreasing student enrollment, decreasing state and federal funding, or a change in general economic conditions. Additionally, higher than anticipated costs associated with salaries, utilities, insurance or other general expenses could impair the ability of a borrower to make annual debt service payments. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which may be supported by reserves or other forms of credit enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous factors, including the rate of student loan defaults, seasoning of the loan portfolio, and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Electric Utilities. The electric utilities industry has been experiencing increased competitive pressures. Federal and state legislation in recent years has been moving the industry toward opening transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel, (b) the availability and cost of capital, (c) the effects of conservation on energy demand, (d) the effects of rapidly changing environmental, safety, and licensing requirements, and other federal, state, and local regulations, (e) timely and sufficient rate increases thereby assisting utilities in recovering increasing energy costs, and (f) opposition to nuclear power.
Health Care. The health care industry is subject to regulatory action by a number of governmental agencies, including federal, state, and local governmental agencies. A major source of revenues for the health care industry is payments from the Medicare and Medicaid programs. As a result, the industry is sensitive to legislative changes and reductions in governmental spending for such programs. A second major source of revenues for the health care industry is payments from private insurance companies and health maintenance organizations. As such, any changes to and reductions in reimbursement rates from these entities for services provided could be detrimental to the revenues of the providers. Numerous other factors may affect the industry, such as general and local economic conditions; demand for services; expenses (including for example, labor, malpractice insurance premiums and pharmaceutical products); and competition among health care providers. In the future, the following factors may adversely affect health care facility operations: adoption of legislation proposing a national health insurance program; other state or local health care reform measures; medical and technological advances which dramatically alter the need for health services or the way in which such services are delivered; changes in medical coverage which alter the traditional fee-for-service revenue stream; and efforts by employers, insurers, and governmental agencies to reduce the costs of health insurance and health care services.
Housing. Housing revenue bonds typically are issued by a state, county, or local housing authority and are secured by the revenues of mortgages originated by the authority using the proceeds of the bond issue. These bonds may be used to make mortgage loans for single-family housing, multi-family housing, or a combination of the two. Because of the impossibility of precisely predicting demand for mortgages from the proceeds of such an issue, there is a risk that the proceeds of the issue will be in excess of demand, which would result in early retirement of the bonds by the issuer. Moreover, such housing revenue bonds depend for their repayment upon the cash flow from the underlying mortgages, which cannot be precisely predicted when the bonds are issued. Any difference in the actual cash flow from such mortgages from the assumed cash flow could have an adverse impact upon the ability of the issuer to make scheduled payments of principal and interest on the bonds, or could result in early retirement of the bonds. Additionally, such bonds depend in part for scheduled payments of principal and interest upon reserve funds established from the proceeds of the bonds, assuming certain rates of return on investment of such reserve funds. If the assumed rates of return are not realized because of changes in interest rate levels or for other reasons, the actual cash flow for scheduled payments of principal and interest on the bonds may be inadequate. The financing of multi-family housing projects is affected by a variety of factors which may impact the borrower's ability to pay debt service and may impair the value of the collateral securing the bonds, if any. These factors include 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. Some authorities provide additional security for the bonds in the form of insurance, subsidies, additional collateral, or state pledges (without obligation) to make up deficiencies.
Transportation. Transportation debt may be issued to finance the construction of airports, toll roads, highways, or other transit facilities. Airport bonds are dependent on the economic conditions of the airport's service area and may be affected by the business strategies and fortunes of specific airlines. They may also be subject to competition from other airports and modes of transportation. Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs, transportation taxes and fees, and availability of fuel also affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public transportation.
Tobacco Settlement Revenue Bonds. Tobacco settlement revenue bonds are secured by a single source of revenue --a state or jurisdiction's proportionate share of periodic payments made by tobacco companies under the Master Settlement Agreement (the "MSA") entered into by participating cigarette manufacturers, 46 states, and other jurisdictions in November of 1998 in settlement of certain smoking-related litigation. Annual payments on the bonds are dependent on the receipt by the issuer of future settlement payments under the MSA. These annual payments are subject to numerous adjustments. The actual amount of future settlement payments depends on annual domestic cigarette shipments, inflation, market share gains by non-participating cigarette manufacturers, and other factors. MSA adjustments may cause bonds to be repaid faster or slower than originally projected. Tobacco bonds are subject to additional risks, including the risk that cigarette consumption declines, that a tobacco company defaults on its obligation to make payments to the state or that the MSA or state legislation enacted pursuant to the MSA is void or unenforceable.
Water and Sewer. Water and sewer revenue bonds are generally secured by the fees charged to each user of the service. The issuers of water and sewer revenue bonds generally enjoy a monopoly status and latitude in their ability to raise rates. However, lack of water supply due to insufficient rain, run-off, or snow pack can be a concern and has led to past defaults. Further, public resistance to rate increases, declining numbers of customers in a particular locale, costly environmental litigation, and Federal environmental mandates are challenges faced by issuers of water and sewer bonds.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations and participations in municipal leases are undivided interests in a portion of an obligation in the form of a lease or installment purchase or conditional sales contract which is issued by a state, local government, or a municipal financing corporation to acquire land, equipment, and/or facilities (collectively hereinafter referred to as "lease obligations"). Generally lease obligations do not constitute general obligations of the municipality for which the municipality's taxing power is pledged. Instead, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate, and make the payments due under the lease obligation. As a result of this structure, municipal lease obligations are generally not subject to state constitutional debt limitations or other statutory requirements that may apply to other municipal securities.
Lease obligations may contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. If the municipality does not appropriate in its budget enough to cover the payments on the lease obligation, the lessor may have the right to repossess and relet the property to another party. Depending on the property subject to the lease, the value of the property may not be sufficient to cover the debt.
In addition to the risk of "non-appropriation," municipal lease securities may not have as highly liquid a market as conventional municipal bonds. Furthermore, municipal lease obligations have the same risk characteristics as Municipal Instruments do generally.
OPTIONS. An option is a contract which conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific amount or value of a particular underlying interest at a specific price (called the "exercise" or "strike" price) at one or more specific times before the option expires. The underlying interest of an option contract can be a security, currency, index, future, swap or other type of financial instrument. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option purchaser is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date.
Options can be traded either through established exchanges ("exchange traded options") or privately negotiated transactions (over-the-counter or "OTC options"). Exchange traded options are standardized with respect to, among other things, the underlying interest, expiration date, contract size and strike price. The terms of OTC options are generally negotiated by the parties to the option contract which allows the parties greater flexibility in customizing the agreement, but OTC options are generally less liquid than exchange traded options.
All option contracts involve credit risk if the counterparty to the option contract fails to perform. Credit risk is low in exchange traded options because the performance of the contract by the counterparty is backed by the clearing agency for the exchange on which the options are traded. The credit risk in OTC options is dependent on the credit worthiness of the individual counterparty to the contract and may be greater than the credit risk associated with exchange traded options.
When purchasing a put option, the purchaser obtains the right (but not the obligation) to sell a specific amount or value of a particular interest to the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical put option can expect to realize a gain if the price of the underlying interest falls. However, if the underlying interest's price does not fall enough to offset the cost of purchasing the option, the purchaser of a put option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The purchaser of a put option may terminate its position by allowing the option to expire, exercising the option or closing out its position in the secondary market at the option's current price, if a liquid secondary markets exists. If the option is allowed to expire, the purchaser will lose the entire premium. If the option is exercised, the purchaser would complete the sale of the underlying interest to the option writer at the strike price.
When purchasing a call option, the purchaser obtains the right (but not the obligation) to purchase a specified amount or value of a particular interest from the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical call option can expect to realize a gain if the price of the underlying interest rises. However, if the underlying interest's price does not rise enough to offset the cost of purchasing the option, the buyer of a call option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The writer of a put or call option takes the opposite side of the transaction from the option's purchaser. In return for receipt of the premium, the writer assumes the obligation to buy or sell (depending on whether the option is a put or a call) a specified amount or value of a particular interest at the strike price if the purchaser of the option chooses to exercise it.
Generally, an option writer sells options with the goal of obtaining the premium paid by the option purchaser. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" when the option is exercised. A call option is in-the-money if the value of the underlying interest exceeds the strike price of the option. A put option is in-the-money if the strike price of the option exceeds the value of the underlying interest. Generally, any profit realized by an option purchaser represents a loss for the option writer. The writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option in the same manner as if the writer were entering into a futures contract.
The writer of a put option may seek to terminate a position in the put option before exercise by closing out the option in the secondary market at its current price. If the secondary market is not liquid for a put option, however, the writer must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes.
A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put) of the underlying interest when the option is exercised. A cash-settled option gives its owner the right to receive a cash payment based on the difference between a determined value of the underlying interest at the time the option is exercised and the fixed exercise price of the option. In the case of physically settled options, it may not be possible to terminate the position at any particular time or at an acceptable price. A cash-settled call conveys the right to receive a cash payment if the determined value of the underlying interest at exercise exceeds the exercise price of the option, and a cash-settled put conveys the right to receive a cash payment if the determined value of the underlying interest at exercise is less than the exercise price of the option.
Combination option positions are positions in more than one option at the same time. A spread involves being both the buyer and writer of the same type of option on the same underlying interest but different exercise prices and/or expiration dates. A straddle consists of purchasing or writing both a put and a call on the same underlying interest with the same exercise price and expiration date.
The principal factors affecting the market value of a put or call option include supply and demand, interest rates, the current market price of the underlying interest in relation to the exercise price of the option, the volatility of the underlying interest and the remaining period to the expiration date.
If a trading market in particular options were to become unavailable, investors in those options would be unable to close out their positions until trading resumes, and option writers may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. Exchanges or other facilities on which options are traded may establish limitations on options trading, may order the liquidation of positions in excess of these limitations, or may impose other sanctions that could adversely affect parties to an options transaction.
Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a Fund.
PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer and is therefore subject to the same risks as other equity securities. Preferred stock has precedence over common stock in the event the issuer is liquidated or declares bankruptcy, but is junior to the interests of the debt instruments of the issuer. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. The value of preferred stock is sensitive to changes in interest rates and to changes in the issuer's credit quality.
REAL ESTATE RELATED INVESTMENTS. Investment in real estate related investments are subject to similar risks to those associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning or applicable tax law; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; and changes in interest rates.
Real estate investment trusts ("REITs") are pooled investment vehicles that invest primarily in income producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs, or a combination of equity and mortgage REITs. Equity REITs invest most of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest most of their assets in real estate mortgages and derive income from interest payments. An investor will indirectly bear its proportionate share of any expenses (such as operating expenses and advisory fees) paid by REITs in which it invests in addition to the expenses paid by the investor.
Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skills of the REIT's manager and generally are not diversified. Equity and mortgage REITs are also subject to heavy cash flow dependency, borrower default, and self-liquidation.
Mortgage REITs are also subject to different combinations of prepayment, extension, interest rate and other market risks. The real estate mortgages underlying mortgage REITs are generally subject to a faster rate of principal repayments in a declining interest rate environment and to a slower rate of principal repayments in an increasing interest rate environment.
In addition, a REIT may be unable to obtain financing to satisfy income and gain distributions required by federal tax law, may fail to qualify for the federal tax exemption for distributed income, or may be adversely affected by changes in federal tax law, for example, by limiting their permissible businesses or investments.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a buyer would acquire a security for a relatively short period of time (usually not more than a week) subject to the obligation of the seller to repurchase and the buyer to resell such security at a fixed time and price (representing the buyer's cost plus interest). The buyer bears the risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the buyer is delayed or prevented from exercising its rights to dispose of the collateral. This risk includes the risk of procedural costs or delays in addition to a loss on the securities if their value should fall below their repurchase price.
RESTRICTED SECURITIES. Restricted securities are securities that are subject to legal restrictions on their re-sale. Difficulty in selling securities may result in a loss or be costly to an investor. Restricted securities generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, the holder of a registered security may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the holder might obtain a less favorable price than prevailed when it decided to seek registration of the security.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, an investor sells securities and receives cash proceeds, subject to its agreement to repurchase the securities at a later date for a fixed price reflecting a market rate of interest. There is a risk that the counter party to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the investor. Unless the appreciation and income on assets purchased with proceeds from reverse repurchase agreements exceed the costs associated with them, the investor's performance is lower than it otherwise would have been. A reverse repurchase agreement can be viewed as a borrowing. If a Fund makes additional investments while a reverse repurchase agreement is outstanding, this may be considered a form of leverage.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment companies include shares of closed-end investment companies, unit investment trusts, exchange-traded funds, and open-end investment companies, represent interests in professionally managed portfolios that may invest in any type of interest. Investing in other investment companies involves substantially the same risks as investing directly in the underlying interests, but involve additional expenses at the investment company-level, such as a proportionate share of portfolio management fees and operating expenses. Certain types of investment companies, such as closed-end investment companies and exchange-traded funds, trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value (NAV) per share. The extent to which a Fund can invest in securities of other investment companies is limited by the Investment Company Act of 1940.
SHORT SALES. A seller may make short sales that are made "against the box" and also those that are not made "against the box." A short sale that is not made "against the box" is a transaction in which a party sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the seller must borrow the security to make delivery to the buyer. The seller then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. It may not be possible to liquidate or close out the short sale at any particular time or at an acceptable price. The price at such time may be more or less than the price at which the security was sold by the seller. Until the security is replaced, the seller is required to repay the lender any dividends or interest which accrue during the period of the loan. To borrow the security, the seller also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. The seller also will incur transaction costs in effecting short sales.
The seller will incur a loss as a result of the short sale if the price of the security or index increases between the date of the short sale and the date on which the seller replaces the borrowed security. Such loss may be unlimited. The seller will realize a gain if the price of the security declines between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends or interest the seller may be required to pay in connection with a short sale.
A seller may also make short sales "against the box," i.e., when a security identical to one owned by the seller is borrowed and sold short. If the seller enters into a short sale against the box, it is required to hold securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) while the short sale is outstanding. The seller will incur transaction costs, including interest, in connection with opening, maintaining, and closing short sales against the box and will forgo an opportunity for capital appreciation in the security.
SOVEREIGN DEBT OBLIGATIONS. Sovereign debt obligations are issued or guaranteed by foreign governments or their agencies, including debt of developing countries. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of developing countries may involve a high degree of risk, and may be in default or present the risk of default. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and pay interest when due, and may require renegotiation or rescheduling of debt payments. In addition, prospects for repayment of principal and payment of interest may depend on political as well as economic factors. Although some sovereign debt, such as Brady Bonds, is collateralized by U.S. Government securities, repayment of principal and payment of interest is not guaranteed by the U.S. Government.
SWAPS AND RELATED DERIVATIVES. A swap is an agreement between two parties pursuant to which each party agrees to make one or more payments to the other, based on different interest rates, currency exchange rates, security or commodity prices, the prices or rates of other types of financial instruments, assets, the levels of specified indices, or other indicators. Swaps can be closed out by physical delivery of the underlying indicator(s) or payment of the cash settlement on settlement date, depending on the terms of the particular agreement. For example, in a typical credit default swap on a specific security, in the event of a credit event one party agrees to pay par on the security while the other party agrees to deliver the security. In the case of physically settled swaps, it may not be possible to close out the swap at any particular time or at an acceptable price. For example, in a typical interest rate swap, one party agrees to pay a fixed rate of interest determined by reference to a specified interest rate or index multiplied by a specified amount (the "notional amount"), while the other party agrees to pay an amount equal to a floating rate of interest determined by reference to an interest rate or index which is reset periodically and multiplied by the same notional amount. On each payment date, the obligations of parties are netted against each other, with only the net amount paid by one party to the other.
Swap agreements are typically individually negotiated and structured to provide exposure to a variety of different types of investments or market factors. Swap agreements may be entered into for hedging or non-hedging purposes. Swap agreements can take many different forms and are known by a variety of names and other types of swap agreements may be available.
Other types of over-the-counter derivatives, such as "caps," "floors," "collars" and options on swaps, or "swaptions," may be entered into for the same types of hedging or non-hedging purposes as swaps. A "cap" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the amount by which a specified fixed or floating rate or other indicator exceeds another rate or indicator (multiplied by a notional amount). A "floor" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the excess, if any, of a specified rate or other indicator over a different rate or indicator (multiplied by a notional amount). A "collar" transaction is a combination of a cap and a floor in which one party pays the floating amount on the cap and the other party pays the floating amount on the floor. A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into the underlying swap on the agreed-upon terms.
The most significant factor in the performance of swaps, caps, floors, and collars is the change in the underlying price, rate, index level or other indicator that determines the amount of payments to be made under the arrangement.
If MFS attempts to use a swap or related investment as a hedge against, or as a substitute for, a portfolio investment, the swap or related derivative may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving swaps and related derivatives can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Swaps and related derivatives may also be subject to liquidity risk since the derivatives are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such derivatives in the secondary market may be smaller than that for more traditional debt instruments. The swaps market is largely unregulated. It is possible that developments in the swaps market, including potential government regulations, could adversely affect an investor's ability to terminate its existing swap agreements or to realize amounts received under such agreements.
In addition, because the purchase and sale of swap and related derivatives takes place in an over-the-counter market, swaps and related derivatives are subject to the creditworthiness of the counterparty to the swap or related derivative, and their values may decline substantially if the counterparty's creditworthiness deteriorates. If the counterparty defaults, the other party's risk of loss consists of the net amount of payments that the non-defaulting party is contractually entitled to receive. The counterparties may be able to eliminate or reduce their exposure under these arrangements by assignment or other disposition or by entering into an offsetting agreement with the same or another counterparty.
TEMPORARY DEFENSIVE POSITIONS. In response to market, economic, political, or other conditions, MFS may depart from its investment strategies for a Fund by temporarily investing for defensive purposes. MFS may invest a large portion or all of a Fund's assets in cash (including foreign currency) or cash equivalents, including, but not limited to, obligations of banks (including certificates of deposit, bankers' acceptances, time deposits and repurchase agreements), commercial paper, short-term notes, U.S. Government Securities and related repurchase agreements.
TENDER OPTION BONDS. Tender option bonds, also known as put bonds or puttable securities, give the bondholder the right to require the issuer or a specified third party acting as agent for the issuer to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. These securities may be floating or variable rate securities. The issuer or third party agent may be unable to purchase the bonds on the purchase date due to a variety of circumstances, which may result in a loss of value of the bonds.
WARRANTS. Warrants are instruments which entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued or delivered as anticipated. If a Fund makes additional investments while a delayed delivery purchase is outstanding, this may result in a form of leverage.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities are debt instruments that provide for periodic adjustments in the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that may change with changes to the level of prevailing interest rates or the issuer's credit quality. There is a risk that the current interest rate on variable and floating rate securities may not accurately reflect current market interest rates or adequately compensate the holder for the current creditworthiness of the issuer. Some variable or floating rate securities are structured with liquidity features such as (1) put options or tender options that permit holders (sometimes subject to conditions) to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries or (2) auction rate features, remarketing provisions, or other maturity-shortening devices designed to enable the issuer to refinance or redeem outstanding debt securities (market-dependent liquidity features). The market-dependent liquidity features may not operate as intended as a result of the issuer's declining creditworthiness, adverse market conditions, or other factors or the inability or unwillingness of a participating broker-dealer to make a secondary market for such securities. As a result, variable or floating rate securities that include market-dependent liquidity features may lose value and the holders of such securities may be required to retain them for an extended period of time or until maturity.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS. Zero coupon and deferred interest bonds are debt instruments which are issued at a discount from face value. The discount approximates the total amount of interest the instruments 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 instrument 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. Bonds on which the interest is payable in kind are known as "PIK bonds." PIK bonds are debt instruments which provide that the issuer may, at its option, pay interest on such instruments in cash or in the form of additional debt instruments. Such instruments 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 instruments may experience greater volatility in market value than debt instruments which make regular payments of interest.
PART II - APPENDIX F
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions which cannot be changed without the approval of a Majority Shareholder Vote.
As fundamental investment restrictions, the Fund may not:
(1) borrow money except to the extent such borrowing is not prohibited by the Investment Company Act of 1940, as amended (the "1940 Act") and exemptive orders granted under such Act;
(2) underwrite securities issued by other persons, except that all or any portion of the assets of the Fund may be invested in one or more investment companies, to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act, and except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933, as amended, in selling a portfolio security;
(3) issue any senior securities except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; for purposes of this restriction, collateral arrangements with respect to any type of swap, option, Forward Contracts and Futures Contracts and collateral arrangements with respect to initial and variation margin are not deemed to be the issuance of a senior security;
(4) make loans except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; and
(5) purchase or sell real estate (excluding securities secured by real estate or interests therein and securities of companies, such as real estate investment trusts, which deal in real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (excluding currencies and any type of option, Futures Contracts and Forward Contracts) in the ordinary course of its business; the Fund reserves the freedom of action to hold and to sell real estate, mineral leases, commodities or commodity contracts (including currencies and any type of option, Futures Contracts and Forward Contracts) acquired as a result of the ownership of securities.
* * * * * *
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that this restriction shall not apply to securities or obligations issued or guaranteed by banks or bank holding companies, finance companies or utility companies.
FOR THE MFS FLOATING RATE HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry. For purposes of this restriction, loan participations will be considered investments in the industry of the underlying borrower, rather than that of the seller of the loan participation.
FOR THE MFS HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund may invest up to 40% of the value of its assets in each of the electric utility and telephone industries.
FOR THE MFS UTILITIES FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the utilities industry.
FOR THE MFS TECHNOLOGY FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the securities of issuers principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements.
FOR ALL OTHER FUNDS:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry.
* * * * * *
In addition, the Funds have adopted the following non-fundamental policies, which may be changed without shareholder approval.
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 10% of the Fund's net assets (taken at market value) would be invested in such securities; repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities; securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 10% limitation.
FOR ALL OTHER FUNDS:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 15% of the Fund's net assets (taken at market value) would be invested in such securities. Repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities. Securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 15% limitation.
* * * * * *
FOR ALL FUNDS:
Except for investment restriction no. 1 and the Fund's non-fundamental policy on investing in illiquid securities, these investment restrictions are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy. In the event the investments exceed the percentage specified in the Fund's non-fundamental policy on illiquid investments, the Fund will reduce the percentage of its assets invested in illiquid investments in due course, taking into account the best interests of shareholders.
For purposes of investment restriction no. 6, investments in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and tax-exempt obligations issued or guaranteed by a U.S. territory or possession, a state or local government, or a political subdivision of any of the foregoing, are not considered an investment in any particular industry.
For purposes of investment restriction no. 6, investments in other investment companies are not considered an investment in any particular industry and portfolio securities held by an underlying fund in which the Fund may invest are not considered to be securities purchased by the Fund.
For purposes of investment restriction no. 6 for MFS Technology Fund, MFS considers an issuer to be principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements if at least 50% of any issuer's assets, income, sales, or profits are committed to, or derived from, such activities, or a third party has given the issuer an industry or sector classification consistent with such activities.
FOR MFS LIFETIME RETIREMENT INCOME FUND, MFS LIFETIME 2010 FUND, MFS LIFETIME 2020 FUND, MFS LIFETIME 2030 FUND, MFS LIFETIME 2040 FUND, MFS INTERNATIONAL DIVERSIFICATION FUND, MFS AGGRESSIVE GROWTH ALLOCATION FUND, MFS CONSERVATIVE ALLOCATION FUND, MFS GROWTH ALLOCATION FUND AND MFS MODERATE ALLOCATION FUND:
In accordance with the Fund's investment program as set forth in its Prospectus, the Fund may invest more than 25% of its assets in any one underlying fund. Although the Fund does not have a policy to concentrate its investments in a particular industry, 25% or more of the Fund's total assets may be indirectly exposed to a particular industry or group of related industries through its investment in one or more underlying funds.
PART II - APPENDIX G
RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS NAME OF RECIPIENT PURPOSE OF DISCLOSURE MSCI BARRA, Inc. Analytical Tool Bloomberg L.P. Analytical Tool Board of Trustees Fund Governance Bowne Typesetting and Printing Services CDS/Computer Software Vendor Checkfree Software Vendor eA Data Automation Services, LLC Data Formatting and Organization Service Eagle Investment Systems Corp. Accounting System Ernst & Young LLP Independent Registered Public Accounting Firm FactSet Research Systems Inc. Analytical Tool GainsKeeper, Inc. Accounting System GFP Acquisition Company, Inc. D.B.A. GCom2 Solutions Software Vendor G.H. Dean Co. Typesetting and Printing Services Institutional Shareholder Services Inc. Proxy Service Provider Investor Tools Perform Analytical Tool ITG, Inc. Analytical Tool JPMorgan Chase Bank Fund Custodian Lipper Inc. Publication Preparation The MacGregor Group Software Vendor Massachusetts Financial Services Co. Fund Management MFS Fund Distributors, Inc. Fund Distribution OMGEO LLC Software Vendor Plexus Analytical Tool Radianz Software Vendor Ropes & Gray LLP Legal Counsel Saloman Analytics Inc. Analytical Tool Siemens Business Services, Inc. IT Client Services and Desktop Architecture Sir Speedy Printing/Copying Services Standard & Poor's Securities Evaluations Services Fund Pricing State Street Bank and Trust Company Custodian Sun Capital Advisers LLC* Fund Management Wilshire Analytics/Axiom Analytical Tool Valley Forge Capital Advisors, Inc.** Fund Management * Sun Capital Advisers LLC receives non-public portfolio holdings disclosure regarding the portion of the MFS Diversified Income Fund for which it serves as sub-adviser. ** Valley Forge Capital Advisors, Inc., receives non-public portfolio holdings disclosure regarding the MFS Sector Rotational Fund for which it serves as sub-adviser. |
This list is current as of May 31, 2007, and any additions, modifications or deletions to the list that have occurred since May 31, 2007 are not reflected.
PART II - APPENDIX H
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of various debt instruments. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE
Moody's long-term obligation ratings are opinions of the relative credit risk of fixed income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.
AAA: Obligations rated "Aaa" are judged to be of the highest quality, with minimal credit risk.
AA: Obligations rated "Aa" are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated "A" are considered upper-medium grade and are subject to low credit risk.
BAA: Obligations rated "Baa" are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
BA: Obligations rated "Ba" are judged to have speculative elements and are subject to substantial credit risk.
B: Obligations rated "B" are considered speculative and are subject to high credit risk.
CAA: Obligations rated "Caa" are judged to be of poor standing and are subject to very high credit risk.
CA: Obligations rated "Ca" are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations rated "C" are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's applies numerical modifiers "1", "2" and "3" to each generic rating classification from "Aa" through "Caa." The modifier "1" indicates that the obligation ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
Issue credit ratings are based, in varying degrees, on the following considerations: (1) likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, AND C: Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the applicable rating category.
N.R.: Not rated.
FITCH RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR).
Investment Grade
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. "A" ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. "BB" ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC: Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.
CC: Default of some kind appears probable.
C: Default is imminent.
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation, or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated "D" upon a default. Defaulted and distressed obligations typically are rated along the continuum of "C" to "B" ratings categories, depending upon their recovery prospects and other relevant characteristics.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
The modifiers "+" or "-`' may be appended to a rating to denote relative status within major ratings categories. Such suffixes are not added to the "AAA" Long-term ratings category, to categories below "CCC," or to Short-term ratings other than "F1." (The +/- modifiers are only used to denote issues within the "CCC" category, whereas issuers are only rated "CCC" without the use of modifiers.)
INVESTMENT ADVISER
MFS Investment Management
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 55824, Boston, MA 02205-5824
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street, Boston, MA 02116 MFS-PART2-SAI-7/07
Class A Shares
Class B Shares
Class C Shares
Class I Shares
MFS EMERGING MARKETS EQUITY FUND
PROSPECTUS OCTOBER 1, 2007
The Prospectus describes the MFS Emerging Markets Equity Fund. The investment objective of the fund is to seek capital appreciation.
RISK RETURN SUMMARY 1 EXPENSE SUMMARY 8 CERTAIN INVESTMENT POLICIES AND RISKS 10 MANAGEMENT OF THE FUND 11 DESCRIPTION OF SHARE CLASSES 15 HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES 23 OTHER INFORMATION 32 FINANCIAL HIGHLIGHTS 36 The Securities and Exchange Commission has not approved or disapproved the fund's shares or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. |
RISK RETURN SUMMARY
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS (Massachusetts Financial Services Company, the fund's investment adviser) normally invests at least 80% of the fund's net assets in equity securities of issuers that are tied economically to emerging market countries. Emerging market countries may include countries determined to have emerging market economies, taking into account a number of factors, including whether a particular country has a low to middle economy according to the International Bank for Reconstruction and Development (the World Bank), the country's foreign currency debt rating, its political and economic stability, and the development of its financial and capital markets. Such countries are located in Latin America, Asia, Africa, the Middle East, and the developing countries of Europe, primarily Eastern Europe.
MFS may invest the fund's assets in companies of any size.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS may invest a relatively high percentage of the fund's assets in a single issuer or a small number of issuers.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
PRINCIPAL INVESTMENT TYPES
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks,
preferred stocks, securities convertible into stocks, and depository receipts for those securities.
DERIVATIVES: Derivatives are financial instruments whose value is based on the value of one or more indicators, such as a security, asset, currency, interest rate, credit rating or index. Derivatives often involve a counterparty to the transaction. Derivatives include futures, forward contracts, options, structured notes, inverse floating rate instruments, swaps, caps, floors, and collars.
PRINCIPAL RISKS
As with any mutual fund, you could lose money on your investment in the fund. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The principal risks of investing in the fund are:
STOCK MARKET RISK: The price of an equity security fluctuates in response to issuer, market, economic, industry, political, and regulatory developments. Prices can decrease significantly in response to these developments, and these developments can affect a single issuer, issuers within a broad market sector, industry or geographic region, or the market in general. Different parts of the market and different types of securities can react differently to these developments. For example, the stocks of growth companies can react differently from the stocks of value companies, and the stocks of large cap companies can react differently from the stocks of small cap companies. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events, can have a dramatic adverse effect on stock markets.
COMPANY RISK: Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of an investment. The price of securities of smaller, less well-known companies can be more volatile than the price of securities of larger companies or the market in general.
FOREIGN RISK: Investments in securities of foreign companies, securities of companies with significant foreign exposure, and foreign currencies can involve additional risks relating to market, economic, political, or regulatory conditions and developments. Political, social, and economic instability, the imposition of currency or capital controls, or the expropriation or nationalization of assets in a particular country can cause dramatic declines in that country's economy. Less stringent regulatory, accounting, and disclosure requirements for issuers and markets are more common in certain foreign countries. Enforcing legal rights can be difficult, costly, and slow in certain foreign countries, and can be particularly difficult against foreign governments. Additional risks of foreign investments include trading, settlement, custodial, and other operational risks, and withholding and other taxes. These factors can make foreign investments,
especially those in emerging markets, more volatile and less liquid than U.S. investments. In addition, foreign markets can react differently to market, economic, political, or regulatory developments than the U.S. market.
EMERGING MARKETS RISK: Emerging markets investments can involve additional and greater risks than the risks associated with investments in developed foreign markets securities. Emerging markets typically have less economic development, market structure and depth and regulatory oversight than developed countries. Emerging markets can also be subject to greater political, social, and economic instability. These factors can make emerging market investments more volatile and less liquid than investments in developed markets.
CURRENCY RISK: A decline in the value of a foreign currency relative to the U.S. dollar reduces the value of the foreign currency and investments denominated in that currency. In addition, the use of foreign exchange contracts to reduce foreign currency exposure can eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. The value of foreign currencies relative to the U.S. dollar fluctuates in response to, among other factors, interest rate changes, intervention (or failure to intervene) by U.S. or foreign governments, central banks, or supranational entities such as the International Monetary Fund, the imposition of currency controls, and other political or regulatory developments in the U.S. or abroad. Foreign currency values can decrease significantly both in the short term and over the long term in response to these and other developments.
GEOGRAPHIC CONCENTRATION RISK: Because MFS may invest a relatively large percentage of the fund's assets in issuers located in a single country, a small number of countries, or a particular geographic region, the fund's performance could be closely tied to the market, currency, economic, political, or regulatory conditions and developments in those countries or that region, and could be more volatile than the performance of more geographically-diversified funds.
ISSUER FOCUS RISK: Because MFS may invest a relatively large percentage of the fund's assets in a single issuer or small number of issuers, the fund's performance could be closely tied to the value of that one issuer or issuers, and could be more volatile than the performance of more diversified funds.
INVESTMENT SELECTION RISK: The MFS analysis of an investment can be incorrect and its selection of investments can lead to an investment focus that results in the fund underperforming other funds with similar investment strategies and/or underperforming the markets in which the fund invests.
COUNTERPARTY AND THIRD PARTY RISK: Transactions involving a counterparty other than the issuer of the instrument, or a third party responsible for servicing the instrument, are subject to the credit risk of the counterparty or third party, and to the counterparty's or third party's ability to perform in accordance with the terms of the transaction.
LIQUIDITY RISK: Certain investments and types of investments are subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. As a result, it may not be possible to sell the investment at any particular time or at an acceptable price.
LEVERAGING RISK: Certain transactions, including when-issued, delayed-delivery, and forward commitment purchases, loans of portfolio securities, and the use of some derivatives, can result in leverage. Leverage involves investment exposure in an amount exceeding the initial investment. In transactions involving leverage, a relatively small market movement or change in other underlying indicator can lead to significantly larger losses to the fund. Leverage can cause increased volatility by magnifying gains or losses on underlying investments.
DERIVATIVES RISK: Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicator(s). Gains or losses from derivatives can be substantially greater than the derivatives' original cost, and therefore, can involve leverage. Derivatives can be complex instruments and can involve analysis that differs from that required for other investment types used by the fund. If the value of a derivative does not correlate well with the particular market or other asset class the derivative is intended to provide exposure to, the derivative may not have the effect anticipated. Derivatives can also reduce the opportunity for gain or result in losses by offsetting positive returns in other investments. Derivatives can be less liquid than other types of investments.
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of the risks of investing in the fund by showing changes in the fund's performance over time. The performance table also shows:
- how the fund's performance over time compares with that of a broad measure of market performance, and
- returns before the deduction of taxes and returns after the deduction of certain taxes for Class A shares.
The chart and table provide past performance information. The fund's past performance (before and after taxes) does not necessarily indicate how the fund will perform in the future. The performance information in the chart and table is based upon calendar year periods, while the performance information presented under the caption "Financial Highlights" and in the fund's shareholder reports is based upon the fund's fiscal year. Therefore, these performance results may differ.
BAR CHART. The bar chart shows changes over time in the annual total return of Class A shares for the past ten calendar years, and assumes the reinvestment of distributions. Previously, the annual total returns for Class B were shown. Class A annual total returns are now being shown to be consistent with the presentation in prospectuses for other MFS funds. The chart and related notes do not take into
account any sales charges (loads) that you may be required to pay upon purchase or redemption of the fund's shares. If these sales charges were included, they would reduce these returns. The return of the fund's other classes of shares will differ from the Class A share returns shown in the bar chart, depending upon the expenses of those classes.
[CHART]
CALENDAR YEAR GAIN LOSS (%) ------------- ------------- 1997 10.85% 1998 (33.00)% 1999 47.62% 2000 (24.15)% 2001 (2.47)% 2002 (2.84)% 2003 52.02% 2004 26.71% 2005 35.48% 2006 29.75% |
The total return for the six-month period ended June 30, 2007 was 14.45%. During the periods shown in the bar chart, the highest quarterly return was 30.86% (for the calendar quarter ended December 31, 1999) and the lowest quarterly return was (25.26)% (for the calendar quarter ended September 30, 1998).
PERFORMANCE TABLE. This table shows how the average annual total returns of each class of the fund, before the deduction of taxes ("Returns Before Taxes"), compare to a broad measure of market performance, and assumes the deduction of the maximum applicable sales loads (initial sales charge and/or contingent deferred sales charge (CDSC), as applicable), and the reinvestment of distributions. In addition, for Class A shares, this table shows Class A average annual total returns:
- after the deduction of taxes on distributions made on Class A shares, such as capital gains and income distributions ( "Class A Shares' Return After Taxes on Distributions "), and
- after the deduction of taxes on both distributions made on Class A shares and on redemption of Class A shares, assuming that the shares are redeemed at the end of the periods for which returns are shown ("Class A Shares' Return After Taxes on Distributions and Sale of Class A Shares").
Average Annual Total Returns (for the Periods Ended December 31, 2006)
RETURNS BEFORE TAXES 1 YEAR 5 YEARS 10 YEARS ------------------------------------------------------------------------------------ SHARE CLASS B, with CDSC (Declining over Six Years from 4% to 0%) 24.91% 26.00% 9.72% C, with CDSC (1% for 12 Months) 27.92% 26.16% 9.74% I, at Net Asset Value 30.20% 27.42% 10.82% A, with Initial Sales Charge (5.75%) 22.29% 25.40% 9.66% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, with Initial Sales Charge (5.75%) 20.60% 24.68% 9.28% A Shares' Return After Taxes on Distributions and Sale of Class A Shares, with Initial Sales Charge (5.75%) 15.88% 22.50% 8.47% BENCHMARK COMPARISON (RETURNS BEFORE TAXES) MSCI Emerging Markets Index*+ 32.59% 26.97% 9.40% |
* The MSCI (Morgan Stanley Capital International) Emerging Markets Index is a market capitalization index that is designed to measure equity market performance in the global emerging markets.
+ Source: FactSet Research Systems Inc.
All performance results reflect any applicable fee and expense waivers in effect during the periods shown; without these, the results would have been lower.
After-tax returns are calculated using the historical highest individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your own tax situation, and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns are shown for only one of the fund's classes of shares, and after-tax returns for the fund's other classes of shares will vary from the returns shown.
The fund commenced investment operations October 24, 1995, with the offering of Class A and Class B shares, and subsequently offered Class C shares on June 27, 1996 and Class I shares on January 2, 1997.
Performance for Class I shares includes the performance of the fund's Class A shares for periods prior to their offering. Blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class specific operating expenses (such as Rule 12b-1 fees). Compared to performance these share classes would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance for share classes with higher operating expenses than those of the share class to which they are blended, and lower performance for share classes with lower operating expenses than those of the share class to which they are blended.
Prior to November 30, 1999, Foreign & Colonial Management Ltd. ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), managed certain assets of the fund. MFS assumed all portfolio management responsibilities from FCM and FCEM for the fund on November 30, 1999. Performance information for periods prior to November 30, 1999 reflects this former sub-investment advisory relationship.
EXPENSE SUMMARY
EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy, redeem, and hold shares of the fund. The annual fund operating expenses are based on expenses incurred during the fund's most recently completed fiscal year adjusted to reflect annualized expenses. The fund's annual operating expenses may vary in future years.
Shareholder Fees (fees paid directly from your investment):
SHARE CLASS A B C I ------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.75% N/A N/A N/A Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is less) See Below(#) 4.00% 1.00% N/A |
Annual Fund Operating Expenses (expenses that are deducted from fund assets):
SHARE CLASS A B C I ------------------------------------------------------------------------------- Management Fees 1.05% 1.05% 1.05% 1.05% Distribution and/or Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A Other Expenses(2) 0.45% 0.45% 0.45% 0.45% Total Annual Fund Operating Expenses(2) 1.85% 2.50% 2.50% 1.50% |
# A contingent deferred sales charge (referred to as a CDSC) of 1% may be deducted from your redemption proceeds if you buy $1 million or more of Class A shares or if you are investing through a retirement plan and your Class A purchase meets certain requirements and you redeem your investment within 12 months of your purchase.
(1) The fund's Rule 12b-1 plan permits it to pay distribution and/or service fees to support the sale and distribution of the fund's Class A, Class B, and Class C shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "Distribution and Service Fees."
(2) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Total Annual Fund Operating Expenses" would have been lower. "Other Expenses" also include the estimated payment of a portion of the transfer-agent-related expenses of the MFS Funds that invest in the fund ("MFS Funds-of-Funds"). See "Management of the Fund-Special Servicing Agreement."
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you redeem your shares at the end of the time periods (unless otherwise indicated);
- Your investment has a 5% return each year and dividends and other distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10 ---------------------------------------------------------------------------- A shares $752 $1,123 $1,518 $2,619 B shares(1) Assuming redemption at end of period $653 $1,079 $1,531 $2,676 Assuming no redemption $253 $ 779 $1,331 $2,676 C shares Assuming redemption at end of period $353 $ 779 $1,331 $2,836 Assuming no redemption $253 $ 779 $1,331 $2,836 I shares $153 $ 474 $ 818 $1,791 |
(1) Class B shares convert to class A shares approximately eight years after purchase; therefore, years nine and ten reflect class A expenses.
CERTAIN INVESTMENT POLICIES AND RISKS
TURNOVER
MFS may engage in active and frequent trading in pursuing the fund's principal investment strategies. Frequent trading increases transaction costs, which may reduce the fund's return. Frequent trading can also result in the realization of a higher percentage of short-term capital gains and a lower percentage of long-term capital gains as compared to a fund that trades less frequently. Because short-term capital gains are distributed as ordinary income, this would generally increase your tax liability unless you hold your shares through a tax-deferred or exempt vehicle.
TEMPORARY DEFENSIVE POLICY
In response to market, economic, political, or other conditions, MFS may depart from the fund's principal investment strategies by temporarily investing for defensive purposes. When MFS invests defensively, different factors could affect the fund's performance and the fund may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Information about investment strategies and investment types not described in the Prospectus and the risks associated with those investment strategies and investment types are described in the fund's Statement of Additional Information ("SAI").
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS"), located at 500 Boylston Street, Boston, Massachusetts, serves as the investment adviser for the fund. Subject to the supervision of the Board of Trustees, MFS is responsible for managing the fund's investments, executing transactions and providing related administrative services and facilities under an Investment Advisory Agreement between the fund and MFS.
For the fiscal year ended May 31, 2007, the fund paid MFS an effective management fee equal to 1.05% of the fund's average daily net assets.
The management fee set forth in the Investment Advisory Agreement is 1.05% annually of the first $500 million, and 1.00% annually in excess of $500 million, of the fund's average daily net assets.
A discussion regarding the basis for the Board of Trustees' approval of the Investment Advisory Agreement is available in the fund's most recent semiannual report for the six-month period that ends November 30.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $202 billion as of June 30, 2007.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of the MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, and inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries with respect to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The lawsuits assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940, the Employee Retirement Income Security Act of 1974 (ERISA), as well as fiduciary duties and other violations of common law. The lawsuits variously have been commenced as class actions or individual actions on behalf of investors who purchased, held, or redeemed shares of the MFS funds during specified periods, as ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT
LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER),
NO. 1:04-MD-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS funds include RIGGS V. MFS et al., CASE NO. 04-CV-01162-JFM
(direct), HAMMERSLOUGH V. MFS et al., CASE NO. 04-MD-01620 (derivative), ANITA
WALKER V. MFS et al., CASE NO. 1:04-CV-01758 (ERISA), and REAVES V. MFS SERIES
TRUST I, et al., CASE NO. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District of
Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., et al., NO. 04CV10584 (GAO)
(a consolidated action, first filed on March 25, 2004) and MARCUS DUMOND, et al.
V. MASSACHUSETTS FINANCIAL SERVS. CO., et al., NO. 04CV11458 (GAO) (filed on May
4, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages,
punitive damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. Insofar as any of the actions is appropriately
brought derivatively on behalf of any of the MFS funds, any recovery will inure
to the benefit of the MFS funds. Several claims of the various lawsuits have
been dismissed; MFS and the other named defendants continue to defend the
various lawsuits.
DISCLOSURE OF PORTFOLIO HOLDINGS. The MFS funds have established a policy with respect to the disclosure of fund portfolio holdings. A description of this policy is provided in the SAI. In addition, by clicking on a fund name under "Select a fund" on the MFS Web site (MFS.COM), the following information is generally available to you:
INFORMATION APPROXIMATE DATE OF POSTING TO WEB SITE --------------------------------------------------------------------------- Fund's top 10 securities holdings as of each month's end 14 days after month end Fund's full securities holdings as of each month's end 24 days after month end |
If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for funds that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the funds or MFS may suspend the posting of this information or modify the elements of this web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
PORTFOLIO MANAGER(S)
Information regarding the portfolio manager(s) of the fund is set forth below. Further information regarding the portfolio manager(s), including other accounts managed, compensation, ownership of fund shares, and possible conflicts of interest, is available in the fund's SAI. The portfolio manager is primarily responsible for the day-to-day management of the fund.
PORTFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
-----------------------------------------------------------------------------
Nicholas D. Smithie Portfolio Manager 2002 Investment Officer of MFS;
employed in the investment
management area of MFS
since 1998.
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ADMINISTRATOR
MFS provides the fund with certain financial, legal, and other administrative services under a Master Administrative Services Agreement between the fund and MFS. Under the Agreement, MFS is paid an annual fee for providing these services.
DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of the fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. MFSC may receive a fee based on the costs it incurs in providing these services plus a target profit margin, including payments made to affiliated and unaffiliated service providers that provide certain sub-accounting and other shareholder services (shareholder servicing payments) and out-of-pocket expenses.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund-of-Funds and the fund, the fund may pay a portion of the transfer agent-related expenses of each MFS Fund-of-Funds, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of benefits
realized or expected to be realized by the fund from the investment in the fund by the MFS Fund-of-Funds.
DESCRIPTION OF SHARE CLASSES
The fund offers Class A, Class B, Class C, and Class I shares through this prospectus.
Class I shares generally are available only to the following eligible investors:
- certain retirement plans established for the benefit of employees and former employees of MFS or its affiliates;
- funds distributed by MFD that invest primarily in shares of MFS funds;
- retirement plans, endowments or foundations that: (i) have, at the time of purchase of Class I shares, aggregate assets of at least $100 million; and (ii) invest at least $10 million in Class I shares of the fund and other MFS funds;
- bank trust departments or law firms acting as trustee or manager for trust accounts which, on behalf of their clients (i) initially invest at least $100,000 in Class I shares of the fund, or (ii) have, at the time of purchase of Class I shares, aggregate assets of at least $10 million invested in Class I shares of the fund and other MFS funds; and
- certain retirement plans offered, administered, or sponsored by insurance companies, as permitted by MFD based on their overall relationship with MFS.
In addition, MFD may accept, in its sole discretion, investments in Class I shares from purchasers not listed above or that do not meet these qualification requirements.
SALES CHARGES AND WAIVERS OR REDUCTIONS
You may be subject to an initial sales charge when you purchase Class A, or a CDSC when you redeem Class A, Class B, or Class C shares. These sales charges are paid to MFD.
In the circumstances described below, you may qualify for a sales charge waiver or reduction for purchases or redemptions of Class A, Class B, or Class C shares. In addition, other sales charge waivers or reductions may apply to certain transactions by retirement plans, section 529 tuition programs, and certain other groups (e.g., affiliated persons of MFS) and with respect to certain types of investment programs (e.g., certain wrap accounts or fund supermarket investments). Details regarding the types of investment programs and categories of investors eligible for these waivers or reductions are provided in the SAI, which is available to you free of charge, and on the fund's Web site at mfs.com. Some of these programs and waivers or reductions may not be available to you if your shares are held through certain types of accounts, such as retirement accounts and 529 plans, or certain accounts that you may have with your financial intermediary.
Waivers or reductions may be eliminated, modified, and added at any time without providing advance notice.
CLASS A SHARES. You may purchase Class A shares at the offering price (which includes the applicable initial sales charge). In some cases, you may purchase Class A shares without an initial sales charge; in these cases, you will generally be subject to a 1% CDSC upon redemption within 12 months of your purchase.
The amount of the initial sales charge you pay when you buy Class A shares differs depending upon the amount you invest, as follows:
INITIAL SALES CHARGE* AS PERCENTAGE OF:
-------------------------------------------------------------
AMOUNT OF PURCHASE GROSS PURCHASE AMOUNT (OFFERING PRICE*) NET AMOUNT INVESTED
-------------------------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1,000,000 2.00% 2.04%
$1,000,000 or more None** None**
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* Offering price is calculated by dividing the net asset value of a share by the difference between 1 and the initial sales charge percentage. Because the offering price is rounded to two decimal places, actual sales charges you pay may be more or less than those calculated using these percentages.
** A 1% CDSC will generally apply to such purchases.
You pay no initial sales charge when you invest $1 million or more in Class A shares (or, with respect to certain retirement plans, if MFD determines in its sole discretion that the total purchases by the retirement plan (or by multiple plans maintained by the same plan sponsor) will equal or exceed within a reasonable period of time a specified threshold determined by MFD). However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS B SHARES. You may purchase Class B shares at net asset value without an initial sales charge, but if you redeem your shares within the first six years after purchase, you may be subject to a CDSC (declining from 4% during the first year to 0% after six years).
The CDSC is imposed according to the following schedule:
If you hold Class B shares for approximately eight years, they will convert to Class A shares of the fund. All Class B shares you acquire through the reinvestment of dividends and distributions will be held in a separate sub-account. Each time any Class B shares in your account convert to Class A shares, a proportionate number of the Class B shares in the sub-account will also convert to Class A shares.
CLASS C SHARES. You may purchase Class C shares at net asset value without an initial sales charge. However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS I SHARES. Eligible investors may purchase Class I shares at net asset value without an initial sales charge or a CDSC upon redemption.
SALES CHARGE WAIVERS OR REDUCTIONS. Below is a summary of certain investor programs whereby the applicable sales charge may be waived or reduced. You or your financial intermediary must inform MFSC upon purchasing fund shares of your intention to invest in a fund under one of the programs below. You can provide this information in your account application or through a separate document provided by your financial intermediary.
INVESTMENTS ELIGIBLE FOR:
-----------------------------------------
WAIVED INITIAL REDUCED INITIAL WAIVED
PROGRAM SALES CHARGE SALES CHARGE CDSC
---------------------------------------------------------------------------
Letter of Intent X
Right of Accumulation X
Automatic Exchange Plan X*
Exchange Privilege X*
Systematic Withdrawal Plan X**
Distribution Reinvestment X
Distribution Investment Program X
Other Sales Charge Waivers X X
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* Investments under the Automatic Exchange Plan or certain other exchanges under the Exchange Privilege may be subject to a sales charge in certain cases.
** Not available for Class A shares and limited for Class B and Class C shares.
- LETTER OF INTENT (LOI). You may pay a reduced or no initial sales charge on purchases of Class A shares if you intend to invest a specific dollar amount, based on the gross amount of your investment (including the amount of any sales charge paid), including investments through any linked accounts in any class of any MFS fund (and the MFS Fixed Fund, a bank collective investment trust) within a 13-month period (36 months for a $1 million commitment). Distributions reinvested in additional shares of the fund or distributions from other MFS funds automatically invested in shares of the fund will not apply toward the satisfaction of the LOI.
For each purchase you make under the LOI you will pay the initial sales charge rate applicable to the total amount you intended to purchase. If, however, you do not purchase the intended amount within the relevant time period, your account will be adjusted by redemption of the amount of shares needed to pay the higher initial sales charge level for the amount actually purchased.
To establish a LOI, you may complete the Letter of Intent section of your account application or service application. In order to benefit from the LOI, you or your financial intermediary must inform MFSC that the LOI is in effect each time shares of a fund are purchased.
- RIGHT OF ACCUMULATION (ROA). Under the ROA, you may pay a reduced or no initial sales charge on purchases of Class A shares by aggregating the total dollar amount of your investment with your existing investments or any linked accounts in any class of any MFS fund (and the MFS Fixed Fund), based on the current maximum public offering price of the funds. For example, you will pay a sales charge on your current purchase at the rate applicable to the total value of all eligible accounts based on the sales charge schedule above.
- LINKING ACCOUNTS FOR LOI AND ROA. For purposes of obtaining reduced sales charges under the LOI and ROA, you may combine the value of your current purchase of shares of an MFS fund with the value of existing accounts held with the MFS funds (or the MFS Fixed Fund) by you, your spouse (or legal equivalent under applicable state law), and your children under the age of 21.
Eligible accounts that you may link under a LOI and ROA may include:
- Individual accounts;
- Joint accounts;
- Trust accounts of which you, your spouse (or legal equivalent under applicable state law), or child under the age of 21 is the grantor;
- MFS 529 College Savings Plan accounts;
- Certain single-participant retirement plan accounts;
- Certain Individual Retirement Accounts;
- Uniform Gifts/Transfers to Minor Acts accounts; and
- Accounts held in the name of your financial intermediary on your behalf, except accounts investing in Class W shares of certain MFS funds.
In order to link such accounts under a LOI or ROA, the broker/dealer at the time of your current purchase must be the broker/dealer (or the clearing broker/dealer for your broker/dealer so long as your account is not aggregated by the clearing broker/dealer with other accounts) for any additional accounts to be linked. MFS fund shares held as follows cannot be combined with your current purchase for purposes of a LOI or ROA:
- Shares held indirectly through financial intermediaries other than the broker/dealer for your current purchase (for example, shares held in a different broker/dealer's brokerage account or with a bank, an insurance company separate account or an investment adviser); or
- Shares held directly in a MFS fund account on which the broker/dealer is different than the broker/dealer for your current purchase.
It is your responsibility to inform the broker/dealer for each current purchase of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. If you have not designated a broker/dealer, you should inform MFSC directly of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. You should provide your financial intermediary (including MFSC if you have not designated a broker/dealer) with certain supporting information at the time of each purchase regarding accounts held with the MFS funds that are eligible to be combined for purposes of a LOI or ROA. Such information may include shareholder identification numbers or applicable account numbers or account statements. You should request that your financial intermediary provide this information to the funds or their agents when placing each purchase order.
SPECIAL NOTE FOR LOI OR ROA ELIGIBLE ACCOUNTS LINKED PRIOR TO MAY 1, 2006. Any LOI or ROA eligible accounts linked prior to May 1, 2006, will remain linked to the extent the broker/dealer information for such accounts is not modified. In the event you change the broker/dealer for any such account, your accounts will no longer be eligible to be linked under a LOI or ROA. In addition, you will not be able to link additional accounts to the extent they do not meet the criteria discussed above.
- AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $2,000 in the fund, you may participate in the automatic exchange plan, a dollar-cost averaging program. This plan permits you to make automatic periodic exchanges from your account in the fund for shares of the same class of other MFS funds. Exchanges will generally be made at net asset value without any sales charges. If you exchange shares out of the MFS Money Market Fund or MFS Government Money Market Fund, or if you exchange Class A shares out of the MFS Cash Reserve Fund into Class A shares of any other MFS fund, you will pay an initial sales charge if you have not already paid this charge on these shares.
- SYSTEMATIC WITHDRAWAL PLAN. If you have an account balance of at least $5,000 in your account in the fund, you may elect to receive (or designate someone else to receive) regular periodic payments (of at
least $50 if by check) through an automatic redemption of Class A, Class B, Class C, or Class I. For Class B and Class C shares, you may incur a CDSC when Class B or Class C shares are redeemed under the plan (or plans if more than one plan is established) if amounts greater than 10% of the value of your account are withdrawn under the plan(s) in any one year (with respect to Class B shares, determined at the time of your first withdrawal under the plan(s) or January 1, 2007, whichever is later and reset annually thereafter and with respect to Class C shares, determined at the time the plan is established). For Class A shares, you may incur a CDSC when Class A shares are redeemed under this plan.
- DISTRIBUTION REINVESTMENT. You may automatically reinvest dividend and capital gain distributions in the same fund without paying an initial sales charge.
- DISTRIBUTION INVESTMENT PROGRAM. You may automatically reinvest dividend and capital gain distributions into the same class of another MFS fund without paying a CDSC or an initial sales charge.
CALCULATION OF CDSC. As discussed above, certain investments in Class A, Class B, and Class C shares are subject to a CDSC. For purposes of calculating the CDSC, purchases made on any day during a calendar month will age one month on the last day of that month, and on the last day of each subsequent month. For example, a 1% CDSC on Class A shares purchased on August 10 will expire at the close of business on July 31 of the following calendar year, and a redemption of those shares made on or after August 1 of the following calendar year will not be subject to the CDSC.
Shares acquired through reinvestment of distributions are not subject to a CDSC. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. For purposes of determining the CDSC, if you sell only some of your shares, shares not subject to a CDSC are sold first, followed by shares held the longest.
DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"). Under the Distribution Plan, the fund pays distribution and service fees to MFD to support the sale and distribution of Class A, Class B, and Class C shares, as well as shareholder servicing and account maintenance activities. The fund has not adopted a Rule 12b-1 plan with respect to its Class I shares. These distribution and service fees equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
MAXIMUM TOTAL
MAXIMUM DISTRIBUTION DISTRIBUTION AND
CLASS FEE MAXIMUM SERVICE FEE SERVICE FEE
-----------------------------------------------------------------------
Class A 0.10% 0.25% 0.35%
Class B 0.75% 0.25% 1.00%
Class C 0.75% 0.25% 1.00%
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These fees are paid out of fund assets of the applicable class of shares. Because these fees are an ongoing expense of the fund, they increase the cost of your investment over time and may cost you more than other types of sales charges.
FINANCIAL INTERMEDIARY COMPENSATION
The term "financial intermediary" includes any broker/dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administrator, insurance company, and any other institutions having a selling, administration, or any similar agreement with MFD, MFS, or one of its affiliates.
Financial intermediaries receive various forms of compensation in connection with the sale of shares of a fund and/or the servicing of shareholder accounts. Financial intermediaries may receive such compensation (i) in the form of up front commissions and ongoing asset-based compensation paid by MFD based on sales charges received and expected to be received by MFD from shareholders and Distribution Plan distribution and service payments received by MFD from the fund, (ii) in the form of shareholder servicing payments paid by MFD and/or one or more of its affiliates (for purposes of this section only, collectively, "MFD") based on the receipt of such payments by MFD from the fund, and (iii) in the form of payments paid by MFD from MFD's own additional resources.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories and such payments can be significant to the financial intermediary. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular fund or share class.
Financial intermediaries may receive up front commissions of up to the following percentage amounts for sales of the following share classes:
Class A 5.75% Class B 3.75% Class C 1.00% |
Financial intermediaries may also receive all or a portion of the following payments: Distribution Plan distribution and service fees as described in "Description of Share Classes - Distribution and Service Fees"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
In addition, financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS funds, to cooperate with MFD's promotional efforts and/or in recognition of their marketing, administrative services, and/or processing support. This compensation from MFD is not reflected in the fees and expenses listed in the fee table section of the fund's prospectus. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary and the quality of the overall relationship with the financial intermediary.
These additional payments by MFD may take the form of payments to financial intermediaries that provide marketing support and administrative services to MFD with respect to fund shares sold or held through the financial intermediary's retail distribution network and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. MFD may also make payments to financial intermediaries to help offset the cost associated with client account maintenance support, statement preparation, and transaction processing. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, MFD may make other payments or allow other promotional incentives or payments to financial intermediaries.
You can find further details in the SAI about the payments made by MFD and the services provided by financial intermediaries. Financial intermediaries may charge you additional fees and/or commissions other than those disclosed in this prospectus. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries that sell fund shares may also act as a broker/dealer in connection with a MFS fund's purchase or sale of portfolio securities. However, the fund and MFS do not consider financial intermediaries' sales of shares of a MFS fund as a factor when choosing broker/dealers to effect portfolio transactions for the MFS funds.
HOW TO PURCHASE, REDEEM, AND EXCHANGE SHARES
You may purchase, redeem, and exchange shares of the fund in the manner described below. If you buy or sell shares of a fund through a retirement account, 529 plan, or financial intermediary, the procedures for buying, selling, and exchanging shares of the fund and the features, policies and fees may differ from those discussed in this prospectus.
HOW TO PURCHASE SHARES
Your shares will be bought at the offering price (the net asset value per share plus any applicable initial sales charge) next calculated after your purchase order is received in proper form. MFSC reserves the right to reject any purchase order that is not in proper form. The specific requirements for proper form vary among account types and transactions. Certain restrictions apply to the use of a transfer on death registration. You or your financial intermediary should contact MFSC to obtain a Transfer on Death registration form and for information regarding MFSC's other requirements for transfer on death registrations.
The fund may reject for any reason, or cancel as permitted or required by law, any purchase orders, including exchanges. The fund may stop offering shares completely, or may offer shares only on a limited basis, for a period of time or permanently.
The fund is required by law to obtain from you certain personal information that will be used to verify your identify. If you do not provide the information, the fund may not be able to open your account. The fund must also take certain steps to verify that the account information you provide is correct.
CLASS A, CLASS B, AND CLASS C SHARES. With respect to Class A, Class B, and Class C shares, you can establish an account by having your financial intermediary process your purchase. The minimum initial investment is generally $1,000, except for: fee-based and wrap accounts offered through certain financial intermediaries, for which there is no minimum initial investment; and IRAs, for which the minimum initial investment is generally $250 ($200 for rollovers from certain Serviced Plans). In addition, the minimum initial investment is $50 for automatic investment or exchange plans. MFSC waives or lowers the initial investment minimum for certain types of investors and investments.
Purchases of Class B shares are subject to a total account value limitation at the time of purchase of $99,999, and purchases of Class C shares are subject to a total account value limitation at the time of purchase of $999,999. If your existing accounts for all share classes held with the MFS funds have a total value equal to $99,999 for Class B share purchases or $999,999 for Class C share purchases, you will not be able to purchase Class B or Class C shares, as applicable. For the purpose of determining your total account value, existing accounts for all share classes held with the MFS funds that are linked under a LOI or ROA will be included.
The fund or its agents may at their discretion accept a purchase request for Class B shares or Class C shares that would otherwise exceed the total account value limitation of $99,999 and $999,999, respectively, under certain circumstances, including, but not limited to, purchases by certain types of group retirement plans sponsored or serviced by MFS or an affiliate.
You may have your financial intermediary process your subsequent purchases or you may contact MFS directly. Generally, there is no minimum for subsequent investments except there is generally a $50 minimum for subsequent investments by check and through automatic exchange plans.
- ADDITIONAL PURCHASES DIRECTLY THROUGH MFSC.
- BY MAIL. You may purchase additional shares by mailing a check with the returnable portion of your statement to MFSC.
- BY TELEPHONE. You may purchase additional shares by transferring money by phone from your pre-designated bank account. You must elect this privilege on your account application or service application.
- ELECTRONICALLY. You may purchase additional shares from a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- BY WIRE. To purchase additional shares by wire, call MFSC for instructions.
- AUTOMATIC INVESTMENT PLAN. You may purchase additional shares by automatically investing a designated amount from your checking or savings account on any day of the month. You must elect this privilege on your account application or service application.
- ADDITIONAL PURCHASES THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary purchase shares on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
CLASS I SHARES. With respect to Class I shares, you can establish an account through your MFD representative, by contacting MFSC directly, or by having your financial intermediary process your purchase. Generally, there are no initial or subsequent investment minimums except as may be required to be an eligible purchaser of Class I shares.
HOW TO REDEEM SHARES
Your shares will be sold at the net asset value per share next calculated after
your redemption order is received in proper form, minus any applicable CDSC.
MFSC
reserves the right to reject any redemption request that is not in proper form. The specific requirements for proper form vary among types of accounts and transactions. In certain circumstances, you may need to have your signature guaranteed and/or submit additional documentation to redeem your shares. In general, no signature guarantee is required for a redemption order for up to $100,000 that is signed by all owners or fiduciaries identified in the account registration, paid as registered, and mailed to the address of record.
The fund normally sends out your redemption proceeds within seven days after your request is received in proper form. Under unusual circumstances, such as when the New York Stock Exchange is closed, trading on the Exchange is restricted, or as permitted by the SEC, the fund may suspend redemptions or postpone payment for more than seven days. Redemption proceeds (other than exchanges) may be delayed until money from prior purchases sufficient to cover your redemption has been received and collected. This can take up to seven days after a purchase.
You may redeem your shares either by having your financial intermediary process your redemption or by contacting MFSC directly.
REDEEMING DIRECTLY THROUGH MFSC.
- BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the name of the fund, your account number, and the number of shares or dollar amount to be redeemed.
- BY TELEPHONE. If a signature guarantee is not required, you can call MFSC to have shares redeemed from your account and proceeds mailed to the address of record on the account. You can also call MFSC to have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account. You must elect this privilege on your account application or service application if you wish to have proceeds wired to your bank account.
- ELECTRONICALLY. You can have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- SYSTEMATIC WITHDRAWAL PLAN. For Class A, Class B, Class C, or Class I shares, you may elect to automatically receive (or designate someone else to receive) regular periodic payments through an automatic redemption of such classes. Please contact MFSC for details.
REDEEMING THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary process a redemption on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. If a signature guarantee is required, your signature may be guaranteed by an eligible bank, broker/dealer, credit union, national securities exchange, registered securities association, clearing agency, or savings association. MFSC may require additional documentation for certain types of registrations and under certain circumstances. Signature guarantees and this additional documentation shall be accepted in accordance with policies established by MFSC, and MFSC may, at its discretion, make certain exceptions to these requirements. Please contact MFSC with any questions and for the requirements for your particular situation.
SHARE CERTIFICATES. If certificates are outstanding for your shares, you may only redeem such shares by mailing the certificates to MFSC. Telephone, electronic, and systematic withdrawal plan redemptions and checkwriting are not available if certificates are outstanding for your shares.
REDEMPTIONS IN KIND. If, during any 90-day period, you redeem shares in an amount greater than the lesser of $250,000 or 1% of fund net assets, the fund has the right to pay the redemption amount above such threshold by a distribution in-kind of portfolio securities (redemption in kind). In the event that the fund makes a redemption in kind, you should expect to incur brokerage and other transaction charges when converting the securities to cash, and the securities may increase or decrease in value before you sell them.
INVOLUNTARY REDEMPTIONS. Because it is costly to maintain small accounts, the MFS funds have reserved the right to redeem your shares without your permission when your account contains less than $500 due to your redemptions or exchanges. Before the fund makes such a redemption, you will be notified and given 60 days to increase your investment to at least $500.
In addition, the MFS funds have reserved the right to redeem your shares without your permission in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Any applicable CDSC will be assessed upon redemption of your shares.
HOW TO EXCHANGE SHARES
An exchange involves the redemption of shares of one fund and the purchase of shares of another fund.
EXCHANGE PRIVILEGE. You can exchange your shares for shares of the same class of most other MFS funds by having your financial intermediary process your exchange request or by contacting MFSC directly. Your shares will be bought at the net asset value next calculated after your exchange order is received in proper form.
You can exchange your Class A shares and your Class I shares for shares of the MFS Money Market Fund or the MFS Government Money Market Fund.
Certain qualified retirement plans may make certain exchanges between the MFS funds and the MFS Fixed Fund. With respect to Class C shares subject to a CDSC,
you will only be eligible to make the exchange to the MFS Fixed Fund if the CDSC would have been waived had the Class C shares been redeemed. Contact MFSC for information concerning transactions involving the MFS Fixed Fund.
The MFS funds allow certain financial intermediaries to place exchange orders on behalf of a group of their discretionary investment advisory clients ("group exchange orders"). As with any exchange request, the funds and their agents reserve the right to reject any group exchange order, and the funds' agents will generally reject any group exchange order received by the funds or their agents after 1 p.m., Eastern time. In addition, MFD has agreements with certain financial intermediaries which set forth the terms and conditions under which group exchange orders may be placed by these financial intermediaries. These conditions may be more restrictive than those applicable to individual exchange orders, and may include the requirement to provide the funds or their agents with advance notice of group exchange orders.
The minimum exchange amount is generally $1,000 (generally $50 for exchanges made under the automatic exchange plan) or all the shares in an account. MFSC waives or lowers the minimum exchange amount for certain types of investors and investments.
Shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged fund and the original purchase date of the shares subject to the CDSC.
Other funds may have different exchange restrictions. You should read the prospectus of the MFS fund into which you are exchanging and consider the differences in objectives, policies, and risks before making any exchange. The exchange privilege may be changed or discontinued at any time, and all exchanges are subject to certain limitations and MFS funds' policies concerning excessive trading practices, which are designed to protect the funds and their shareholders from the harmful effects of frequent trading.
OTHER CONSIDERATIONS
FREQUENT TRADING
- RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. The Board of Trustees of the MFS funds has adopted the purchase and exchange limitation policies described below, which it believes are reasonably designed to discourage frequent fund share transactions. MFSC seeks to monitor and enforce these policies, subject to oversight by the Board of Trustees, pursuant to procedures approved by the Board of Trustees. The MFS funds may alter their policies at any time without notice to shareholders.
- GENERAL PURCHASE AND EXCHANGE LIMITATION POLICIES. The MFS funds reserve the right to restrict, reject, or cancel (with respect to
cancellations, within one business day of the order), without any prior notice, any purchase or exchange order, including transactions believed to represent frequent trading activity. For example, MFSC may in its discretion restrict, reject, or cancel a purchase or exchange order even if the transaction is not subject to specific exchange or other limitations described in this prospectus if MFSC determines that accepting the order could interfere with the efficient management of a fund's portfolio, increase costs to the fund, dilute the value of an investment in the fund to long-term shareholders, or otherwise not be in the fund's best interests. In the event that MFSC rejects or cancels an exchange request, neither the redemption nor the purchase side of the exchange will be processed. Each MFS fund reserves the right to delay for one business day the processing of exchange requests in the event that, in MFSC's judgment, such delay would be in the fund's best interest, in which case both the redemption and purchase side of the exchange will receive the fund's net asset values at the conclusion of the delay period.
- SPECIFIC EXCHANGE AND PURCHASE LIMITATION POLICIES. Under the MFS Funds' purchase and exchange limitation policy, MFSC will generally restrict, reject or cancel purchase and exchange orders if MFSC determines that an accountholder has made two exchanges, each in an amount of $5,000 or more, out of an account in an MFS fund during a calendar quarter ("two exchange limit"). This policy does not apply to exchanges:
- out of the MFS money market funds; or
- initiated by a retirement plan trustee or sponsor rather than by a plan participant, and other similar non-discretionary exchanges (e.g., in connection with fund mergers/acquisitions/liquidations).
In circumstances where shareholders hold shares through financial intermediaries, the MFS funds may rely upon the financial intermediary's policy to restrict frequent trading and its monitoring of such policy in lieu of the MFS funds' two-exchange limit if MFSC believes that the financial intermediary's policy is reasonably designed to identify and curtail trading activity that is not in the best interest of the fund.
In addition, MFSC may make exceptions to this policy if, in its judgment, the transaction does not represent frequent trading activity, such as purchases made through systematic purchase plans or payroll contributions. In applying this policy, MFSC considers the information available to it at the time and reserves the right to consider trading multiple accounts under common ownership, control, or influence to be trading out of a single account.
Exchanges made on the same day in the same account are aggregated for purposes of counting the number and dollar amount of exchanges made by the accountholder (e.g., a shareholder who on the same day
exchanges $6,000 from one MFS fund into two other MFS funds, by exchanging $3,000 into each of the two MFS funds, will be viewed as having made one exchange transaction exceeding $5,000 in value).
- LIMITATIONS ON THE ABILITY TO DETECT AND CURTAIL FREQUENT TRADING PRACTICES. Shareholders seeking to engage in frequent trading practices may deploy a variety of strategies to avoid detection, and, despite the efforts of MFSC to prevent frequent trading, there is no assurance that MFSC will be able to identify such shareholders or curtail their trading practices. The ability of MFSC to detect and curtail frequent trading practices may also be limited by operational systems and technological limitations.
MFSC receives purchase, exchange, and redemption orders through certain financial intermediaries that hold omnibus accounts with an MFS fund. Omnibus account arrangements are common forms of holding shares of MFS funds, particularly among certain financial intermediaries such as brokers, retirement and 529 plans, investment advisors, and variable insurance products. A financial intermediary's policy restricting frequent trading may be more or less restrictive than the MFS funds' policies, may permit certain transactions not permitted by the MFS funds' policies, or prohibit transactions not subject to the MFS funds' policies.
MFSC is generally not able to identify trading by a particular underlying shareholder within an omnibus account, which makes it difficult or impossible to determine if a particular underlying shareholder has violated the two exchange limit or is otherwise engaged in frequent trading. However, MFSC reviews trading activity at the omnibus level to detect suspicious trading activity. If MFSC detects suspicious trading activity at the omnibus level it will contact the financial intermediary to request underlying shareholder level activity to determine whether there is underlying shareholder level frequent trading. In certain instances, a financial intermediary may be unwilling or unable to provide MFSC with information about underlying shareholder level activity.
If frequent trading is identified, MFSC will take appropriate action. MFSC's ability to monitor and deter frequent trading in omnibus accounts at the underlying shareholder level is dependent upon the capability and cooperation of the financial intermediary. Accordingly, depending upon the composition of a fund's shareholder accounts, the level of cooperation provided by the financial intermediary and in light of efforts made by certain shareholders to evade these limitations, MFSC may not be in a position to monitor and deter frequent trading with respect to a significant percentage of a fund's shareholders. You should consult your financial intermediary regarding the application of these limitations and whether your financial intermediary imposes any additional or different limitations.
- FREQUENT TRADING RISKS. To the extent that the MFS funds or their agents are unable to curtail excessive trading practices in a fund, these practices may interfere with the efficient management of the fund's portfolio, may result in increased transaction and administrative costs, and may adversely impact the fund's performance.
In addition, to the extent that the fund invests in foreign securities, the interests of long-term shareholders may be diluted as a result of time-zone arbitrage, a short-term trading practice that seeks to exploit changes in the value of the fund's investments that result from events occurring after the close of the foreign markets on which the investments trade, but prior to the time the fund determines its net asset value. The fund's use of fair valuation can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that the fund's fair valuation policies and procedures will prevent dilution of the fund's net asset value by short-term traders.
To the extent that the fund invests in securities that trade infrequently or are difficult to value, such as the securities of smaller companies, high yield debt instruments, and floating rate loans, the interests of long-term shareholders may be diluted as a result of price arbitrage, a short-term trading strategy that seeks to exploit perceived pricing inefficiencies in the fund's investments. Such short-term trading strategies may interfere with efficient management of the fund's portfolio to a greater degree than funds that invest in more frequently traded or liquid securities, in part because the fund may have difficulty selling these portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage may also cause dilution in the value of fund shares held by other shareholders.
UNAUTHORIZED TRANSACTIONS. MFS will not be responsible for losses that result from unauthorized transactions unless MFSC does not follow procedures reasonably designed to verify your identity. If an account has more than one owner or authorized person, MFSC will accept telephone and online instructions from any one owner or authorized person. It is important that you contact MFSC immediately about any transactions you believe to be unauthorized.
ABILITY TO CONTACT MFSC. Certain methods of contacting MFSC, such as by mail, telephone, or electronically, may be unavailable or delayed (for example, after natural disasters or during periods of significant/major political, social, or economic instability).
RESERVATION OF OTHER RIGHTS. In addition to the rights expressly stated elsewhere in this prospectus, MFSC reserves the right to: 1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; and 2) freeze any account or suspend account services when MFSC has received reasonable notice (written or otherwise) of a dispute between registered or
beneficial account owners or when MFSC believes a fraudulent transaction may occur or has occurred.
ANTI-MONEY LAUNDERING RESTRICTIONS. Federal law requires the fund to implement policies and procedures reasonably designed to prevent, detect and report money laundering and other illegal activity. The fund, consistent with applicable federal law, may redeem your shares and close your account; suspend, restrict or cancel purchase and redemption orders; process redemption requests and withhold your proceeds; and take other action if it is unable to verify your identity within a reasonable time or conduct required due diligence on your account or as otherwise permitted by its anti-money laundering policies and procedures. Any applicable CDSC will be assessed upon redemption of your shares.
CONFIRMATIONS IN QUARTERLY STATEMENTS. Transactions made under certain periodic investment and withdrawal programs (including reinvestment plans) will be confirmed on quarterly account statements.
OTHER INFORMATION
VALUATION
The price of each class of the fund's shares is based on its net asset value. The net asset value of each class of shares is determined each day the New York Stock Exchange (the Exchange) is open for trading as of the close of regular trading on the Exchange (generally 4:00 p.m. Eastern time). However, net asset value may be calculated earlier as permitted by the SEC. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. On days when the Exchange is closed (such as week-ends and holidays), net asset value is not calculated, and the fund does not transact purchase and redemption orders. To the extent the fund's assets are traded in other markets on days when the fund does not price its shares, the value of the fund's assets may change when you will not be able to purchase or redeem shares.
To determine net asset value, the fund's investments for which reliable market quotations are readily available are valued at market value. Certain short term debt instruments are valued at amortized cost.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund's investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees.
Under the fund's valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. These valuations can be based on both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as a foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net
asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund's net asset value may differ from quoted or published prices for the same investments.
DISTRIBUTIONS
The fund intends to declare and pay a dividend to shareholders at least annually.
Any capital gains are distributed at least annually.
DISTRIBUTION OPTIONS
The following distribution options are generally available:
- Dividend and capital gain distributions reinvested in additional shares (THIS OPTION WILL BE ASSIGNED IF NO OTHER OPTION IS SPECIFIED);
- Dividend distributions in cash; capital gain distributions reinvested in additional shares;
- Dividend and capital gain distributions in cash; or
- Dividend and capital gain distributions reinvested into the same class of shares of another MFS Fund.
The distribution option for accounts with dividend distributions of less than $10 will generally be changed to reinvestment in additional shares of the fund. If you have elected to receive distributions in cash, and the postal service is unable to deliver checks to your address of record, or you do not respond to mailings from MFSC with regard to uncashed distribution checks, your distribution option may be converted to having all distributions reinvested in additional shares. You should contact MFSC to change your distribution option, and your request to do so must be received by MFSC before the record date for a distribution in order to be effective for that distribution. No interest will accrue on amounts represented by uncashed distribution checks.
TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in the fund may have on your particular
tax situation, including possible foreign, state, and local taxes. Also, this discussion does not apply to shares of the fund held through tax-exempt retirement plans.
The fund expects to distribute substantially all of its income and gains annually. Distributions from the fund are taxable whether you receive them in cash or reinvest them in additional shares. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Any gain resulting from the sale or exchange of your shares will generally also be subject to tax.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the fund owned the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains from the sale of investments that the fund owned for more than one year and that are properly designated by the fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the fund owned for one year or less will be taxable as ordinary income. For taxable years beginning before January 1, 2011, if some or all of the fund's income derives from "qualified dividend income" and if you are an individual who meets holding period and other requirements with respect to the fund's shares, those distributions that are properly designated by the fund as derived from "qualified dividend income" are taxed at the rates applicable to long-term capital gains.
Long-term capital gain rates applicable to most individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
The fund's investments in foreign securities may be subject to foreign withholding taxes, which will decrease the fund's return on those securities. The fund generally will be eligible to elect to "pass through" to you foreign income taxes that it pays, in which case you must include your share of those taxes in gross income as a distribution from the fund and you will be allowed to claim a credit (or a deduction, if you itemize deductions) for such amounts on your federal income tax return, subject to certain limitations. In addition, the fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the fund's recognition of ordinary income and may affect the timing, amount, or character of the fund's distributions.
The Form 1099 that is mailed to you every January details your distributions and how they are treated for federal tax purposes.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS AND PROSPECTUSES
The fund produces financial reports every six months and updates its prospectus annually. To avoid sending duplicate copies of materials to households, only one copy of the fund's annual and semiannual report and prospectus will be mailed to
shareholders having the same residential address on the fund's records. However, any shareholder may contact MFSC (please see back cover for address and telephone number) to request that copies of these reports and prospectuses be sent personally to that shareholder.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a fund's financial performance for the past five years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent registered public accounting firm, whose report, together with the fund's financial statements, are included in the fund's Annual Report to shareholders. The fund's Annual Report is available upon request by contacting MFS Service Center, Inc. (please see back cover for address and telephone number). The financial statements contained in the Annual Report are incorporated by reference into the SAI. The fund's independent registered public accounting firm is Ernst & Young LLP.
CLASS A
YEARS ENDED 5/31
------------------------------------------------------
2007 2006 2005 2004 2003
Net asset value, beginning of period $ 32.38 $ 25.12 $ 19.15 $ 13.67 $ 15.16
-------- -------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.49 $ 0.44 $ 0.28 $ 0.11 $ 0.09
Net realized and unrealized gain (loss) on investments and
foreign currency 10.36 9.12 5.72 5.52 (1.58)
-------- -------- ------- ------- -------
Total from investment operations $ 10.85 $ 9.56 $ 6.00 $ 5.63 $ (1.49)
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.61) $ (0.17) $ (0.03) $ (0.15) $ --
From net realized gain on investments and foreign currency
transactions (2.22) (2.13) -- -- --
-------- -------- ------- ------- -------
Total distributions declared to shareholders $ (2.83) $ (2.30) $ (0.03) $ (0.15) $ --
-------- -------- ------- ------- -------
Redemption fees added to paid-in capital (d) $ 0.00(w) $ (0.00)(w) $ 0.00(w) $ 0.00(w) $ --
-------- -------- ------- ------- -------
Net asset value, end of period $ 40.40 $ 32.38 $ 25.12 $ 19.15 $ 13.67
======== ======== ======= ======= =======
Total return (%) (r)(s)(t) 34.65 38.79 31.32 41.34 (9.83)
-------- -------- ------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 1.81 1.78 1.88 2.20 2.49
Expenses after expense reductions (f) 1.80 1.78 1.88 2.10 2.29
Net investment income 1.37 1.41 1.25 0.62 0.68
Portfolio turnover 91 58 73 116 214
Net assets at end of period (000 omitted) $285,924 $192,718 $77,352 $48,806 $27,180
|
CLASS B
YEARS ENDED 5/31
---------------------------------------------------
2007 2006 2005 2004 2003
Net asset value, beginning of period $ 31.10 $ 24.22 $ 18.57 $ 13.28 $ 14.79
------- ------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.27 $ 0.22 $ 0.12 $ 0.01 $ 0.01
Net realized and unrealized gain (loss) on investments and
foreign currency 9.91 8.81 5.53 5.36 (1.52)
------- ------- ------- ------- -------
Total from investment operations $ 10.18 $ 9.03 $ 5.65 $ 5.37 $ (1.51)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.36) $ (0.02) $ -- $ (0.08) $ --
From net realized gain on investments and foreign currency
transactions (2.22) (2.13) -- -- --
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (2.58) $ (2.15) $ -- $ (0.08) $ --
------- ------- ------- ------- -------
Redemption fees added to paid-in capital (d) $ 0.00(w) $ 0.00(w) $ 0.00(w) $ 0.00(w) $ --
------- ------- ------- ------- -------
Net asset value, end of period $ 38.70 $ 31.10 $ 24.22 $ 18.57 $ 13.28
======= ======= ======= ======= =======
Total return (%) (r)(s)(t) 33.77 37.96 30.43 40.64 (10.34)
------- ------- ------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 2.45 2.43 2.53 2.73 2.99
Expenses after expense reductions (f) 2.45 2.43 2.53 2.63 2.79
Net investment income 0.78 0.74 0.56 0.08 0.10
Portfolio turnover 91 58 73 116 214
Net assets at end of period (000 omitted) $63,450 $65,700 $36,289 $31,053 $21,568
|
CLASS C
YEARS ENDED 5/31
--------------------------------------------------
2007 2006 2005 2004 2003
Net asset value, beginning of period $ 30.77 $ 24.05 $ 18.44 $13.19 $ 14.69
------- ------- ------- ------ -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.25 $ 0.25 $ 0.13 $ 0.01 $ 0.01
Net realized and unrealized gain (loss) on investments and
foreign currency 9.81 8.69 5.48 5.33 (1.51)
------- ------- ------- ------ -------
Total from investment operations $ 10.06 $ 8.94 $ 5.61 $ 5.34 $ (1.50)
------- ------- ------- ------ -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.43) $ (0.09) $ -- $(0.09) $ --
From net realized gain on investments and foreign currency
transactions (2.22) (2.13) -- -- --
------- ------- ------- ------ -------
Total distributions declared to shareholders $ (2.65) $ (2.22) $ -- $(0.09) $ --
------- ------- ------- ------ -------
Redemption fees added to paid-in capital (d) $ 0.00(w) $ 0.00(w) $ 0.00(w) $ 0.00(w) $ --
------- ------- ------- ------ -------
Net asset value, end of period $ 38.18 $ 30.77 $ 24.05 $18.44 $ 13.19
======= ======= ======= ====== =======
Total return (%) (r)(s)(t) 33.78 37.89 30.42 40.73 (10.35)
------- ------- ------- ------ -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL
DATA:
Expenses before expense reductions (f) 2.45 2.44 2.53 2.73 2.99
Expenses after expense reductions (f) 2.45 2.44 2.53 2.63 2.79
Net investment income 0.73 0.82 0.59 0.08 0.08
Portfolio turnover 91 58 73 116 214
Net assets at end of period (000 omitted) $71,895 $52,604 $11,022 $7,013 $ 3,063
|
CLASS I
YEARS ENDED 5/31
----------------------------------------------------
2007 2006 2005 2004 2003
Net asset value, beginning of period $ 33.46 $ 25.87 $ 19.72 $ 14.05 $ 15.50
-------- ------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.64 $ 0.56 $ 0.37 $ 0.20 $ 0.25
Net realized and unrealized gain (loss) on investments and
foreign currency 10.73 9.40 5.88 5.68 (1.70)
-------- ------- ------- ------- -------
Total from investment operations $ 11.37 $ 9.96 $ 6.25 $ 5.88 $ (1.45)
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.72) $ (0.24) $ (0.10) $ (0.21) $ --
From net realized gain on investments and foreign currency
transactions (2.22) (2.13) -- -- --
-------- ------- ------- ------- -------
Total distributions declared to shareholders $ (2.94) $ (2.37) $ (0.10) $ (0.21) $ --
-------- ------- ------- ------- -------
Redemption fees added to paid-in capital (d) $ 0.00(w) $ 0.00(w) $ 0.00(w) $ 0.00(w) $ --
-------- ------- ------- ------- -------
Net asset value, end of period $ 41.89 $ 33.46 $ 25.87 $ 19.72 $ 14.05
======== ======= ======= ======= =======
Total return (%) (r)(s) 35.14 39.25 31.74 42.04 (9.42)
-------- ------- ------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 1.46 1.43 1.53 1.73 1.99
Expenses after expense reductions (f) 1.45 1.43 1.53 1.63 1.79
Net investment income 1.72 1.76 1.60 1.08 1.93
Portfolio turnover 91 58 73 116 214
Net assets at end of period (000 omitted) $157,372 $96,643 $41,523 $18,821 $12,317
|
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
(t) Total returns do not include any applicable sales charges.
(w) Per share amount was less than $0.01.
MFS EMERGING MARKETS EQUITY FUND
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF TRUSTEES. The Board of Trustees of the MFS funds has adopted procedures by which shareholders may send communications to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [fund name], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116-3741, Attention: Frank Tarantino, Independent Chief Compliance Officer of the Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the MFS fund to which they relate and (iii) identify the class and number of shares held by the shareholder.
IF YOU WANT MORE INFORMATION ABOUT MFS EMERGING MARKETS EQUITY FUND, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's actual investments. Annual reports discuss the effect of recent market conditions and investment strategies on the fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated October 1, 2007, provides more detailed information about the fund and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: mfs.com
Information about the fund (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other information about the fund are available on the Edgar Database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-4492.
[MFS(R) INVESTMENT MANAGEMENT LOGO] STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 2007
MFS EMERGING MARKETS EQUITY FUND
A SERIES OF MFS SERIES TRUST X
500 BOYLSTON STREET, BOSTON, MA 02116
This Statement of Additional Information ("SAI") contains additional information about the Fund and should be read in conjunction with the Fund's Prospectus dated October 1, 2007. The Fund's financial statements are incorporated into this SAI by reference to the Fund's most recent Annual Report to shareholders. A copy of the Annual Report accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual Report without charge by contacting the Fund's transfer agent, MFS Service Center, Inc. (please see the back cover of Part II of this SAI for address and telephone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains information that is particular to the Fund, while Part II contains information that generally applies to all of the funds in the MFS Family of Funds (the "MFS Funds"). Each part of this SAI has a variety of appendices which can be found at the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION (SAI) - PART I
Part I of this SAI contains information that is particular to the Fund.
DEFINITIONS 1 MANAGEMENT OF THE FUND 1 SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS 2 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS 3 TAX CONSIDERATIONS 3 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS 3 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS 3 APPENDIX A - TRUSTEE COMPENSATION AND COMMITTEES A-1 APPENDIX B - SHARE OWNERSHIP B-1 APPENDIX C - PORTFOLIO MANAGER(S) C-1 APPENDIX D - CERTAIN SERVICE PROVIDER COMPENSATION D-1 APPENDIX E - SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS E-1 APPENDIX F - PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS F-1 |
DEFINITIONS
"Fund" - MFS Emerging Markets Equity Fund. The Fund was previously known as MFS Foreign/Colonial Emerging Markets Equity Fund (prior to December 1, 1999).
"Trust" - MFS Series Trust X, a Massachusetts business trust organized in 1985. The Trust was previously known as MFS Government Mortgage Fund (prior to June 2, 1995), MFS Government Income Plus Fund (prior to March 1, 1993), MFS Government Income Plus Trust (prior to August 3, 1992), and MFS Government Securities High Yield Trust (prior to October 16, 1989).
"MFS" or "Adviser" - Massachusetts Financial Services Company, a Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated October 1, 2007, as amended or supplemented from time to time.
MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. The Trust is an open-end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the Trust are set forth in APPENDIX A to Part II of this SAI.
TRUSTEE COMPENSATION AND COMMITTEES
Compensation paid to the non-interested Trustees for certain specified periods, as well as information regarding committees of the Board of Trustees, is set forth in APPENDIX A to this Part I.
SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and officers of the Trust as a group, as well as the dollar value range of each Trustee's share ownership in the Fund and, on an aggregate basis, in all MFS Funds overseen by the Trustee, by investors who are deemed to "control" the Fund, if any, and by investors who own 5% or more of any class of Fund shares, if any, is set forth in APPENDIX B to this Part I.
Part I-1
PORTFOLIO MANAGER(S)
Information regarding the Fund's portfolio manager(s), including other accounts managed, compensation, ownership of Fund shares, and possible conflicts of interest, is set forth in APPENDIX C to this Part I.
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to certain of its service providers for advisory services, administrative services, and transfer agency services, for certain specified periods, are set forth in APPENDIX D to this Part I.
CUSTODIAN
State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, serves as the custodian of the assets of the Fund (the "Custodian"). The Custodian is responsible for safekeeping and controlling the Fund's cash and securities, handling the receipt and delivery of securities, collecting interest and dividends on the Fund's investments, serving as the Fund's foreign custody manager, providing reports on foreign securities depositaries, maintaining books of original entry and other required books and accounts for the Fund, and calculating the daily net asset value of each class of shares of the Fund. The Fund may invest in securities of the Custodian and may deal with the Custodian as principal in securities transactions.
The Fund has an expense offset arrangement that reduces the Fund's custodian fees based upon the amount of cash maintained by the Fund with its custodian.
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid for certain specified periods in connection with the purchase and sale of the Fund's shares are set forth in APPENDIX E to this Part I.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Fund's plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"), for the Fund's most recent fiscal year, are set forth in APPENDIX E to this Part I.
Part I-2
INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS
INVESTMENT STRATEGIES AND RISKS
Certain investment strategies and risks are described in APPENDIX E to Part II of this SAI.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which are described in APPENDIX F of Part II of this SAI.
TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, information concerning purchases by the Fund of securities issued by its regular broker/dealers for its most recent fiscal year, and information concerning the amount of transactions and related commissions to broker/dealer firms that MFS has determined provide valuable research for the Fund's most recent fiscal year, are set forth in APPENDIX F to this Part I. Portfolio transactions and brokerage commissions are more fully described in Part II of this SAI under the heading "Portfolio Transactions and Brokerage Commissions."
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS
Ernst & Young LLP is the Independent Registered Public Accounting Firm, providing audit services, tax return review, and other related services and assistance in connection with the review of various Securities and Exchange Commission filings.
The Fund's Financial Statements and Financial Highlights for the fiscal year ended May 31, 2007, are incorporated by reference into this SAI from the Fund's Annual Report to shareholders and have been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon reports of such firm, given upon their authority as experts in accounting and auditing. A copy of the Fund's Annual Report accompanies this SAI.
Part I-3
PART I - APPENDIX A
TRUSTEE COMPENSATION AND COMMITTEES
The Fund pays the non-interested Trustees an annual fee plus a fee for each meeting attended. In addition, the non-interested Trustees are reimbursed for their out-of-pocket expenses.
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFITS TOTAL TRUSTEE FEES
TRUSTEE ACCRUED AS PART OF FROM FUND AND FUND
TRUSTEE NAME FEES FROM FUND(1) FUND EXPENSE COMPLEX(2)
--------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $1,504 N/A $210,289
Lawrence H. Cohn, M.D $1,504 $ 0 $208,289
David H. Gunning $1,542 N/A $219,642
William R. Gutow $1,504 N/A $208,289
Michael Hegarty $1,504 N/A $209,289
J. Atwood Ives $1,825 $792 $285,289
Lawrence T. Perera $1,545 $869 $228,289
J. Dale Sherratt $1,675 $ 0 $250,289
Laurie J. Thomsen $1,549 N/A $209,289
Robert W. Uek $1,600 N/A $227,789
|
(1) For the fiscal year ended May 31, 2007.
(2) Information provided is for calendar year 2006. Each Trustee receiving compensation served as Trustee of 97 funds within the MFS Fund complex (having aggregate net assets at December 31, 2006, of approximately $102 billion).
Retirement Benefit Deferral Plan-- Under a Retirement Benefit Deferral Plan, certain Trustees have deferred benefits from a prior retirement plan. The value of the benefits is periodically readjusted as though the Trustee had invested an equivalent amount in Class A shares of the Fund(s) designated by such Trustee. The value of the deferred benefits will be paid to the Trustees upon retirement or thereafter. The plan does not obligate a Fund to retain the services of any Trustee or pay any particular level of compensation to any Trustee. The plan is not funded and a Fund's obligation to pay the Trustee's deferred compensation is a general unsecured obligation.
Part I-A-1
COMMITTEES
The Board has established the following Committees:
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
AUDIT COMMITTEE 8 Oversees the accounting and auditing procedures of the Butler*, Gutow*, Sherratt*,
Fund and, among other duties, considers the selection of Thomsen*, and Uek*
the independent accountants for the Fund and the scope
of the audit, and considers the effect on the
independence of those accountants of any non-audit
services such accountants provide to the Fund and any
audit or non-audit services such accountants provide to
other MFS Funds, MFS and/or certain affiliates. The
Committee is also responsible for establishing
procedures for the receipt, retention, and treatment of
complaints received by the Fund regarding accounting,
internal accounting controls, or auditing matters and
the confidential, anonymous submission of concerns
regarding questionable fund accounting matters by
officers of the Fund and employees of the Fund's
investment adviser, administrator, principal
underwriter, or any other provider of accounting-related
services to the Fund.
COMPLIANCE AND 8 Oversees the development and implementation of the Butler*, Cohn*, Gunning*, Gutow*,
GOVERNANCE Fund's regulatory and fiduciary compliance policies, and Sherratt*
COMMITTEE procedures, and practices under the 1940 Act, and other
applicable laws, as well as oversight of compliance
policies of the Fund's investment adviser and certain
other service providers as they relate to Fund
activities. The
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Part I-A-2
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
Fund's Independent Chief Compliance Officer reports
directly to the Committee and assists the Committee in
carrying out its responsibilities. In addition, the
Committee advises and makes recommendations to the Board
on matters concerning Trustee practices and
recommendations concerning the functions and duties of
the committees of the Board.
CONTRACTS 5 Requests, reviews, and considers the information deemed All non-interested Trustees of the
REVIEW reasonably necessary to evaluate the terms of the Board (Butler, Cohn, Gunning,
COMMITTEE investment advisory and principal underwriting Gutow, Hegarty, Ives, Perera,
agreements and the Plan of Distribution under Rule 12b-1 Sherratt, Thomsen, and Uek)
that the Fund proposes to renew or continue, and to make
its recommendations to the full Board of Trustees on
these matters.
NOMINATION AND 1 Recommends qualified candidates to the Board in the All non-interested Trustees of the
COMPENSATION event that a position is vacated or created. The Board (Butler, Cohn, Gunning,
COMMITTEE Committee will consider recommendations by shareholders Gutow, Hegarty, Ives, Perera,
when a vacancy exists. Shareholders wishing to recommend Sherratt, Thomsen, and Uek)
candidates for Trustee for consideration by the
Committee may do so by writing to the Fund's Secretary
at the principal executive office of the Fund. Such
recommendations must be accompanied by biographical and
occupational data on the candidate (including whether
the candidate would be an "interested person" of the
Fund), a written consent by the candidate to be named as
a nominee and to serve as Trustee if elected, record and
ownership
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Part I-A-3
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
information for the recommending shareholder with
respect to the Fund, and a description of any
arrangements or understandings regarding recommendation
of the candidate for consideration. The Committee is
also responsible for making recommendations to the Board
regarding any necessary standards or qualifications for
service on the Board. The Committee also reviews and
makes recommendations to the Board regarding
compensation for the non-interested Trustees.
PORTFOLIO 8 Oversees the policies, procedures, and practices of the Cohn*, Gunning*, Hegarty*, and
TRADING AND Fund with respect to brokerage transactions involving Perera*
MARKET REVIEW portfolio securities as those policies, procedures, and
COMMITTEE practices are carried out by MFS and its affiliates. The
Committee also oversees the administration of the Fund's
proxy voting policies and procedures by MFS. In
addition, the Committee receives reports from MFS
regarding the policies, procedures, and practices of MFS
and its affiliates in connection with their marketing
and distribution of shares of the Fund.
PRICING 8 Oversees the determination of the value of the portfolio Hegarty*, Perera*, Thomsen*, and
COMMITTEE securities and other assets held by the Fund and Uek*
determines or causes to be determined the fair value of
securities and assets for which market quotations are
not "readily available" in accordance with the 1940 Act.
The Committee delegates primary responsibility for
carrying out these functions to
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Part I-A-4
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
MFS and MFS' internal valuation committee pursuant to
pricing policies and procedures approved by the
Committee and adopted by the full Board. These
policies include methodologies to be followed by MFS
in determining the fair values of portfolio
securities and other assets held by the Fund for
which market quotations are not readily available. The
Committee meets periodically with the members of
MFS'internal valuation committee to review and assess
the quality of fair valuation and other pricing
determinations made pursuant to the Fund's pricing
policies and procedures, and to review and assess the
policies and procedures themselves. The Committee
also exercises the responsibilities of the Board
under the Amortized Cost Valuation Procedures
approved by the Board on behalf of each Fund which
holds itself out as a "money market fund" in
accordance with Rule 2a-7 under the 1940 Act.
SERVICES 8 Reviews and evaluates the contractual arrangements of Gunning*, Sherratt*, Thomsen*,
CONTRACTS the Fund relating to transfer agency, administrative and Uek*
COMMITTEE services, custody, pricing and bookkeeping services, and
lending of portfolio securities, and makes
recommendations to the full Board of Trustees on these
matters.
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(1) The Trustees' identification and background are set forth in Appendix A to
Part II.
* Non-interested or independent Trustees. Although Mr. Ives is not a member of all Committees of the Board, he is invited to and attends many of the Committees' meetings in his capacity as Chair of the Trustees.
Part I-A-5
PART I - APPENDIX B
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of August 31, 2007, the current Trustees and officers of the Trust as a group owned less than 1% of any class of the Fund's shares. The following table shows the dollar range of equity securities beneficially owned by each current Trustee in the Fund and, on an aggregate basis, in all MFS Funds overseen by each current Trustee, as of December 31, 2006.
The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. Over $100,000
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE OF EQUITY EQUITY SECURITIES IN ALL MFS
NAME OF TRUSTEE SECURITIES IN THE FUND FUNDS OVERSEEN BY TRUSTEE
-------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N D
Robert C. Pozen N D
NON-INTERESTED TRUSTEES
Robert E. Butler B D
Lawrence H. Cohn, M.D N D
David H. Gunning D D
William R. Gutow N D
Michael Hegarty N D
J. Atwood Ives N D
Lawrence T. Perera A D
J. Dale Sherratt N D
Laurie J. Thomsen C D
Robert W. Uek N D
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25% OR GREATER OWNERSHIP OF THE FUND
The following table identifies those investors who own 25% or more of the Fund's shares (all share classes taken together) as of August 31, 2007, and are therefore presumed to control the Fund. All holdings are of record unless otherwise indicated.
Part I-B-1
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any class of the Fund's shares as of August 31, 2007. All holdings are of record unless otherwise indicated.
NAME AND ADDRESS OF INVESTOR PERCENTAGE OWNERSHIP
--------------------------------------------------------------------
Charles Schwab & Company, Inc. 8.21% of Class A Shares
For the Benefit of Clearing Customers
101 Montgomery Street
San Francisco, CA 94104-4122
Merrill Lynch Pierce Fenner & Smith, Inc. 31.61% of Class C Shares
For the Sole Benefit of its Customers
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Citigroup Global Markets Inc. 5.28% of Class B Shares
Surpas House Account 8.08% of Class C Shares
ATTN: Cindy Tempesta
333 West 34th Street, 7th Floor
New York, NY 10001-2402
MFS International Diversification Fund 76.75% of Class I Shares
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116-3740
DBTCO 5.16% of Class I Shares
P.O. Box 747
Dubuque, IA 52004-0747
MFS Defined Contribution Plan 6.71% of Class I Shares
C/O MFS Investment Management Inc.
ATTN: Mark A. Leary, SVP-HR
500 Boylston Street, 6th Floor
Boston, MA 02116-3740
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Part I-B-2
PART I - APPENDIX C
PORTFOLIO MANAGER(S)
COMPENSATION
Portfolio manager total cash compensation is a combination of base salary and performance bonus:
BASE SALARY - Base salary represents a smaller percentage of portfolio manager total cash compensation (generally below 33%) than incentive compensation.
PERFORMANCE BONUS - Generally, incentive compensation represents a majority of portfolio manager total cash compensation.
The performance bonus is based on a combination of quantitative and qualitative factors, with more weight given to the former (generally over 60%) and less weight given to the latter.
The quantitative portion is based on pre-tax performance of all of the accounts managed by the portfolio manager (which includes the Fund and any other accounts managed by the portfolio manager) over a one-, three-, and five-year period relative to the appropriate Lipper peer group universe and/or one or more benchmark indices with respect to each account. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one- and five-year periods (adjusted as appropriate if the portfolio manager has served for shorter periods).
The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts, and traders) and management's assessment of overall portfolio manager contributions to investor relations and the investment process (distinct from fund and other account performance).
Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors.
Finally, portfolio managers are provided with a benefits package including a defined contribution plan, health coverage and other insurance, which are available to other employees of MFS on substantially similar terms. The percentage such benefits represent of any portfolio manager's compensation depends upon the length of the individual's tenure at MFS and salary level, as well as other factors.
Part I-C-1
OWNERSHIP OF FUND SHARES
The following table shows the dollar range of equity securities of the Fund beneficially owned by the Fund's portfolio manager(s) as of the Fund's fiscal year ended May 31, 2007. The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
Nicholas D. Smithie D
OTHER ACCOUNTS
In addition to the Fund, the Fund's portfolio manager is responsible (either individually or jointly) for the day-to-day management of certain other accounts, the number and total assets of which, as of the Fund's fiscal year ended May 31, 2007, were as follows:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES* INVESTMENT VEHICLES OTHER ACCOUNTS
--------------------------------------------------------------------------------
NUMBER OF TOTAL NUMBER OF TOTAL NUMBER OF TOTAL
NAME ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS ASSETS
------------------------------------------------------------------------------------------------------
Nicholas D. Smithie 6 $1.8 billion 2 $159.8 million 2 $7.9 million
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* Includes the Fund.
Advisory fees are not based upon performance of any of the accounts identified in the table above.
POTENTIAL CONFLICTS OF INTEREST
The Adviser seeks to identify potential conflicts of interest resulting from a portfolio manager's management of both the Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts.
The management of multiple funds and accounts (including proprietary accounts) may give rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there may be securities which are suitable for the Fund's portfolio as well as for accounts of the Adviser or its subsidiaries with similar investment objectives. A Fund's trade allocation policies
Part I-C-2
may give rise to conflicts of interest if the Fund's orders do not get fully executed or are delayed in getting executed due to being aggregated with those of other accounts of the Adviser or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely impact the value of the Fund's investments. Investments selected for funds or accounts other than the Fund may outperform investments selected for the Fund.
When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and 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 most cases, however, the Adviser believes that the Fund's ability to participate in volume transactions will produce better executions for the Fund.
The Adviser does not receive a performance fee for its management of the Fund. As a result, the Adviser and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund - for instance, those that pay a higher advisory fee and/or have a performance fee.
Part I-C-3
PART I - APPENDIX D
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund for advisory services, administrative services, and transfer agency services, over the specified periods are set forth below. For information regarding sales charges and distribution payments paid to MFD, see APPENDIX E to this Part I.
AMOUNT AMOUNT AMOUNT PAID
AMOUNT PAID TO WAIVED BY PAID TO MFSC TO MFS FOR
MFS FOR ADVISORY MFS FOR FOR TRANSFER GENERAL
SERVICES AFTER ADVISORY AGENCY ADMINISTRATIVE
FISCAL YEAR ENDED WAIVERS SERVICES SERVICES(1) SERVICES
--------------------------------------------------------------------------------
May 31, 2007 $5,017,814 $0 $603,351 $93,190
May 31, 2006 $3,020,229 $0 N/A $44,370
May 31, 2005 $1,375,134 $0 N/A $12,376
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(1) Amount paid to MFSC for transfer agency services includes: a) reimbursements for certain out-of-pocket expenses and payments made under agreements with affiliated and unaffiliated entities that provide subaccounting services; and b) payments made pursuant to the Special Servicing Agreement for transfer agent related expenses of Fund-of-Funds investing in the Fund. In addition to the fees disclosed, the Fund also paid directly $78,767 for transfer agent related services for the fiscal year ended May 31, 2007.
Part I-D-1
PART I - APPENDIX E
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
----------------------------------------------------------------------------------------------------------------
REALLOWED TO
FINANCIAL
FISCAL YEAR END TOTAL RETAINED BY MFD INTERMEDIARIES CLASS A SHARES CLASS B SHARES CLASS C SHARES
----------------------------------------------------------------------------------------------------------------
May 31, 2007 $488,824 $ 67,652 $421,172 $17,552 $78,990 $33,277
May 31, 2006 $928,003 $135,881 $792,122 $ 2,272 $48,528 $12,946
May 31, 2005 $247,373 $ 32,875 $214,498 $ 2,274 $33,257 $ 1,893
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DISTRIBUTION PLAN PAYMENTS
During the fiscal year ended May 31, 2007, the Fund made the following Distribution Plan payments:
AMOUNT OF DISTRIBUTION AND/OR SERVICE FEES:
--------------------------------------------------------------------------------------
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO FINANCIAL INTERMEDIARIES(1)
--------------------------------------------------------------------------------------
Class A Shares $822,159 $297,426 $524,733
Class B Shares $635,074 $484,147 $150,927
Class C Shares $607,995 $333,389 $274,606
Class I Shares N/A N/A N/A
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(1) May include amounts paid to financial intermediaries affiliated with MFD.
Amounts retained by MFD may represent fees paid to MFD but not yet paid to intermediaries as of the close of the period, compensation to MFD for commissions advanced by MFD to financial intermediaries upon sale of Fund shares, and/or compensation for MFD's distribution and servicing costs.
Part I-E-1
PART I - APPENDIX F
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
The following brokerage commissions were paid by the Fund during the specified time periods:
FISCAL YEAR END BROKERAGE COMMISSIONS PAID BY FUND* ----------------------------------------------------- May 31, 2007 $2,042,726 May 31, 2006 $1,135,267 May 31, 2005 $ 538,139 |
* The increase in brokerage commissions paid by the Fund over the preceding two fiscal years was due, in large part, to a corresponding increase in Fund assets from May 31, 2005 to May 31, 2007.
SECURITIES ISSUED BY REGULAR BROKER/DEALERS
During the fiscal year ended May 31, 2007, the Fund purchased securities issued by the following regular broker/dealers of the Fund, which had the following values as of May 31, 2007:
TRANSACTIONS WITH RESEARCH FIRMS
During the fiscal year ended May 31, 2007, the Fund allocated the following amount of transactions, and related commissions, to broker/dealer firms that have been deemed by MFS to provide valuable Research ("Research Firms"). The provision of Research was not necessarily a factor in the placement of this business with such Research Firms.(1)
DOLLAR AMOUNT OF TRANSACTIONS WITH COMMISSIONS PAID ON TRANSACTIONS WITH
RESEARCH FIRMS RESEARCH FIRMS
--------------------------------------------------------------------------
$781,852,756 $1,914,019
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(1) The amounts shown do not include transactions directed to electronic communication networks (ECNs) owned by the Research Firms.
Part I-F-1
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI, updated through July 1, 2007, as amended or supplemented from time to time, describes policies and practices that apply to the Funds in the MFS Family of Funds. References in this Part II to a "Fund" mean each Fund in the MFS Family of Funds, unless noted otherwise. References in this Part II to a "Trust" mean the Massachusetts business trust of which the Fund is a series, or, if the Fund is itself a Massachusetts business trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
DEFINITIONS ............................................................. 3 MANAGEMENT OF THE FUND .................................................. 3 SALES CHARGE WAIVERS .................................................... 10 DISTRIBUTION PLAN ....................................................... 10 FINANCIAL INTERMEDIARY COMPENSATION ..................................... 13 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS .......................... 13 NET INCOME AND DISTRIBUTIONS ............................................ 13 TAX CONSIDERATIONS ...................................................... 14 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS ........................ 27 DISCLOSURE OF PORTFOLIO HOLDINGS ........................................ 31 DETERMINATION OF NET ASSET VALUE ........................................ 35 SHAREHOLDER SERVICES .................................................... 37 DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES .................... 40 APPENDIX A - TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND ...... 42 APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES ....................... 51 APPENDIX C - WAIVERS OF SALES CHARGES ................................... 75 APPENDIX D - FINANCIAL INTERMEDIARY COMPENSATION ........................ 91 APPENDIX E - INVESTMENT STRATEGIES AND RISKS ............................ 102 APPENDIX F - INVESTMENT RESTRICTIONS .................................... 137 APPENDIX G - RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS ........................................................ 141 APPENDIX H - DESCRIPTION OF BOND RATINGS ................................ 143 |
I. DEFINITIONS
"Alliance Plans" - include retirement plans with respect to which MFS (or one of its affiliates) has entered into an administrative arrangement with a third party to provide certain recordkeeping and/or administrative services.
"Financial intermediary" - includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administration, and any other institutions having a selling, administration or other similar agreement with MFD, MFS or one of its affiliates.
"Majority Shareholder Vote" - as defined currently in the 1940 Act to be the lesser of (i) 67% or more of the voting securities present at a meeting at which holders of voting securities representing more than 50% of the outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities.
"Serviced Plans" - include retirement plans for which MFS or one of its affiliates is responsible for providing participant recordkeeping services.
"1940 Act"- the Investment Company Act of 1940 and the rules and regulations thereunder, as amended from time to time, and as such Act, rules or regulations are interpreted by the Securities and Exchange Commission.
II. MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
Board Oversight -- The Board of Trustees which oversees the Fund provides broad supervision over the business and operations of the Fund.
Trustees and Officers -- Identification and Background -- The identification and background of the Trustees and Officers of the Trust are set forth in Appendix A of this Part II.
INVESTMENT ADVISER
MFS provides the Fund with investment advisory services. MFS and its predecessor organizations have a history of money management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc., which in turn is an indirect majority-owned subsidiary of Sun Life Financial Inc. (a diversified financial services company).
Unless otherwise noted, MFS votes proxies on behalf of the Funds pursuant to the proxy voting policies described in Appendix B to this SAI Part II (except for the MFS Union Standard Equity Fund, for which Institutional Shareholders Services, Inc., votes proxies as described in Appendix B to this SAI Part II). Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, 2006 is available without charge by visiting MFS.COM and clicking on "Proxy Voting" and by visiting the SEC's Web site at http://www.sec.gov. Prior to January 1, 2007, JMR/Financial, Inc., voted proxies on behalf of MFS Union Standard Equity Fund.
INVESTMENT SUB-ADVISERS - MFS has engaged Sun Capital Advisers LLC (referred to as Sun Capital) to act as sub-adviser with respect to the real estate related portion of the MFS Diversified Income Fund's portfolio. Sun Capital is located at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Sun Capital is an indirect wholly-owned subsidiary of Sun Life Financial Inc. ("Sun Life Financial"), a corporation organized in Canada as well as an affiliate of MFS. Sun Life Financial and its affiliates currently transact business in Canada, the United States and Asia Pacific region. Sun Life Financial is a reporting company under the Securities Exchange Act of 1934 with common shares listed on the Toronto, New York, and Philippine stock exchanges. Sun Life Financial Inc. is located at 150 King Street West, Toronto, Canada, M5H 1J9.
Sun Capital is a Delaware limited liability company and a registered investment adviser. Sun Capital provides investment management and supervisory services to mutual funds and institutional accounts.
MFS has engaged Valley Forge Capital Advisors, Inc. (referred to as Valley Forge), to act as sub-adviser with respect to the MFS Sector Rotational Fund's portfolio. Valley Forge is located at 83 General Warren Boulevard, Suite 200, Malvern, Pennsylvania 19355. Valley Forge is 56% owned by George M. Mara and 20% owned by Maryanne P. Mara.
Valley Forge is a Delaware corporation and a registered investment adviser. Valley Forge provides investment management and supervisory services to mutual funds, high net worth individuals and institutional accounts.
Unless otherwise noted, all references to "sub-adviser" shall include Sun Capital with respect to that portion of the Diversified Income Fund for which Sun Capital provides day-to-day investment advisory services and Valley Forge for MFS Sector Rotational Fund.
INVESTMENT ADVISORY AGREEMENT -- MFS manages the Fund pursuant to an Investment Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, MFS provides the Fund with investment advisory services. Subject to such policies as the Trustees may determine, MFS makes investment decisions for the Fund. For these services, MFS receives an annual investment advisory fee, computed and paid monthly, as disclosed in the Prospectus under the heading "Management of the Fund(s)."
MFS pays the compensation of the Trust's officers and of any Trustee who is an employee of MFS. MFS also furnishes at its own expense investment advisory and administrative services, office space, equipment, clerical personnel, investment advisory facilities, and executive and supervisory personnel necessary for managing the Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are "not affiliated" with MFS and all expenses of the Fund incurred in its operation and offering of shares (other than those assumed by MFS in writing) including but not limited to: management fees; Rule 12b-1 fees; administrative services fees; retirement plan administration services fees; program management services fees; governmental fees; interest charges; taxes; membership dues in the Investment Company Institute allocable to the Fund; fees and expenses of independent auditors, of legal counsel, and of any transfer agent, registrar, or dividend disbursing agent of the Fund; expenses of repurchasing and redeeming shares and servicing shareholder accounts; expenses of preparing, printing and mailing stock certificates, shareholder reports, notices, proxy statements, confirmations, periodic investment 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; organizational and start up costs; and such non-recurring or extraordinary expenses as may arise, including those relating to actions, suits, or proceedings to which the Fund is a party or otherwise may have an exposure, and the legal obligation which the Fund may have to indemnify the Trust's Trustees and officers with respect thereto. 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 to the extent that the Distribution Agreement with MFS Fund Distributors, Inc. ("MFD"), provides that MFD is to pay all of such expenses. Expenses of the Trust which are not attributable to a specific series are allocated between the series in a manner believed by management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two-year term and continues in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by Majority Shareholder Vote and, in either case, by a majority of the Trustees who are not "interested persons" of the Fund or MFS as defined by the 1940 Act. The Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a Majority Shareholder Vote, or by either party on not more than 60 days' nor less than 30 days' written notice. The Advisory Agreement may be approved, renewed, amended, or terminated as to one Fund in the Trust, even though the Agreement is not approved, renewed, amended, or terminated as to any other Fund in the Trust.
The Advisory Agreement also provides that neither MFS 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, gross negligence, or reckless disregard of its or their duties and obligations under the Advisory Agreement.
SUB-ADVISORY AGREEMENTS - Sun Capital serves as the MFS Diversified Income Fund's Sub-Adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Sun Capital (the "Sun Capital Sub-Advisory Agreement"). The Sun Capital Sub-Advisory Agreement provides that the Adviser delegate to Sun Capital the authority to make investment decisions for a portion of the MFS Diversified Income Fund (for the purposes of this paragraph, the "Fund"). Sun Capital will provide portfolio management services for the Fund for the portion of the portfolio invested in REITs ("real estate investment trust") and other real estate related investments. For these services, the Adviser pays Sun Capital an investment advisory fee, computed daily and paid monthly in arrears, at the annual rate of 0.30% of the Fund's average daily net assets managed by Sun Capital. The Sun Capital Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by a majority of the Independent Trustees. The Sun Capital Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a majority of the Independent Trustees, by a Majority Shareholder Vote, or by the Adviser or Sub-Adviser on not less than 60 days' written notice. The Sun Capital Sub-Advisory Agreement specifically provides that neither the Sub-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 misconduct, bad faith, reckless disregard, or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under the Sun Capital Sub-Advisory Agreement.
Valley Forge serves as the MFS Sector Rotational Fund's sub-adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Valley Forge (for purposes of this paragraph, the "Valley Forge Sub-Advisory Agreement"). The Valley Forge Sub-Advisory Agreement provides that the Adviser delegate to Valley Forge the authority to make investment decisions for the MFS Sector Rotational Fund (for the purposes of this paragraph, the "Fund"). For these services, the Adviser pays Valley Forge an investment advisory fee, computed and paid quarterly in arrears, in an amount equal to 0.35% annually of the first $1 billion of the fund's average daily net assets; 0.30% annually of the fund's average daily net assets in excess of $1 billion and up to $2.5 billion; 0.25% annually of the fund's average daily nets assets in excess of $2.5 billion and up to $5 billion; and 0.20% annually of the fund's average daily net assets in excess of $5 billion. The Valley Forge Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by the Board of Trustees or by the vote of a majority of the Fund's outstanding voting securities, and, in either case, by a majority of the Trustees who are not parties to the Valley Forge Sub-Advisory Agreement or interested persons of any such party. The Valley Forge Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by the Trustees, by vote of a majority of the Fund's outstanding voting securities, or by the Adviser or Valley Forge on not less than 60 days' written notice. The Valley Forge Sub-Advisory Agreement specifically provides that neither Valley Forge 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 duties or by reason of reckless disregard of its obligations and duties under the Valley Forge Sub-Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal and other administrative services under a Master Administrative Services Agreement between the Fund and MFS. Under the Agreement, the fund pays an annual fee to MFS for providing these services.
Effective August 1, 2006, the maximum annual fee payable by each Fund is $17,500 plus an amount equal to the following percentage of the Fund's average daily net assets (except for Funds investing primarily in shares of MFS Funds):
------------------------------------------------------------------- On the first $50,000,000 in assets 0.0000% ------------------------------------------------------------------- $50,000,000 - $750,000,000 in assets 0.0175% ------------------------------------------------------------------- $750,000,000 - $1,500,000,000 in assets 0.0170% ------------------------------------------------------------------- $1,500,000,000 - $2,500,000,000 in assets 0.0165% ------------------------------------------------------------------- $2,500,000,000 - $4,000,000,000 in assets 0.0120% ------------------------------------------------------------------- Over $4,000,000,000 0.0000% ------------------------------------------------------------------- |
The fees are subject to minimum and maximum fees, based on the asset level of the MFS Funds.
In addition, MFS provides, either directly or through affiliated and/or unaffiliated entities, certain administrative, recordkeeping, and communication/educational services to the retirement plans and retirement plan participants which invest in Class R1, Class R2, Class R3, Class R4 and Class R5 shares under a Master Class R Administration and Services Agreement. Under the Agreement, the Fund pays an annual fee to MFS for these services at the following percentages of the average daily net assets attributable to that class of shares: 0.35% for Class R1; 0.25% for Class R2; 0.15% for Class R3; 0.15% for Class R4; and 0.10% for Class R5 shares.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the Fund under a Shareholder Servicing Agent Agreement. Under the Agreement, MFSC may receive a fee based on the costs it incurs in providing these services, plus a target profit margin. MFSC may also contract with other affiliated and unaffiliated service providers to provide some or all of the services described above. State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, performs dividend disbursing agent functions for the Fund.
MFSC may receive a fee from the Fund designed to achieve a target pre-tax annual profit margin. Taking into account this goal, effective April 1, 2007, the Fund (except Funds investing primarily in other MFS Funds) pays MFSC a fee based on its average daily net assets equal to 0.048%. Such fee rate shall continue until modified by agreement between the Fund and MFSC, taking into account MFSC's pre-tax profit margin target.
In addition, MFSC is reimbursed by the Fund for certain expenses incurred by MFSC on behalf of the Fund. These reimbursements include payments for certain out-of-pocket expenses, such as costs related to mailing shareholder statements and the use of third party recordkeeping systems, incurred by MFSC in performing the services described above. MFSC is also reimbursed for payments made under agreements with affiliated and unaffiliated service providers that provide sub-accounting and other shareholder services, including without limitation recordkeeping, reporting and transaction processing services. Payments made under these agreements are based on the Fund's average daily net assets and/or the Fund accounts serviced by the service provider.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund which invests in other MFS Funds ("MFS fund-of-funds") and each underlying fund in which an MFS fund-of-funds invests ("underlying funds"), the underlying fund may pay a portion of each MFS fund-of-fund's transfer agent-related expenses, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the MFS fund-of-funds.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD" or the "Distributor"), a wholly owned subsidiary of MFS, serves as distributor for the continuous offering of shares of the Fund pursuant to a Distribution Agreement. The Agreement obligates MFD to use best efforts to find purchasers for shares of the Fund.
See Appendix D to this Part II for information regarding sales charges and Rule 12b-1 distribution and service payments paid to MFD.
PROGRAM MANAGER(S)
MFD serves as program manager for a qualified tuition program under Section 529 of the Internal Revenue Code through which 529 share classes are available as investment options to program participants. The Fund's 529 share classes may also be offered through qualified tuition programs for which MFD does not serve as program manager. MFD provides, either directly or through third parties, recordkeeping, tax reporting, and account services, as well as services designed to maintain the programs' compliance with the Internal Revenue Code and other regulatory requirements under a Master 529 Administrative Services Agreement.
Under the Agreement, the Fund pays MFD a fee for these services of up to 0.35% annually of the assets attributable to the 529 share classes. The current annual fee has been established at 0.25% of the average daily net assets attributable to each 529 share class up to $10 billion in assets, 0.225% from $10 billion in assets up to $20 billion in assets, and 0.20% from $20 billion in assets and above. The fee may only be increased with the approval of the Fund's Board of Trustees. MFD pays a portion of this fee to third parties who provide these services.
Please consult the program description for your particular qualified tuition program for a discussion of the fees paid to and services received from the program manager.
CODE OF ETHICS
The Fund, its Adviser, its sub-adviser (if applicable) and Distributor have adopted separate codes of ethics as required under the Investment Company Act of 1940 ("the 1940 Act"). Subject to certain conditions and restrictions, each code permits personnel subject to the code to invest in securities for their own accounts, including securities that may be purchased, held or sold by the Fund. Securities transactions by some of these persons may be subject to prior approval of the Adviser's or sub-adviser's Compliance Departments, and securities transactions of certain personnel are subject to quarterly reporting and review requirements.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge paid to MFD and imposed upon
purchases of Class A, Class A1, and Class 529A shares, and the CDSC paid to MFD
and imposed upon redemptions of Class A, Class A1, Class B, Class B1, Class C,
Class 529B, and Class 529C shares, are waived. These circumstances are described
in Appendix C of this Part II. The Fund, MFS, and their affiliates reserve the
right to eliminate, modify, and add waivers at any time in their discretion.
DISTRIBUTION PLAN
The Trustees have approved a plan for all funds (except the MFS Money Market
Fund and the MFS Government Money Market Fund) in accordance with Rule 12b-1
under the 1940 Act for Class A, Class B, Class B1, Class C, Class 529A, Class
529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, Class W and
Class J shares (the "Distribution Plan"). The Fund has not adopted a
Distribution Plan with respect to its Class A1, Class I or Class R5 shares. In
approving the Distribution Plan, the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust as defined in the 1940
Act and have no direct or indirect financial interest in the operation of the
Distribution Plan or any agreements relating to the Distribution Plan
("Distribution Plan Qualified Trustees"), concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders.
The Distribution Plan is designed to promote sales of shares and minimize redemptions, as well as to assist in the servicing and maintenance of shareholder accounts. Increasing a Fund's net assets through sales of shares, or minimizing reductions in net assets by minimizing redemptions, may help reduce a Fund's expense ratio by spreading the Fund's fixed costs over a larger base and may reduce the potential adverse effect of selling a Fund's portfolio securities to meet redemptions. There is, however, no assurance that the net assets of the Fund will increase or not be reduced, or that other benefits will be realized as a result of the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its continuance is specifically approved at least annually by vote of both the Trustees and a majority of the Distribution Plan Qualified Trustees. The Distribution Plan also requires that the Fund and MFD each provide the Trustees, and that the Trustees review, at least quarterly, a written report of the amounts expended (and purposes therefor) under the Distribution Plan. The Distribution Plan may be terminated at any time by vote of a majority of the Distribution Plan Qualified Trustees or by a Majority Shareholder Vote of the shares of the class to which the Distribution Plan relates ("Designated Class"). The Distribution Plan may not be amended to increase materially the amount of permitted distribution expenses without the approval of a majority of the shares of the Designated Class of the Fund, or may not be materially amended in any case without a vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The distribution and service fees paid to MFD equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
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MAXIMUM TOTAL
MAXIMUM MAXIMUM SERVICE DISTRIBUTION AND
CLASS DISTRIBUTION FEE FEE SERVICE FEE
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Class A 0.10% 0.25% 0.35%
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Class B 0.75% 0.25% 1.00%
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Class B1 0.75% 0.25% 1.00%
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Class C 0.75% 0.25% 1.00%
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Class 529A 0.25% 0.25% 0.50%
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Class 529B 0.75% 0.25% 1.00%
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Class 529C 0.75% 0.25% 1.00%
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Class R 0.25% 0.25% 0.50%
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Class R1 0.50% 0.25% 0.75%
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Class R2 0.25% 0.25% 0.50%
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Class R3 0.25% 0.25% 0.50%
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Class R4 0.00% 0.25% 0.25%
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Class W 0.10% 0.00% 0.10%
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Class J 0.25% 0.70%/0.75% 0.95%/1.00%
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Service Class 0.25% 0.00% 0.25%
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|
In certain circumstances, the fees described above may not be implemented, are being waived, or do not apply to certain MFS Funds. Current distribution and service fees for each Fund are reflected under the captions "Expense Summary" and "Description of Share Classes -- Distribution and Service Fees" in the Prospectus.
SERVICE FEES
The Distribution Plan provides that the Fund may pay MFD a service fee based on the average daily net assets attributable to the Designated Class, (i.e., Class A, Class B, Class B1, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, or Class J shares, as appropriate) annually. Class W shares do not pay a service fee. MFD may, at its discretion, retain all or a portion of such payments or pay all or a portion of such payments to financial intermediaries. Service fees compensate MFD and/or financial intermediaries for shareholder servicing and account maintenance activities, including, but not limited to, shareholder recordkeeping (including assisting in establishing and maintaining customer accounts and records), transaction processing (including assisting with purchase, redemption and exchange requests), shareholder reporting, arranging for bank wires, monitoring dividend payments from the Funds on behalf of customers, forwarding certain shareholder communications from the Funds to customers, corresponding with shareholders and customers regarding the Funds (including receiving and responding to inquiries and answering questions regarding the Funds), and aiding in maintaining the investment of their respective customers in the Funds. Financial intermediaries may from time to time be required to meet certain criteria in order to receive service fees.
DISTRIBUTION FEES
The Distribution Plan provides that the Fund may pay MFD a distribution fee based on the average daily net assets attributable to the Designated Class as partial consideration for distribution services performed and expenses incurred in the performance of MFD's obligations under its distribution agreement with the Fund. Distribution fees compensate MFD and/or financial intermediaries for their expenses in connection with the distribution of Fund shares, including, but not limited to, commissions to financial intermediaries, printing prospectuses and reports used for sales purposes, the preparation and printing of sales literature, personnel, travel, office expense and equipment, payments made to wholesalers employed by MFD (employees may receive additional compensation if they meet certain targets for sales of one or more MFS Funds), and other distribution-related expenses. The amount of the distribution fee paid by the Fund with respect to each class differs under the Distribution Plan, as does the use by MFD of such distribution fees. While the amount of compensation received by MFD in the form of distribution fees during any year may be more or less than the expenses incurred by MFD under its distribution agreement with the Fund, the Fund is not liable to MFD for any losses MFD may incur in performing services under its Distribution Agreement with the Fund.
In addition, with respect to Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Emerging Growth Fund, MFS High Income Fund, MFS Total Return Fund, MFS Research Fund, MFS Strategic Income Fund, and MFS Bond Fund, to the extent that the annualized aggregate service and distribution fees paid under the Distribution Plan do not exceed 0.35% of Class A shares' average daily net assets, the Fund is permitted to pay such distribution-related expenses or other distribution-related expenses.
FINANCIAL INTERMEDIARY COMPENSATION
MFD and/or its affiliates may pay commissions, Rule 12b-1 distribution and service fees, 529 administrative services fees, retirement plan administrative and service fees, shareholder servicing fees, and other payments to financial intermediaries that sell Fund shares as described in Appendix D of this Part II.
INVESTMENT STRATEGIES, RISKS AND RESTRICTIONS
Set forth in Appendix E of this Part II is a description of investment strategies which the MFS Funds may generally use in pursuing their investment objectives and investment policies to the extent such strategies are consistent with their investment objectives and investment policies, and a description of the risks associated with these investment strategies. Set forth in Appendix F of this Part II is a description of investment restrictions to which the Fund is subject.
NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is determined each day during which the New York Stock Exchange is open for trading (see "Determination of Net Asset Value" below for a list of days that the Exchange is closed).
For this purpose, the net income attributable to shares of a money market fund (from the time of the immediately preceding determination thereof) shall consist of (i) all interest income accrued on the portfolio assets of the money market fund less (ii) all actual and accrued expenses of the money market fund determined in accordance with generally accepted accounting principles. Interest income shall include discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income is determined, the net asset value per share (i.e., the value of the net assets of the money market fund divided by the number of shares outstanding) is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment, representing the reinvestment of dividend income, is reflected by an increase in the number of shares in the shareholder's account.
It is expected that the shares of the money market fund will have a positive net income at the time of each determination thereof. If for any reason the net income determined at any time is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the money market fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to each such account. If and to the extent that such negative amount exceeds such declared dividends at the end of the month (or during the month in the case of an account liquidated in its entirety), the money market fund could reduce the number of its outstanding shares by treating each shareholder of the money market fund as having contributed to its capital that number of full and fractional shares of the money market fund in the account of such shareholder which represents its proportion of such excess. Each shareholder of the money market fund will be deemed to have agreed to such contribution in these circumstances by his or her investment in the money market fund. This procedure would permit the net asset value per share of the money market fund to be maintained at a constant $1.00 per share.
In addition, the money market funds intend to distribute net realized short- and long-term capital gains, if any, at least annually.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute to its shareholders all or substantially all of its net investment income. The net investment income of these Funds consists of non-capital gain income less expenses. In addition, these Funds intend to distribute net realized short- and long-term capital gains, if any, at least annually. Shareholders will be informed of the tax consequences of such distributions, including whether any portion represents a return of capital, after the end of each calendar year.
TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important federal
(and, where noted, state) income tax consequences affecting the Fund and its
shareholders. The discussion is very general, and therefore prospective
investors are urged to consult their tax advisers about the impact an investment
in the Fund may have on their own tax situations.
TAX TREATMENT OF THE FUND
Federal Taxes -- The Fund (even if it is a Fund in a Trust with multiple series) is treated as a separate entity for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has elected (or in the case of a new Fund, intends to elect) to be, and intends to qualify to be treated each year as, a "regulated investment company" under Subchapter M of the Code.
In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in "qualified publicly traded partnerships" (as defined below);
(b) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid-generally, taxable ordinary income and the excess, if any, of the net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year; and
(c) diversify its holdings so that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested (x) in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or businesses or (y) in the securities of one or more qualified publicly traded partnerships (as defined below).
In the case of the Fund's investment in loan participations, the Fund shall treat both the financial intermediary and the issuer of the loan participation as an issuer for the purposes of meeting the diversification requirement described in paragraph (c).
In general, for purposes of the 90% income requirement described in paragraph
(a) above, income derived from a partnership will be treated as qualifying
income only to the extent such income is attributable to items of income of the
partnership which would be qualifying income if realized by the regulated
investment company. However, 100% of the net income derived from an interest in
a "qualified publicly traded partnership" (which is defined as any partnership
(i) whose interests are traded on an established securities market or whose
interests are readily traded on a secondary market or the substantial equivalent
thereof and (ii) that derives less than 90% of its income from the qualifying
income described in paragraph (a)(i) above) will be treated as qualifying
income. In addition, although in general the passive loss rules of the Code do
not apply to regulated investment companies, such rules do apply to a regulated
investment company with respect to items attributable to an interest in a
qualified publicly traded partnership. Finally, for purposes of paragraph (c)
above, the term "outstanding voting securities of such issuer" will include
the equity securities of a qualified publicly traded partnership.
As a regulated investment company, the Fund will not be subject to any federal income or excise taxes on its net investment income and net realized capital gains that it distributes to shareholders in accordance with the timing requirements imposed by the Code. The Fund's foreign-source income, if any, may be subject to foreign withholding taxes. If the Fund failed to qualify as a "regulated investment company" in any year, it would incur a regular federal corporate income tax on all of its taxable income, whether or not distributed, and Fund distributions would generally be taxable as dividend income to the shareholders.
If the Fund fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or later if the Fund is permitted so to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders by the Fund in January of a year generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November, or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
Massachusetts Taxes -- As long as it qualifies as a regulated investment company under the Code, the Fund will not be required to pay Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
Tax Treatment of Distributions -- Subject to the special rules discussed below for Municipal Funds, shareholders of the Fund normally will have to pay federal income tax and any state or local income taxes on the dividends and "Capital Gain Dividends" (as defined below) they receive from the Fund. Except as described below, any distributions from ordinary income or from net short-term capital gains are taxable to shareholders as ordinary income for federal income tax purposes whether paid in cash or reinvested in additional shares.
For taxable years beginning before January 1, 2011, "qualified dividend income" received by an individual will be taxed at the rates applicable to long-term capital gains. In order for some portion of the dividends received by a Fund shareholder to be qualified dividend income, the Fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to the Fund's shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (1) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such date), (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) if the recipient elects to have the dividend income treated as investment interest, or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (b) treated as a passive foreign investment company. Payments in lieu of dividends, such as payments pursuant to securities lending arrangements, also do not qualify to be treated as qualified dividend income.
In general, a distribution of investment income designated by the Fund as derived from qualified dividend income will be treated as qualified dividend income by a shareholder taxed as an individual provided the shareholder meets the holding period and other requirements described above with respect to the Fund's shares. In any event, if the qualified dividend income received by the Fund during any taxable year is 95% or more of its gross income for that taxable year, then 100% of the Fund's dividends (other than Capital Gain Dividends), will be eligible to be treated as qualified dividend income. For this purpose, in the case of a sale or other disposition of the Fund of stock or securities, the only gain included in the term "gross income" is the excess of net short-term capital gain from such sales or dispositions over the net long-term capital loss from such sales or dispositions.
Properly designated distributions of net capital gain (i.e., the excess of net long-term capital gain over the net short-term capital loss) ("Capital Gains Dividends"), whether paid in cash or reinvested in additional shares, are taxable to shareholders as long-term capital gains for federal income tax purposes without regard to the length of time the shareholders have held their shares.
Long-term capital gain rates applicable to individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
Any Fund dividend that is declared in October, November, or December of any calendar year, payable to shareholders of record in such a month and paid during the following January, will be treated as if received by the shareholders on December 31 of the year in which the dividend is declared. The Fund will notify shareholders regarding the federal tax status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the Fund on a daily basis, will have the effect of reducing the per share net asset value of Fund shares by the amount of the distribution. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Capital Loss Carryovers-- Distributions from capital gains are generally made after applying any available capital loss carryovers. The amounts and expiration dates of any capital loss carryovers available to the Fund are shown in the notes to the financial statements for the Fund.
Dividends-Received Deduction-- If the Fund receives dividend income from U.S. corporations, a portion of the Fund's ordinary income dividends is normally eligible for the dividends-received deduction for corporations if the recipient otherwise qualifies for that deduction with respect to its holding of Fund shares. Availability of the deduction for particular corporate shareholders is subject to certain limitations, and deducted amounts may be subject to the alternative minimum tax or result in certain basis adjustments.
Disposition of Shares-- In general, any gain or loss realized upon a disposition of Fund shares by a shareholder that holds such shares as a capital asset will be treated as a long-term capital gain or loss if the shares have been held for more than 12 months and otherwise as a short-term capital gain or loss. However, any loss realized upon a disposition of Fund shares held for six months or less will be treated as a long-term capital loss to the extent of any Capital Gain Dividends made with respect to those shares.
Shares Purchased Through Tax-Qualified Plans -- Distributions by the Fund to
retirement plans that qualify for tax-exempt treatment under federal income tax
laws will not be taxable. Special tax rules apply to investments through such
plans. You should consult your tax adviser to determine the suitability of the
Fund as an investment through such a plan and the tax treatment of distributions
(including distributions of amounts attributable to an investment in the Fund)
from such a plan.
U.S. Taxation of Non-U.S. Persons -- Capital Gain Dividends and exempt-interest
dividends, if any, will not be subject to withholding of federal income tax.
However, distributions properly designated as exempt-interest dividends may be
subject to backup withholding, as discussed below. In general, dividends other
than Capital Gain Dividends and exempt-interest dividends, if any, paid by the
Fund to a shareholder that is not a "U.S. person" within the meaning of the
Code (such shareholder, a "Non-U.S. Person") are subject to withholding of U.S
federal income tax at a rate of 30% (or lower applicable treaty rate) even if
they are derived from income or gains (such as portfolio interest, short-term
capital gains, or foreign-source dividend and interest income) that, if paid to
a Non-U.S. Person directly, would not be subject to withholding. However,
effective for taxable years of the Fund beginning after December 31, 2004, and
before January 1, 2008, the Fund will not be required to withhold any amounts
with respect to (i) distributions (other than distributions to a Non-U.S. Person
(w) that has not provided a satisfactory statement that the beneficial owner is
not a U.S. person, (x) to the extent that the dividend is attributable to
certain interest on an obligation if the Non-U.S. Person is the issuer or is a
10% shareholder of the issuer, (y) that is within certain foreign countries that
have inadequate information exchange with the United States, or (z) to the
extent the dividend is attributable to interest paid by a person that is a
related person of the Non-U.S. Person and the Non-U.S. Person is a controlled
foreign corporation) from U.S.-source interest income that would not be subject
to U.S. federal income tax if earned directly by an individual Non-U.S. Person
(an "interest-related dividend"), and (ii) distributions (other than
distributions to an individual Non-U.S. Person who is present in the United
States for a period or periods aggregating 183 days or more during the year of
the distribution) of net short-term capital gains in excess of net long-term
capital losses (a "short-term capital gain dividend"), in each such case to
the extent such distributions are properly designated by the Fund. This
provision will first apply to the Fund (1) with respect to its direct portfolio
investments (if any) in its taxable year beginning after December 31, 2004, and,
(2) with respect to its investments in underlying Funds (if any), with respect
to designated distributions from such underlying Funds in their taxable years
beginning after December 31, 2004, that are received by the Fund in its taxable
year beginning after December 31, 2004. Depending on the circumstances, the Fund
may make such designations with respect to all, some or none of its potentially
eligible dividends and/or treat such dividends, in whole or in part, as
ineligible for this exemption for withholding. The Fund does not currently
intend to, but may in certain circumstances, designate distributions as
interest-related dividends or as short-term capital gain dividends except with
respect to Research Bond Fund J shares. In order to qualify for this exemption
from withholding, a foreign person will need to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN or substitute Form). In the case of
shares held through an intermediary, the intermediary may withhold even if the
Fund makes a designation with respect to a payment. Foreign persons should
contact their intermediaries with respect to the application of these rules to
their accounts.
If a beneficial holder who is a Non-U.S. Person has a trade or business in the United States, and the dividends are effectively connected with the conduct by the beneficial holder of a trade or business in the United States, the dividend will be subject to U.S. federal net income taxation at regular income tax rates.
In general, special tax rules apply to distributions that a "qualified investment entity" (a "QIE") pays to foreign shareholders that are attributable to gain from the Fund's sale or exchange of "U.S. real property interests" (a "USRPI Distribution"). A Fund will be a QIE if it is both (i) a regulated investment company and (ii) a "U.S. real property holding corporation" (determined without regard to certain exceptions, described below, for 5% holders of publicly traded classes of stock and for interests in domestically-controlled regulated investment companies and real estate investment trusts ("REITs")). Under the Code, a "U.S. real property holding corporation" is any corporation that holds (or held during the previous five-year period) "U.S. real property interests" ("USRPIs") (defined as U.S. real property and interests (other than solely as a creditor) in "U.S. real property holding corporations") with an aggregate fair market value equal to 50% or more of the fair market value of the corporation's real property assets and other trade-or-business assets. A USRPI does not include (i) any class of stock of a corporation that is traded on an established securities market with respect to a person who holds 5% or less of such class of stock at all times during the previous five-year period and (ii) a regulated investment company's interests in domestically controlled REITs and other regulated investment companies.
For taxable years beginning on or after January 1, 2006, where a foreign shareholder has owned more than 5% of a class of shares of a Fund that is a QIE during the one-year period preceding the date of the USRPI Distribution, the Fund will be required to withhold 35% of any USRPI Distribution and the foreign shareholder will have an obligation to file a U.S. tax return and pay tax. For all other foreign shareholders of a Fund that is a QIE, a USRPI Distribution will be treated as ordinary income (notwithstanding any designation by the Fund that such distribution is a Capital Gain Dividend) and the Fund will be required to withhold 30% (or lower applicable treaty rate) of such distribution. If a Fund that is a QIE makes a distribution to its foreign shareholders that is attributable to a USRPI Distribution received by the Fund from a "lower-tier" REIT or regulated investment company that is a QIE, that distribution will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the "lower-tier" REIT or regulated investment company.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend and certain other conditions are met, or (iii) the shares are USRPIs or the Capital Gain Dividends are USRPI Distributions.
Foreign shareholders in the Fund should consult their tax advisers with respect to the potential application of the above rules.
Backup Withholding -- The Fund is also required in certain circumstances to apply backup withholding at the rate of 28% on taxable dividends, including Capital Gain Dividends, redemption proceeds (except for redemptions by money market funds), and certain other payments that are paid to any non-corporate shareholder (including a Non-U.S. Person) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor residents of the United States. The back-up withholding rules also apply to distributions that are properly designated as exempt-interest dividends.
Foreign Income Taxation of a Non-U.S. Person -- Distributions received from the Fund by a Non-U.S. Person may also be subject to tax under the laws of their own jurisdictions.
State and Local Income Taxes: U.S. Government Securities -- Dividends paid by the Fund that are derived from interest on obligations of the U.S. Government and certain of its agencies and instrumentalities (but generally not distributions of capital gains realized upon the disposition of such obligations) may be exempt from state and local income taxes. The Fund generally intends to advise shareholders of the extent, if any, to which its dividends 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.
Certain Investments -- Any investment in zero coupon bonds, deferred interest bonds, payment-in-kind bonds, certain inflation-adjusted debt instruments, certain stripped securities, and certain securities purchased at a market discount (including certain high yield debt obligations) will cause the Fund to recognize income prior to the receipt of cash payments with respect to those securities. To distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund's investments in REIT equity securities may also require the Fund to accrue and distribute income not yet received and may at other times result in the Fund's receipt of cash in excess of the REIT's earnings. If the Fund distributes such amounts, such distribution could constitute a return of capital to Fund shareholders for federal income tax purposes. Income from REIT securities generally will not be eligible for treatment as qualified dividend income. Any investment in residual interests of a Collateralized Mortgage Obligation (a "CMO") that has elected to be treated as a real estate mortgage investment conduit (a "REMIC") can create complex tax problems, especially if the Fund has state or local governments or other tax-exempt organizations as shareholders. Under current law, the Fund serves to block unrelated business taxable income ("UBTI") from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if either: (1) the Fund invests in REITs that hold residual interests in REMICs; or (2) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). If a charitable remainder trust (as defined in Code Section 664) realizes any UBTI for a taxable year, it will lose its tax-exempt status for the year.
Options, Futures Contracts, and Forward Contracts -- The Fund's transactions in options, futures contracts, forward contracts, short sales, and swaps and related transactions will be subject to special tax rules that may affect the amount, timing, and character of Fund income and distributions to shareholders. For example, certain positions held by the Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out on that day), and any gain or loss associated with the positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by the Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," and may be subject to special tax rules that would cause deferral of Fund losses, adjustments in the holding periods of Fund securities, and conversion of short-term into long-term capital losses. Certain tax elections exist for straddles that may alter the effects with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund will limit its activities in options, futures contracts, forward contracts, short sales, and swaps and related transactions to the extent necessary to meet the diversification requirements of Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to foreign investments by the Fund. Foreign exchange gains and losses realized by the Fund may be treated as ordinary income and loss. Use of foreign currencies for non-hedging purposes and investment by the Fund in certain "passive foreign investment companies" may be limited in order to avoid a tax on the Fund. The Fund may elect to mark to market certain investments in "passive foreign investment companies" on the last day of each year. This election may cause the Fund to recognize income prior to the receipt of cash payments with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund.
Foreign Income Taxes -- Investment income received by the Fund and gains with respect to foreign securities may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of tax or an exemption from tax on such income; the Fund intends to qualify for treaty reduced rates where available. It is not possible, however, to determine the Fund's effective rate of foreign tax in advance, since the amount of the Fund's assets to be invested within various countries is not known.
If more than 50% of the total assets of a Fund are represented by direct investments in foreign stock and securities at the close of its taxable year, the Fund may elect to "pass through" to its shareholders foreign income taxes paid by it. If the Fund so elects, shareholders will be required to treat their pro rata portions of the foreign income taxes paid by the Fund as part of the amounts distributed to them by it and thus includable in their gross income for federal income tax purposes. Shareholders who do not itemize deductions would (subject to such limitations) be able to claim a credit but not a deduction. No deduction will be permitted to individuals in computing their alternative minimum tax liability. If the Fund is not eligible, or does not elect, to "pass through" to its shareholders foreign income taxes it has paid, shareholders will not be able to claim any deduction or credit for any part of the foreign taxes paid by the Fund. In addition, the Fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the Fund's recognition of ordinary income and may affect the timing, amount, or character of the Fund's distributions.
Tax Shelter Reporting -- Under Treasury regulations, if a shareholder recognizes a loss with respect to the Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Underlying Funds -- If the Fund invests all of its assets in shares of underlying Funds, its distributable income and gains will normally consist entirely of distributions from the underlying Funds' income and gains and gains and losses on the dispositions of shares of underlying Funds. To the extent that an underlying Fund realizes net losses on its investments for a given taxable year, the Fund will not be able to recognize its share of those losses (so as to offset distributions of net income or capital gains from other underlying Funds) until it disposes of shares of the underlying Fund. Moreover, even when the Fund does make such a disposition, a portion of its loss may be recognized as a long-term capital loss, which will not be treated as favorably for federal income tax purposes as a short-term capital loss or an ordinary deduction. In particular, the Fund will not be able to offset any capital losses from its dispositions of underlying Fund shares against its ordinary income, which includes distributions of any net short-term capital gains realized by an underlying Fund. In addition, in certain circumstances, the "wash sale" rules under Section 1091 of the Code may apply to a Fund's sales of underlying Fund shares that have generated losses. A wash sale occurs if shares of an underlying Fund are sold by the Fund at a loss and the Fund acquires additional shares of that same underlying Fund thirty days before or after the date of the sale. The wash sale rules could defer losses of the Fund on sales of underlying Fund shares (to the extent such sales are wash sales) for extended (and, in certain cases, potentially indefinite) periods of time. As a result of the foregoing rules, and certain other special rules, it is possible that the amounts of net investment income and net capital gains that the Fund will be required to distribute to shareholders will be greater than such amounts would have been had the Fund invested directly in the securities held by the underlying Funds, rather than investing in shares of the underlying Funds. For similar reasons, the character of distributions from a Fund (e.g., capital gains as compared to ordinary income, eligibility for the dividends-received deduction, etc.) will not necessarily be the same as it would have been had the Fund invested directly in the securities held by the underlying Funds.
If the Fund received dividends from an underlying Fund that qualifies as a regulated investment company, and the underlying Fund designates such dividends as "qualified dividend income," then the Fund is permitted in turn to designate a portion of its distributions as "qualified dividend income" as well, provided the Fund meets holding period and other requirements with respect to shares of the underlying Fund.
Depending on the Fund's percentage ownership in an underlying Fund before and after a redemption of shares of such underlying Fund, such a redemption may cause the Fund to be treated as receiving a dividend on the full amount of the distribution instead of receiving capital gain income on the shares of the underlying Fund. This would be the case where the Fund holds a significant interest in an underlying Fund and redeems only a small portion of such interest. It is possible that such a dividend will qualify as "qualified dividend income;" otherwise, it will be taxable as ordinary income.
The fact that a Fund achieves its investment objectives by investing in underlying Funds will generally not adversely affect the Fund's ability to pass on to foreign shareholders the full benefit of the interest-related dividends and short-term capital gain dividends that it receives from its underlying investments in the Funds, except possibly to the extent that (1) interest-related dividends received by the Fund are offset by deductions allocable to the Fund's qualified interest income or (2) short-term capital gain dividends received by the Fund are offset by the Fund's net short- or long-term capital losses, in which case the amount of a distribution from the Fund to a foreign shareholder that is properly designated as either an interest-related dividend or a short-term capital gain dividend, respectively, may be less than the amount that such shareholder would have received had they invested directly in the underlying Funds. Furthermore, if the Fund is a QIE and invests in an underlying Fund that is a QIE, a distribution to a foreign shareholder that is attributable to a USRPI Distribution received by the Fund will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the underlying Fund.
Under the current law, a Fund of Funds cannot pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying Fund. A Fund is permitted to elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and securities at the close of its taxable year. Foreign securities held indirectly through an underlying Fund do not contribute to this 50% threshold.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of Funds whose objective is to invest primarily in obligations that pay interest that is exempt from federal income tax ("Municipal Funds").
Tax-Exempt Distributions -- The portion of a Municipal Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends will increase a corporate shareholder's alternative minimum tax. Except when the Fund provides actual monthly percentage breakdowns, the percentage of income designated as tax-exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Taxable Distributions -- A Municipal Fund may also earn some income that is taxable as ordinary income (including interest from any obligations that lose their federal tax exemption and, subject to a de minimis exception, when a bond purchased at a price less than its stated redemption price at maturity (a so-called "market discount bond") matures or is disposed of by the Municipal Fund) and may recognize capital gains and losses as a result of the disposition of securities and from certain options and futures transactions. Shareholders normally will have to pay federal income tax on the non-exempt interest dividends and capital gain distributions they receive from the Fund, whether paid in cash or reinvested in additional shares. However, such Funds do not expect that the non-tax-exempt portion of their net investment income, if any, will be substantial. Because Municipal Funds expect to earn primarily tax-exempt interest income, it is expected that dividends from such Funds will not qualify for the dividends-received deduction for corporations and will not be treated as "qualified dividend income" taxable to non-corporate shareholders at reduced rates.
Consequences of Distributions by a Municipal Fund: Effect of Accrued Tax-Exempt Income -- Shareholders redeeming shares after tax-exempt income has been accrued but not yet declared as a dividend should be aware that a portion of the proceeds realized upon redemption of the shares will reflect the existence of such accrued tax-exempt income and that this portion 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 redemption. For this reason, if a shareholder wishes to redeem shares of a Municipal Fund that does not declare dividends on a daily basis, the shareholder may wish to consider whether he or she could obtain a better tax result by redeeming immediately after the Fund declares dividends representing substantially all the ordinary income (including tax-exempt income) accrued for that period.
Certain Additional Information for Municipal Fund Shareholders -- Interest on indebtedness incurred by shareholders to purchase or carry Municipal Fund shares will not be deductible for federal income tax purposes. Exempt-interest dividends are taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal income tax. You should consult your tax adviser to determine what effect, if any, an investment in a Fund may have on the federal taxation of your benefits. Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by private activity bonds should consult their tax advisers before purchasing Fund shares.
Consequences of Redeeming Shares -- Any loss realized on a redemption of Municipal Fund shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received with respect to those shares. If not disallowed, any such loss will be treated as a long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares.
State and Local Income Taxes: Municipal Obligations -- The exemption of exempt-interest dividends for federal income tax purposes does not necessarily result in exemption under the income tax laws of any state or local taxing authority. Some states do exempt from tax that portion of an exempt interest dividend that represents interest received by a regulated investment company on its holdings of securities issued by that state and its political subdivisions and instrumentalities. Therefore, the Fund will report annually to its shareholders the percentage of interest income earned by it during the preceding year on Municipal Bonds and will indicate, on a state-by-state basis only, the source of such income.
SPECIAL CONSIDERATIONS FOR 529 SHARE CLASSES
The following special consideration applies specifically to the ownership of a Fund' 529 share classes through a tuition program that qualifies under Section 529 of the Code.
The 529 share classes are an investment option under one or more tuition programs designed to qualify under Section 529 of the Code so that earnings on investments are not subject to federal income tax (to either a contributor to the tuition program or a designated beneficiary) until the earnings are withdrawn. Withdrawals of earnings that are used to pay "qualified higher education expenses" are tax-free for federal income tax purposes. State and local taxes may still apply. These tax benefits are not available to 529 shares that are not owned through a qualifying Section 529 tuition program.
Withdrawals of earnings that are not used for the designated beneficiary's qualified higher education expenses generally are subject not only to federal income tax but also to a 10% penalty tax unless such amounts are transferred within sixty (60) days to another tuition program for the same designated beneficiary (only one such transfer may be made in any twelve (12) month period) or another designated beneficiary who is a member of the family of the designated beneficiary with respect to which the distribution was made and certain other conditions are satisfied. The 10% penalty tax will not apply to withdrawals made under certain circumstances, including certain withdrawals made after the designated beneficiary dies, becomes disabled, or receives a scholarship or other tax-free payment for educational expenses that does not exceed the amount of the distribution. Withdrawals attributable to contributions to the tuition program (including the portion of any rollover from another tuition program that is attributable to contributions to that program) are not subject to tax.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
For the purposes of this section, all references to the "Adviser" shall include
the Sub-Adviser with respect to MFS Diversified Income Fund and MFS Sector
Rotational Fund.
Specific decisions to purchase or sell securities for the Funds are made by persons affiliated with the Adviser. Any such person may serve other clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
In connection with the selection of broker/dealers and the placing of Fund
portfolio transactions, the Adviser seeks to achieve for the Funds the best
overall price and execution available from responsible brokerage firms, taking
account of all factors it deems relevant, including by way of illustration:
price; the size of the transaction; the nature of the market of the security;
the amount of the commission; the timing and impact of the transaction taking
into account market prices and trends; the reputation, experience and financial
stability of the broker/dealer involved; the willingness of the broker/dealer to
commit capital; the need for anonymity in the market; and the quality of
services rendered by the broker/dealer in that and other transactions.
In the case of securities traded in the over-the-counter market, portfolio transactions may be effected either on an agency basis, which involves the payment of negotiated brokerage commissions to the broker/dealer, including electronic communication networks, or on a principal basis at net prices without commissions, but which include compensation to the broker/dealer in the form of a mark-up or mark-down, depending on where the Adviser believes best execution is available. In the case of securities purchased from underwriters, the cost of such securities generally includes a fixed underwriting commission or concession. From time to time, soliciting dealer fees are available to the Adviser on tender or exchange offers. Such soliciting or dealer fees are, in effect, recaptured by the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended ("Section 28(e)"), the Adviser may cause the Funds to pay a broker/dealer which provides "brokerage and research services" (as defined by the Securities Exchange Act of 1934, as amended) to the Adviser an amount of commission for effecting a securities transaction for the Funds in excess of the amount other broker/dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the effecting broker/dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Funds and its other clients. "Commissions," as interpreted by the SEC, include fees paid to brokers for trades conducted on an agency basis, and certain mark-ups, markdowns, commission equivalents and other fees received by dealers in riskless principal transactions placed in the over-the-counter market.
The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement) or required in connection therewith by applicable rules. In determining whether a service or product qualifies as "brokerage and research services," the Adviser evaluates whether the service or product provides lawful and appropriate assistance to the Adviser in carrying out its investment decision-making responsibilities. It is often not possible to place a dollar value on the brokerage and research services the Adviser received from brokers. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions is based primarily on the professional opinions of the persons responsible for the placement and review of such transactions.
Broker/dealers may be willing to furnish statistical, research and other factual information or services ("Research"), for example, investment research reports; access to analysts; execution systems and trading analytics; reports or databases containing corporate, fundamental, and technical analyses; portfolio modeling strategies; and economic research services, such as publications, chart services, and advice from economists concerning macroeconomics information, and analytical investment information about particular corporations to the Adviser for no consideration other than brokerage or underwriting commissions. Such broker/dealers may be involved from time to time in executing, clearing or settling securities transactions on behalf of the Funds ("Executing Brokers"), or may have entered into agreements with one or more Executing Brokers pursuant to which they are responsible for performing one or more functions, the performance of which has been identified by the SEC as being sufficient to constitute effecting securities transactions within the meaning of Section 28(e) as interpreted by the SEC ("Effecting Brokers"). In reliance on this interpretation the Adviser expects to enter into Commission Sharing Agreements with Executing Brokers which will provide for the Executing Brokers to pay a portion of the Commissions paid by the Funds for securities transactions to Effecting Brokers. In addition to effecting securities transactions on behalf of the Funds pursuant to a Commission Sharing Agreement, the Effecting Brokers will also provide Research for the benefit of the Adviser. If a government agency with regulatory authority over the affairs of the Adviser or its subsidiaries, or a court of competent jurisdiction, were to determine that an Effecting Broker is not effecting a securities transaction within the meaning of Section 28(e), the Adviser believes that such Research should be considered as Research provided by the relevant Executing Broker and permitted by Section 28(e), provided that the relationship with such Executing Broker is otherwise consistent with the requirement for Research under Section 28(e). In such circumstances the Adviser will in effect be paying a greater commission in order to obtain third party research. The Adviser may use brokerage commissions from the Funds' portfolio transactions to acquire Research, subject to the procedures and limitations described in this discussion.
The advisory fee paid by each of the Funds to the Adviser is not reduced as a consequence of the Adviser's receipt of Research. To the extent the Funds' portfolio transactions are used to obtain Research, the brokerage commissions paid by the Funds might exceed those that might otherwise be paid for execution only. The Research received may be useful and of value to the Adviser in serving both the Funds and other clients of the Adviser; accordingly, not all of the Research provided by brokers through which the Funds effect securities transactions may be used by the Adviser in connection with the Funds. The Adviser would, through the use of the Research, avoid the additional expenses that would be incurred if it attempted to develop comparable information through its own staff.
From time to time, the Adviser prepares a list of broker/dealer firms that have been deemed by the Adviser to provide valuable Research as determined periodically by the investment staff ("Research Firms"), together with a suggested non-binding amount of brokerage commissions ("non-binding target") to be allocated to each Research Firm, subject to certain requirements. These Research Firms may include Executing Brokers and Effecting Brokers. In instances when the Adviser allocates commissions to Research Firms that are effecting trades within the meaning of Section 28(e) on behalf of client accounts, such trades will be executed in accordance with the Adviser's obligation to seek best execution for its client accounts. Neither the Adviser nor the Funds have an obligation to any Research Firm if the amount of brokerage commissions paid to the Research Firm is less than the applicable non-binding target. The Adviser reserves the right to pay cash to the Research Firm from its own resources in an amount the Adviser determines in its discretion.
If the Adviser determines that any service or product has a mixed use (i.e., it also serves functions that do not assist the investment decision-making or trading process), the Adviser will allocate the costs of such service or product accordingly in its reasonable discretion. The Adviser will allocate brokerage commissions to Research Firms only for the portion of the service or product that the Adviser determines assists it in the investment decision-making or trading process and will pay for the remaining value of the product or service in cash.
In effecting portfolio transactions on behalf of the Funds and the Adviser's other clients, the Adviser from time to time may instruct the broker/dealer that executes a transaction to allocate, or "step out," a portion of such transaction to another broker/dealer. The broker/dealer to which the Adviser has "stepped out" would then settle and complete the designated portion of the transaction, and the executing broker/dealer would settle and complete the remaining portion of the transaction that has not been "stepped out." Each broker/dealer may receive a commission or brokerage fee with respect to that portion of the transaction that it settles and completes.
In certain instances there may be securities that are suitable for the Funds' portfolios as well as for one or more of the other clients of the Adviser or of any subsidiary of the Adviser (or that the Adviser believes should no longer be held by the Funds' portfolios or by other clients of the Adviser or any subsidiary of the Adviser). 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. Transactions for each client are generally effected independently unless the Adviser determines to purchase or sell the same securities for several clients at approximately the same time. The Adviser may, but is not required to, aggregate together purchases and sales for several clients and will allocate the trades in a fair and equitable manner, across participating clients. The Adviser has adopted policies that are reasonably designed to ensure that when two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. Among other things, these policies prohibit allocations of equity initial public offerings, equity limited offerings or fixed income new issues to, among others: (1) Private Portfolio Management accounts; (2) funds or other accounts the beneficial owners of which are principally the Adviser's officers and employees of the Trust or Trustees which are not being offered to the public; and (3) any accounts owned beneficially solely by the Adviser or any direct or indirect subsidiary of the Adviser. However, these policies do not prohibit allocations to funds or other accounts owned beneficially by Sun Life of Canada (U.S.) Financial Services Holdings, Inc., or Sun Life Financial Inc., or their affiliates other than the Adviser and its direct and indirect subsidiaries. In addition, accounts in which the Adviser or any of its direct or indirect subsidiaries is the sole beneficial owner generally will be allocated investment opportunities (other than with respect to equity initial public offerings, equity limited offerings or fixed income new issues) on the same basis as Funds or other clients of the Adviser when the account has been established and seeded by the Adviser or the subsidiary with a limited amount of assets for the purpose of establishing a performance record to enable the Adviser or the subsidiary to offer the account's investment style to unaffiliated third parties.
It is recognized that in some cases this system could have a detrimental effect on the price or availability of a security as far as the Funds are concerned. In other cases, however, the Adviser believes that such practices may produce increased investment opportunities for the Funds.
DISCLOSURE OF PORTFOLIO HOLDINGS
Each Fund has established a policy governing the disclosure of its portfolio
holdings that is reasonably designed to protect the confidentiality of the
Fund's non-public portfolio holdings and prevent inappropriate selective
disclosure of such holdings. The Fund's Board of Trustees has approved this
policy and will be asked to approve any material amendments to this policy.
Exceptions to this policy may be authorized by MFS' general counsel or a senior
member of the MFS legal department acting under the supervision of MFS' general
counsel (an "Authorized Person").
Neither MFS nor the Fund nor, if applicable, a sub-adviser, will receive any compensation or other consideration in connection with its disclosure of Fund portfolio holdings.
PUBLIC DISCLOSURE OF PORTFOLIO HOLDINGS
In addition to the public disclosure of Fund portfolio holdings through required SEC quarterly filings, a Fund may make its portfolio holdings publicly available on the MFS Web site in such scope and form and with such frequency as MFS may reasonably determine.
The following information is generally available to you on the MFS Web site (MFS.COM):
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APPROXIMATE DATE OF POSTING
INFORMATION TO WEB SITE
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Fund's full securities holdings 24 days after month end
as of each month's end
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Fund's top 10 securities holdings
as of each month's end 14 days after month end
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If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for fund's that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the Fund or MFS may suspend the posting of this information or modify the elements of this Web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the Fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
Not all registered investment companies that are advised by MFS publicly disclose portfolio holdings in the form or on the schedule described above, and registered investment companies that are sub-advised by MFS or its affiliates may be subject to different portfolio holdings disclosure policies that may permit public disclosure of portfolio holdings information in different forms and at different times. In addition, separate account and unregistered product clients of MFS or its affiliates have access to their portfolio holdings, and prospective clients have access to representative portfolio holdings. These clients and prospective clients are not subject to the Fund's portfolio holdings disclosure policies. Some of these registered investment companies, sub-advised Funds, separate accounts, and unregistered products, all advised or sub-advised by MFS or its affiliates, have substantially similar or identical investment objectives and strategies to certain Funds. They therefore have potentially substantially similar, and in certain cases nearly identical, portfolio holdings as those Funds.
A Fund's portfolio holdings are considered to be publicly disclosed: (a) upon the disclosure of the portfolio holdings in a publicly available, routine filing with the SEC that is required to include the information; (b) the day after the Fund makes such information available on its Web site (assuming that it discloses in its prospectus that such information is available on its Web site); or (c) at such additional times and on such additional basis as determined by the SEC or its staff.
DISCLOSURE OF NON-PUBLIC PORTFOLIO HOLDINGS
A Fund may, in certain cases, disclose to third parties its portfolio holdings which have not been made publicly available. Disclosure of non-public portfolio holdings to third parties may only be made if an Authorized Person determines that such disclosure is not impermissible under applicable law or regulation. In the case of sub-advisers, as applicable, this determination may be made by a senior member of the sub-adviser's legal or compliance departments (a "Sub-Adviser Authorized Person"). In addition, the third party receiving the non-public portfolio holdings may, at the discretion of an Authorized Person, be required to agree in writing to keep the information confidential and/or agree not to trade directly or indirectly based on the information. Such agreements may not be required in circumstances such as where portfolio securities are disclosed to brokers to obtain bids/prices or in interviews with the media. MFS will seek to monitor a recipient's use of non-public portfolio holdings provided under these agreements and, when appropriate, use its best efforts to enforce the terms of these agreements. The restrictions and obligations described in this paragraph do not apply to non-public portfolio holdings provided to MFS or its affiliates.
In addition, to the extent that an Authorized Person determines that there is a potential conflict with respect to the disclosure of information that is not publicly available between the interests of a Fund's shareholders, on the one hand, and MFS, MFD or an affiliated person of MFS, MFD, or the Fund, on the other hand, the Authorized Person must inform MFS' conflicts officer of such potential conflict, and MFS' conflicts officer shall determine whether, in light of the potential conflict, disclosure is reasonable under the circumstances, and shall report such potential conflict of interest determinations to the Fund's Independent Chief Compliance Officer and the Board of Trustees of the Fund. MFS also reports to the Board of Trustees of the Fund regarding the disclosure of information regarding the Fund that is not publicly available.
Subject to compliance with the standards set forth in the previous two paragraphs, non-public portfolio holdings may be disclosed in the following circumstances:
Employees of MFS or MFD or, if applicable, a sub-adviser, (collectively "Fund representatives") disclose non-public portfolio holdings in connection with the day-to-day operations and management of the Fund. Full portfolio holdings are disclosed to a Fund's custodians, independent registered accounting firm, financial printers, regulatory authorities, and stock exchanges and other listing organizations. Portfolio holdings are disclosed to a Fund's pricing service vendors and broker/dealers when requesting bids for, or price quotations on, securities, and to other persons (including independent contractors) who provide systems or software support in connection with Fund operations, including accounting, compliance support, and pricing. Portfolio holdings may also be disclosed to persons assisting a Fund in the voting of proxies or in connection with litigation relating to Fund portfolio holdings. In connection with managing the Funds, MFS or, if applicable, a sub-adviser, may use analytical systems provided by third parties who may have access to Fund portfolio holdings.
Non-public portfolio holdings may be disclosed in connection with other activities, such as to participants in in-kind purchases and redemptions of Fund shares, to service providers facilitating the distribution or analysis of portfolio holdings, once the information is public, and in other circumstances not described above. All such disclosures are subject to compliance with the applicable disclosure standards.
In addition, subject to such disclosure not being impermissible under applicable law or regulation, Fund representatives may disclose Fund portfolio holdings and related information, which may be based on non-public portfolio holdings, under the following circumstances (among others):
Fund representatives may provide oral or written information ("portfolio commentary") about a Fund, including, but not limited to, how the Fund's investments are divided among various sectors, industries, countries, value and growth stocks, small, mid, and large-cap stocks, among stocks, bonds, currencies and cash, types of bonds, bond maturities, bond coupons, and bond credit quality ratings. This portfolio commentary may also include information on how these various weightings and factors contributed to Fund performance. Fund representatives may also express their views orally or in writing on one or more of a Fund's portfolio holdings or may state that a Fund has recently purchased or sold one or more holdings.
Fund representatives may also provide oral or written information ("statistical information") about various financial characteristics of a Fund or its underlying portfolio securities including, but not limited to, alpha, beta, coefficient of determination, duration, maturity, information ratio, Sharpe ratio, earnings growth, payout ratio, price/book value, projected earnings growth, return on equity, standard deviation, tracking error, weighted average quality, market capitalization, percent debt to equity, price to cash flow, dividend yield or growth, default rate, portfolio turnover, and risk and style characteristics.
The portfolio commentary and statistical information may be provided to members of the press, shareholders in the Fund, persons considering investing in the Fund, or representatives of such shareholders or potential shareholders, such as fiduciaries of a 401(k) plan or a trust and their advisers, and the content and nature of the information provided to each of these persons may differ.
ONGOING ARRANGEMENTS TO MAKE NON-PUBLIC PORTFOLIO HOLDINGS AVAILABLE
With authorization from an Authorized Person or, as applicable, a Sub-Adviser Authorized Person, consistent with "Disclosure of Non-Public Portfolio Holdings" above, Fund representatives may disclose non-public Fund portfolio holdings to the recipients identified on Appendix G to this SAI Part II, or permit the recipients identified in Appendix G to this SAI Part II to have access to non-public Fund portfolio holdings, on an on-going basis.
This list of recipients in Appendix G to this SAI Part II is current as of May 31, 2007, and any additions, modifications, or deletions to this list that have occurred since May 31, 2007, are not reflected. The portfolio holdings of the Fund which are provided to these recipients, or to which these recipients have access, may be the Fund's current portfolio holdings. As a condition to receiving or being provided access to non-public Fund portfolio holdings, the recipients listed in Appendix G to this SAI Part II must agree, or otherwise have an independent duty, to maintain this information in confidence.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the New York Stock Exchange (the "Exchange") is open for trading.
(As of the date of this SAI, the Exchange is open for trading every weekday
except in an emergency and for the following holidays (or the days on which they
are observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day, and
Christmas Day.) This determination is made once each day as of the close of
regular trading on the Exchange (generally, 4 p.m., Eastern time) (the
"valuation time") 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 Fund shares outstanding for that class. In
accordance with regulations for regulated investment companies and except for
money market funds, changes in portfolio holdings and number of shares
outstanding are generally reflected in a Fund's net asset value the next
business day after such change.
MONEY MARKET FUNDS
Money market instruments are valued at amortized cost, which approximates market value. Amortized cost involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its current market value. Each money market fund's use of amortized cost is subject to the Fund's compliance with Rule 2a-7 under the Investment Company Act of 1940. The amortized cost value of an instrument can be different from the market value of an instrument.
The Board of Trustees for each money market fund has established procedures designed to stabilize its net asset value per share at $1.00 and has delegated to the Adviser the responsibility for the implementation and administration of such procedures. Under the procedures, the adviser is responsible for monitoring and notifying the Board of Trustees of circumstances where the net asset value calculated by using market valuations may deviate from the $1.00 per share calculated using amortized cost and might result in a material dilution or other unfair result to investors or existing shareholders. Under such circumstances, the Board may take such corrective action, if any, as it deems appropriate to eliminate or reduce, to the extent reasonably practicable, any such dilution or unfair results. Such corrective action could include selling portfolio instruments prior to maturity to realize capital gains or losses; shortening average portfolio maturity; withholding dividends; calculating net asset value by using available market quotations; and such other measures as the Trustees may deem appropriate.
NON-MONEY MARKET FUNDS
Open-end investment companies are generally valued at their net asset value per share. The underlying investments of open-end investment companies managed by the Adviser are valued as described below.
Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded. For securities held short for which there were no sales reported that day, the position is generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded.
Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by an independent pricing service.
Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value.
Exchange-traded options are generally valued at the last sale or official closing price as provided by an independent pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by an independent pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from an independent source.
Futures contracts are generally valued at last posted settlement price as provided by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by an independent pricing service on the market on which such futures contracts are primarily traded.
Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by an independent pricing service for proximate time periods.
Swaps are generally valued at valuations provided by an independent pricing service.
Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker/dealer bid quotation.
Values obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by an independent pricing service.
SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available certain programs designed to enable shareholders to add to or withdraw from their investment with applicable sales charges reduced or waived. These programs are generally described in the prospectus and additional details regarding certain of these programs are set forth below. These programs or waivers may be changed or discontinued by the Fund at any time without notice. Some of these programs and waivers may not be available to you if your shares are held through certain types of accounts, such as certain retirement accounts and 529 plans, or certain accounts that you maintain with your financial intermediary. You or your financial intermediary must inform MFSC of your intention to invest in the Fund under one of the programs below upon purchasing Fund shares. You can provide this information in your account application or through a separate document provided by your financial intermediary.
LETTER OF INTENT. Out of the shareholder's initial purchase (or subsequent purchases if necessary), 5% of the dollar amount specified in the Letter of Intent application shall be held in escrow by MFSC in the form of shares registered in the shareholder's name. All distributions on escrowed shares will be paid to the shareholder or to the shareholder's 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 minimum investment amount is not completed, MFSC will redeem an appropriate number of the escrowed shares in order to pay the higher sales charge level for the amount actually purchased. Shares remaining after any such redemption will be released by MFSC. By completing and signing the Account Application or separate Letter of Intent application, the shareholder irrevocably appoints MFSC his or her attorney to surrender for redemption any or all escrowed shares with full power of substitution in the premises.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). To initiate this service, shares having an aggregate value of at least $5,000 must be held on deposit by, or certificates for such shares must be deposited with, MFSC. MFSC may charge the account for services rendered and expenses incurred beyond those normally assumed by the Fund with respect to the redemption of shares. No charge is currently assessed against the account, but one could be instituted by MFSC on 60 days' notice in writing to the shareholder in the event that the Fund ceases to assume the cost of these services. The Fund may terminate any SWP for an account if the value of the account falls below $5,000 as a result of share redemptions (other than as a result of a SWP). Any SWP may be terminated at any time by either the shareholder or the Fund.
GROUP PURCHASES. A bona fide group and all its members may be treated at MFD's discretion as a single purchaser and, under the Right of Accumulation (but not the Letter of Intent), obtain quantity sales charge discounts on the purchase of Class A, Class A1, or 529A shares if the group (1) gives its endorsement or authorization to the investment program so that it may be used by the financial intermediary to facilitate solicitation of the membership, thus effecting economies of sales effort; (2) 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 financial intermediary, 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.
EXCHANGE PRIVILEGE
MONEY MARKET FUNDS
If you exchange your shares out of MFS Cash Reserve Fund, MFS Government Money Market Fund, or MFS Money Market Fund into Class A or Class 529A shares of any other MFS Fund, you will pay the initial sales charge, if applicable, if you have not already paid this charge on these shares. You will not pay the charge if:
o the shares exchanged from either Fund were acquired by an exchange from any other MFS Fund;
o the shares exchanged from either Fund were acquired by automatic investment of dividends from any other MFS Fund; or
o the shares being exchanged would have, at the time of purchase, been eligible for purchase at net asset value had you invested directly in the MFS Fund into which the exchange is being made.
MFS FIXED FUND. Class A, Class A1, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund held by certain qualified retirement plans may be exchanged for units of participation of the MFS Fixed Fund (the "Units"), and Units may be exchanged for Class A, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund (if the share purchase eligibility for these share classes is met). With respect to exchanges between Class C shares subject to a CDSC and Units, a shareholder will only be eligible to make the exchange if the CDSC would have been waived had the Class C shares been redeemed. With respect to exchanges between Class A and Class A1 shares and Units, shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares or Units will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged Fund and the original purchase date of the shares subject to the CDSC. In the event that a shareholder initially purchases Units and then exchanges into Class A shares subject to an initial sales charge of a MFS Fund, the initial sales charge shall be due upon such exchange, but will not be imposed with respect to any subsequent exchanges between such Class A and Class A1 shares and Units with respect to shares on which the initial sales charge has already been paid.
TELEPHONE EXCHANGES. No more than ten exchanges may be made in any one exchange request by telephone.
DESCRIPTION OF SHARES, VOTING RIGHTS, AND LIABILITIES
The Trust's Declaration of Trust, as amended or amended and restated from time
to time, permits the Trust's Board of Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) of each
series, 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, and to divide such shares into classes. The Board of Trustees
has reserved the right to create and issue additional series and classes of
shares and to classify or reclassify outstanding shares.
Each shareholder of the Fund is entitled to one vote for each dollar of net asset value (number of shares of the Fund owned times net asset value per share) of the Fund, on each matter on which the shareholder is entitled to vote. Each fractional dollar amount is entitled to a proportionate fractional vote. Except when a larger vote is required by applicable law, a majority of the voting power of the shares voted in person or by proxy on a matter will decide that matter and a plurality of the voting power of the shares voted in person or by proxy will elect a Trustee. Shareholders of all series of the Trust generally will vote together on all matters except when a particular matter affects only shareholders of a particular class or series or when applicable law requires shareholders to vote separately by series or class.
Except in limited circumstances, the Trustees may, without any shareholder vote, amend or otherwise supplement the Trust's Declaration of Trust. Each Trust except MFS Series Trust XII, or any series or class thereof, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets if authorized (either at a meeting or by written consent) by a Majority Shareholder Vote of the class, series, or trust, as applicable. MFS Series Trust XII, or any series or class of MFS Series Trust XII, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets without any shareholder vote to the extent permitted by law. Each Trust, or any series or class, may reincorporate or reorganize (but not with another operating entity) without any shareholder vote. The Trust, any series of the Trust, or any class of any series, may be terminated at any time by a vote of 1) a Majority Shareholder Vote, or 2) by the Trustees by written notice to the shareholders of that series or class.
The Trustees may cause a shareholder's shares to be redeemed for any reason under terms set by the Trustees, including, but not limited to, 1) to protect the tax status of a Fund, 2) the failure of a shareholder to provide a tax identification number if required to do so, 3) the failure of a shareholder to pay when due for the purchase of shares issued to the shareholder, 4) in order to eliminate accounts whose values are less than a minimum amount established by the Trustees, 5) the failure of a shareholder to meet or maintain the qualifications for ownership of a particular class of shares, and 6) to eliminate ownership of shares by a particular shareholder when the Trustees determine that the particular shareholder's ownership is not in the best interests of the other shareholders of the applicable Fund (for example, in the case of an alleged market timer). The exercise of the above powers is subject to any applicable provisions under the 1940 Act or the rules adopted thereunder.
Under the Declaration of Trust, the Fund may convert to a master/feeder structure or a fund of funds structure without shareholder approval. In a master/feeder structure, a Fund invests all of its assets in another investment company with similar investment objectives and policies. In a Fund of Funds structure, a Fund invests all or a portion of its assets in multiple investment companies.
The Trust is an entity 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 Trust also maintains insurance for the protection of the Trust and its shareholders and the Trustees, officers, employees, and agents of the Trust covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust, and that the Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust or other agreement with a Trustee protects a Trustee against any liability to which he or she would otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
The Trust's Declaration of Trust provides that shareholders may not bring suit on behalf of the fund without first requesting that the Trustees bring such suit unless there would be irreparable injury to the Fund or if a majority of the Trustees (or a majority of Trustees on any committee established to consider the merits of such action) have a personal financial interest in the action. Trustees are not considered to have a personal financial interest by virtue of being compensated for their services as Trustees or as trustees of Funds with the same or an affiliated investment adviser or distributor.
The Trust's Declaration of Trust provides that by becoming a shareholder of the Fund, each shareholder shall be expressly held to have assented to and agreed to be bound by the provisions of the Declaration of Trust.
PART II - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND
BACKGROUND
The Trustees and officers of the Trust, as of July 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(S) TRUSTEE/OFFICER DURING THE PAST FIVE YEARS
Robert J. Trustee April 2005; Massachusetts Financial
Manning(3) December 2004 - Services Company, Chief
(born 10/20/63) March 2005 Executive Officer,
(Advisory President, Chief
Trustee); Investment Officer and
February - Director
December 2004
(Trustee)
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Robert C. Pozen(3) Trustee April 2005; Massachusetts Financial
(born 8/8/46) December 2004 Services Company, Chairman
-March 2005 (since February 2004); MIT
(Advisory Sloan School (education),
Trustee); Senior Lecturer (since
February - 2006); Secretary of
December 2004 Economic Affairs, The
(Trustee) Commonwealth of
Massachusetts (January
2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to
December 2001); Fidelity
Management & Research
Company (investment
adviser), President (March
1997 to July 2001); Bell
Canada Enterprises
(telecommunications),
Director; Medtronic, Inc.
(medical technology),
Director; Telesat
(satellite
communications), Director
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INDEPENDENT TRUSTEES
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J. Atwood Ives Trustee and February 1992 Private investor; Eastern
Chair of Enterprises (diversified
(born 5/1/36) Trustees services company),
Chairman, Trustee and
Chief Executive Officer
(until November 2000)
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Robert E. Butler(4) Trustee January 2006 Consultant - regulatory
and compliance matters
(born 11/29/41) (since July 2002);
PricewaterhouseCoopers LLP
(professional services
firm), Partner (November
2000 until June 2002)
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Lawrence H. Cohn, Trustee August 1993 Brigham and Women's
M.D. Hospital, Chief of Cardiac
(born 3/11/37) Surgery (until 2005);
Harvard Medical School,
Professor of Cardiac
Surgery; Physician
Director of Medical Device
Technology for Partners
HealthCare
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David H. Gunning Trustee January 2004 Retired; Cleveland-Cliffs
Inc. (mining products and
(born 5/30/42) service provider), Vice
Chairman/Director (until
May 2007); Portman Limited
(mining), Director (since
2005); Encinitos Ventures
(private investment
company), Principal (1997
to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director
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William R. Gutow Trustee December 1993 Private investor and real
(born 9/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman; Atlantic
Coast Tan (tanning
salons), Vice Chairman
(since 2002)
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Michael Hegarty Trustee December 2004 Retired; AXA Financial
(financial services and
(born 12/21/44) insurance), Vice Chairman
and Chief Operating
Officer (until May 2001);
The Equitable Life
Assurance Society
(insurance), President and
Chief Operating Officer
(until May 2001)
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Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 6/23/35) (attorneys), Partner
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J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 9/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing
General Partner (since
1993); Cambridge
Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
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Laurie J. Thomsen Trustee March 2005 New Profit, Inc. (venture
(born 8/5/57) philanthropy), Partner
(since 2006); Private
investor; Prism Venture
Partners (venture
capital), Co-founder and
General Partner (until
June 2004); The Travelers
Companies (commercial
property liability
insurance), Director
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Robert W. Uek Trustee January 2006 Retired (since 1999);
(born 5/18/41) PricewaterhouseCoopers LLP
(professional services
firm), Partner (until
1999); Consultant to
investment company
industry (since 2000); TT
International Funds
(mutual fund complex),
Trustee (2000 until 2005);
Hillview Investment Trust
II Funds (mutual fund
complex), Trustee (2000
until 2005)
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Maria F. Dwyer(3) President November 2005 Massachusetts Financial
(born 12/1/58) Services Company,
Executive Vice President
and Chief Regulatory
Officer (since March 2004)
and Chief Compliance
Officer (since December
2006); Fidelity Management
& Research Company, Vice
President (prior to March
2004); Fidelity Group of
Funds, President and
Treasurer (prior to March
2004)
-------------------------------------------------------------------------------
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Tracy Atkinson(3) Treasurer September 2005 Massachusetts Financial
Services Company, Senior
(born 12/30/64) Vice President (since
September 2004);
PricewaterhouseCoopers
LLP, Partner (prior to
September 2004)
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Christopher R. Assistant July 2005 Massachusetts Financial
Bohane(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 1/18/74) Clerk Counsel (since April
2003); Kirkpatrick &
Lockhart LLP (law firm),
Associate (prior to April
2003)
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Ethan D. Corey(3) Assistant July 2005 Massachusetts Financial
Secretary and Services Company, Special
(born 11/21/63) Assistant Counsel (since December
Clerk 2004); Dechert LLP (law
firm), Counsel (prior to
December 2004)
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David L. Assistant July 2005 Massachusetts Financial
DiLorenzo(3) Treasurer Services Company, Vice
President (since June
(born 8/10/68) 2005); JP Morgan Investor
Services, Vice President
(prior to June 2005)
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Mark D. Fischer(3) Assistant July 2005 Massachusetts Financial
Treasurer Services Company, Vice
(born 10/27/70) President (since May
2005); JP Morgan
Investment Management
Company, Vice President
(prior to May 2005)
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Brian E. Assistant May 2006 Massachusetts Financial
Langenfeld(3) Secretary and Services Company,
Assistant Assistant Vice President
(born 3/7/73) Clerk and Counsel (since May
2006); John Hancock
Advisers, LLC, Assistant
Vice President and Counsel
(May 2005 to April 2006);
John Hancock Advisers,
LLC, Attorney and
Assistant Secretary (prior
to May 2005)
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Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial
(born 11/13/57) Treasurer Services Company, Senior
Vice President
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-------------------------------------------------------------------------------
Susan S. Newton(3) Assistant May 2005 Massachusetts Financial
Secretary and Services Company, Senior
(born 3/7/50) Assistant Vice President and
Clerk Associate General Counsel
(since April 2005); John
Hancock Advisers, LLC,
Senior Vice President,
Secretary and Chief Legal
Officer (prior to April
2005); John Hancock Group
of Funds, Senior Vice
President, Secretary and
Chief Legal Officer (prior
to April 2005)
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-------------------------------------------------------------------------------
Susan A. Assistant July 2005 Massachusetts Financial
Pereira(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 11/5/70) Clerk Counsel (since June 2004);
Bingham McCutchen LLP (law
firm), Associate (prior to
June 2004)
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-------------------------------------------------------------------------------
Mark N. Secretary and January 2006 Massachusetts Financial
Polebaum(3) Clerk Services Company,
Executive Vice President,
(born 5/1/52) General Counsel and
Secretary (since January
2006); Wilmer Cutler
Pickering Hale and Dorr
LLP (law firm), Partner
(prior to January 2006)
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Frank L. Tarantino Independent June 2004 Tarantino LLC (provider of
Chief compliance services),
(born 3/7/44) Compliance Principal (since June
Officer 2004); CRA Business
Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (prior to March
2003)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
James O. Yost(3) Assistant September 1990 Massachusetts Financial
(born 06/12/60) Treasurer Services Company, Senior
Vice President
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|
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each
Trustee has served continuously since appointment unless indicated
otherwise.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of the trust within the meaning of the Investment
Company Act of 1940 (referred to as the 1940 Act), which is the principal
federal law governing investment companies like the fund, as a result of
position with MFS. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
(4) In 2004 and 2005, Mr. Butler provided consulting services to the
independent compliance consultant retained by MFS pursuant to its
settlement with the SEC concerning market timing and related matters. The
terms of that settlement required that compensation and expenses related to
the independent compliance consultant be borne exclusively by MFS and,
therefore, MFS paid Mr. Butler for the services he rendered to the
independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a
total of $351,119.29.
The Trust held a shareholders' meeting in 2005 to elect Trustees, and will hold a shareholders' meeting at least once every five years thereafter, to elect Trustees. Each Trustee (except Messrs. Butler and Uek) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of July 1, 2007, the Trustees served as board members of 97 funds within the MFS Family of Funds.
PART II - APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
MARCH 1, 2007
Massachusetts Financial Services Company, MFS Institutional Advisors, Inc. and MFS' other investment adviser subsidiaries (collectively, "MFS") have adopted proxy voting policies and procedures, as set forth below ("MFS Proxy Voting Policies and Procedures"), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the registered investment companies sponsored by MFS, other than the MFS Union Standard Equity Fund (the "MFS Funds"). References to "clients" in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.
The MFS Proxy Voting Policies and Procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
A. VOTING GUIDELINES
1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST
MFS' policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS' clients, and not in the interests of any other party or in MFS' corporate interests, including interests such as the distribution of MFS Fund shares, administration of 401(k) plans, and institutional relationships.
MFS periodically reviews matters that are presented for shareholder vote by either management or shareholders of public companies. Based on the overall principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote. In all cases, MFS will exercise its discretion in voting on these matters in accordance with this overall principle. In other words, the underlying guidelines are simply that - guidelines. Proxy items of significance are often considered on a case-by-case basis, in light of all relevant facts and circumstances, and in certain cases MFS may vote proxies in a manner different from these guidelines.
As a general matter, MFS maintains a consistent voting position on similar proxy proposals with respect to various issuers. In addition, MFS generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts. However, MFS recognizes that there are gradations in certain types of proposals that might result in different voting positions being taken with respect to different proxy statements. There also may be situations involving matters presented for shareholder vote that are not governed by the guidelines. Some items that otherwise would be acceptable will be voted against the proponent when it is seeking extremely broad flexibility without offering a valid explanation. MFS reserves the right to override the guidelines with respect to a particular shareholder vote when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients.
From time to time, MFS receives comments on these guidelines as well as regarding particular voting issues from its clients. These comments are carefully considered by MFS when it reviews these guidelines each year and revises them as appropriate.
These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its affiliates that are likely to arise in connection with the voting of proxies on behalf of MFS' clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and E below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Voting Committee is responsible for monitoring and reporting with respect to such potential material conflicts of interest.
2. MFS' POLICY ON SPECIFIC ISSUES
ELECTION OF DIRECTORS
MFS believes that good governance should be based on a board with at least a simple majority of directors who are "independent" of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of "independent" directors. While MFS generally supports the board's nominees in uncontested elections, we will withhold our vote for, or vote against, as applicable, a nominee to a board of a U.S. issuer if, as a result of such nominee being elected to the board, the board would be comprised of a majority of members who are not "independent" or, alternatively, the compensation, nominating or audit committees would include members who are not "independent."
MFS will also withhold its vote for, or vote against, as applicable, a nominee to a board if we can determine that he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason stated in the proxy materials. In addition, MFS will withhold its vote for, or vote against, as applicable, all nominees standing for re-election to a board if we can determine: (1) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (2) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. Responsive action would include the rescission of the "poison pill"(without a broad reservation to reinstate the "poison pill" in the event of a hostile tender offer), or assurance in the proxy materials that the terms of the "poison pill" would be put to a binding shareholder vote within the next five to seven years.
MFS will also withhold its vote for, or vote against, as applicable, a nominee (other than a nominee who serves as the issuer's Chief Executive Officer) standing for re-election if such nominee participated (as a director or committee member) in the approval of a senior executive compensation package MFS deems to be "excessive." In the event that MFS determines that an issuer has adopted an "excessive" executive compensation package, MFS will withhold its vote for, or vote against, as applicable, the re-election of the issuer's Chief Executive Officer as director regardless of whether the Chief Executive Officer participated in the approval of the package. MFS will determine whether a senior executive compensation package is excessive on a case by case basis. Examples of "excessive" executive compensation packages include packages that contain egregious employment contract terms or pension payouts, backdated stock options, overly generous hiring bonuses for chief executive officers or packages which include excessive perks.
MFS evaluates a contested election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management's track record, the qualifications of the nominees for both slates and an evaluation of what each side is offering shareholders.
MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company's bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) ("Majority Vote Proposals").
MFS considers voting against Majority Vote Proposals if the company has adopted, or has proposed to adopt in the proxy statement, formal corporate governance principles that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast.
MFS believes that a company's election policy should address the specific circumstances at that company. MFS considers whether a company's election policy articulates the following elements to address each director nominee who fails to receive an affirmative majority of votes cast in an election:
o Establish guidelines for the process by which the company determines the status of nominees who fail to receive an affirmative majority of votes cast and disclose the guidelines in the annual proxy statement;
o Guidelines should include a reasonable timetable for resolution of the nominee's status and a requirement that the resolution be disclosed together with the reasons for the resolution;
o Vest management of the process in the company's independent directors, other than the nominee in question; and
o Outline the range of remedies that the independent directors may consider concerning the nominee.
CLASSIFIED BOARDS
MFS opposes proposals to classify a board (e.g., a board in which only one-third of board members are elected each year). MFS supports proposals to declassify a board.
NON-SALARY COMPENSATION PROGRAMS
MFS votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give "free rides" on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted.
MFS also opposes stock option programs that allow the board or the compensation committee, without shareholder approval, to reprice underwater options or to automatically replenish shares (i.e., evergreen plans). MFS will consider on a case-by-case basis proposals to exchange existing options for newly issued options (taking into account such factors as whether there is a reasonable value-for-value exchange).
MFS opposes stock option programs and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or could result in excessive dilution to other shareholders. As a general guideline, MFS votes against restricted stock plans, stock option, non-employee director, omnibus stock plans and any other stock plan if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS may accept a higher percentage (up to 20%) in the case of startup or small companies which cannot afford to pay large salaries to executives, or in the case where MFS, based upon the issuer's public disclosures, believes that the issuer has been responsible with respect to its recent compensation practices, including the mix of the issuance of restricted stock and options.
EXPENSING OF STOCK OPTIONS
MFS supports shareholder proposals to expense stock options because we believe that the expensing of options presents a more accurate picture of the company's financial results to investors. We also believe that companies are likely to be more disciplined when granting options if the value of stock options were treated as an expense item on the company's income statements.
EXECUTIVE COMPENSATION
MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. Therefore, except as provided in paragraph 2 above with respect to "excessive compensation" and the election of directors, MFS opposes shareholder proposals that seek to set restrictions on executive compensation. MFS also opposes shareholder requests for disclosure on executive compensation beyond regulatory requirements because we believe that current regulatory requirements for disclosure of executive compensation are appropriate and that additional disclosure is often unwarranted and costly. Although we support linking executive stock option grants to a company's performance, MFS opposes shareholder proposals that mandate a link of performance-based options to a specific industry or peer group stock index. MFS believes that compensation committees should retain the flexibility to propose the appropriate index or other criteria by which performance-based options should be measured.
MFS supports reasonably crafted shareholder proposals that (i) require the issuer to adopt a policy to recover the portion of performance-based bonuses and awards paid to senior executives that were not earned based upon a significant negative restatement of earnings unless the company already has adopted a clearly satisfactory policy on the matter, or (ii) expressly prohibit any future backdating of stock options.
EMPLOYEE STOCK PURCHASE PLANS
MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution.
"GOLDEN PARACHUTES"
From time to time, shareholders of companies have submitted proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer's annual compensation that is not determined in MFS' judgment to be excessive.
ANTI-TAKEOVER MEASURES
In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from "poison pills" and "shark repellents" to super-majority requirements.
MFS will vote for proposals to rescind existing "poison pills" and
proposals that would require shareholder approval to adopt prospective "poison
pills." Nevertheless, MFS will consider supporting the adoption of a
prospective "poison pill" or the continuation of an existing "poison pill" if we
can determine that the following two conditions are met: (1) the "poison pill"
allows MFS clients to hold an aggregate position of up to 15% of a company's
total voting securities (and of any class of voting securities); and (2) either
(a) the "poison pill" has a term of not longer than five years, provided that
MFS will consider voting in favor of the "poison pill" if the term does not
exceed seven years and the "poison pill" is linked to a business strategy or
purpose that MFS believes is likely to result in greater value for shareholders;
or (b) the terms of the "poison pill" allow MFS clients the opportunity to
accept a fairly structured and attractively priced tender offer (e.g., a
"chewable poison pill" that automatically dissolves in the event of an all cash,
all shares tender offer at a premium price).
MFS will consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer.
REINCORPORATION AND REORGANIZATION PROPOSALS
When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. While MFS generally votes in favor of management proposals that it believes are in the best long-term economic interests of its clients, MFS may oppose such a measure if, for example, the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers.
ISSUANCE OF STOCK
There are many legitimate reasons for the issuance of stock. Nevertheless, as noted above under "Non-Salary Compensation Programs," when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g. by approximately 15% or more), MFS generally votes against the plan. In addition, MFS votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a "blank check") because the unexplained authorization could work as a potential anti-takeover device. MFS may also vote against the authorization or issuance of common or preferred stock if MFS determines that the requested authorization is not warranted.
REPURCHASE PROGRAMS
MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders.
CONFIDENTIAL VOTING
MFS votes in favor of proposals to ensure that shareholder voting results are kept confidential. For example, MFS supports proposals that would prevent management from having access to shareholder voting information that is compiled by an independent proxy tabulation firm.
CUMULATIVE VOTING
MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS' clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company's nominating committee, which (for U.S. listed companies) must be comprised solely of "independent" directors.
WRITTEN CONSENT AND SPECIAL MEETINGS
Because the shareholder right to act by written consent (without calling a formal meeting of shareholders) can be a powerful tool for shareholders, MFS generally opposes proposals that would prevent shareholders from taking action without a formal meeting or would take away a shareholder's right to call a special meeting of company shareholders.
INDEPENDENT AUDITORS
MFS believes that the appointment of auditors for U.S. issuers is best left to the board of directors of the company and therefore supports the ratification of the board's selection of an auditor for the company. Some shareholder groups have submitted proposals to limit the non-audit activities of a company's audit firm or prohibit any non-audit services by a company's auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company's auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company's auditor for specific pieces of non-audit work in the limited situations permitted under current law.
OTHER CORPORATE GOVERNANCE, CORPORATE RESPONSIBILITY AND SOCIAL ISSUES
There are many groups advocating social change or changes to corporate governance or corporate responsibility standards, and many have chosen the publicly-held corporation as a vehicle for advancing their agenda. Generally, MFS votes with management on such proposals unless MFS can determine that the benefit to shareholders will outweigh any costs or disruptions to the business if the proposal were adopted. Common among the shareholder proposals that MFS generally votes against are proposals requiring the company to use corporate resources to further a particular social objective outside the business of the company, to refrain from investing or conducting business in certain countries, to adhere to some list of goals or principles (e.g., environmental standards), to disclose political contributions made by the issuer, to separate the Chairman and Chief Executive Officer positions, or to promulgate special reports on various activities or proposals for which no discernible shareholder economic advantage is evident.
The laws of various states may regulate how the interests of certain clients subject to those laws (e.g., state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients.
FOREIGN ISSUERS
Many of the items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted in favor) for foreign issuers include the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; and (v) approval of share repurchase programs.
MFS generally supports the election of a director nominee standing for re-election in uncontested elections unless it can be determined that (1) he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason given in the proxy materials; (2) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (3) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. MFS will also withhold its vote for, or vote against, as applicable, a director nominee standing for re-election of an issuer that has adopted an excessive compensation package for its senior executives as described above in the section entitled "Voting Guidelines-MFS' Policy on Specific Issues-Election of Directors."
MFS generally supports the election of auditors, but may determine to vote against the election of a statutory auditor in certain markets if MFS reasonably believes that the statutory auditor is not truly independent. MFS will evaluate all other items on proxies for foreign companies in the context of the guidelines described above, but will generally vote against an item if there is not sufficient information disclosed in order to make an informed voting decision.
In accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting ("share blocking"). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior to the meeting (e.g., one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the "block" restriction lifted early (e.g., in some countries shares generally can be "unblocked" up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer's transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY VOTING COMMITTEE
The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The MFS Proxy Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable;
b. Determines whether any potential material conflicts of interest exist with respect to instances in which (i) MFS seeks to override these MFS Proxy Voting Policies and Procedures and (ii) votes on ballot items not clearly governed by these MFS Proxy Voting Policies and Procedures; and
c. Considers special proxy issues as they may arise from time to time.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its affiliates that could arise in connection with the voting of proxies on behalf of MFS' clients. Any significant attempt to influence MFS' voting on a particular proxy matter should be reported to the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, or (ii) matters presented for vote are not governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy Voting Committee, or delegees, will follow these procedures:
a. Compare the name of the issuer of such proxy against a list of significant current and potential (i) distributors of MFS Fund shares, (ii) retirement plans administered by MFS or its affiliate MFS Retirement Services, Inc. ("RSI"), and (iii) MFS institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee;
c. If the name of the issuer appears on the MFS Significant Client List, then the MFS Proxy Voting Committee will be apprised of that fact and each member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS' clients, and not in MFS' corporate interests; and
d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer's relationship to MFS, the analysis of the matters submitted for proxy vote, the votes as to be cast and the reasons why the MFS Proxy Voting Committee determined that the votes were cast in the best long-term economic interests of MFS' clients, and not in MFS' corporate interests. A copy of the foregoing documentation will be provided to MFS' Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS' distribution, institutional business units and RSI. The MFS Significant Client List will be reviewed and updated periodically, as appropriate.
3. GATHERING PROXIES
Most proxies received by MFS and its clients originate at Automatic Data Processing Corp. ("ADP") although a few proxies are transmitted to investors by corporate issuers through their custodians or depositories. ADP and issuers send proxies and related material directly to the record holders of the shares beneficially owned by MFS' clients, usually to the client's custodian or, less commonly, to the client itself. This material will include proxy cards, reflecting the shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy statements with the issuer's explanation of the items to be voted upon.
MFS, on behalf of itself and the Funds, has entered into an agreement with an independent proxy administration firm, Institutional Shareholder Services, Inc. (the "Proxy Administrator"), pursuant to which the Proxy Administrator performs various proxy vote related administrative services, such as vote processing and recordkeeping functions for MFS' Funds and institutional client accounts. The Proxy Administrator receives proxy statements and proxy cards directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator's system by an MFS holdings datafeed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for all upcoming shareholders' meetings are available on-line to certain MFS employees and the MFS Proxy Voting Committee.
4. ANALYZING PROXIES
Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator at the prior direction of MFS automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by the MFS Proxy Voting Committee. With respect to proxy matters that require the particular exercise of discretion or judgment, MFS considers and votes on those proxy matters. MFS receives research from ISS which it may take into account in deciding how to vote. In addition, MFS expects to rely on ISS to identify circumstances in which a board may have approved excessive executive compensation. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have little or no involvement in specific votes taken by MFS. This is designed to promote consistency in the application of MFS' voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g., corporate actions, such as mergers and acquisitions), a representative of the MFS Proxy Voting Committee may consult with or seek recommendations from portfolio managers or analysts.(1) However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted.
(1) From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst is not available to provide a recommendation on a merger or acquisition proposal. If such a recommendation cannot be obtained prior to the cut-off date of the shareholder meeting, certain members of the MFS Proxy Voting Committee may determine to abstain from voting.
As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients. Any such override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies.
5. VOTING PROXIES
In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy Voting Committee to monitor the proxy voting process. When proxy materials for clients are received, they are forwarded to the Proxy Administrator and are input into the Proxy Administrator's system. Through an interface with the portfolio holdings database of MFS, the Proxy Administrator matches a list of all MFS Funds and clients who hold shares of a company's stock and the number of shares held on the record date with the Proxy Administrator's listing of any upcoming shareholder's meeting of that company.
When the Proxy Administrator's system "tickler" shows that the voting cut-off date of a shareholders' meeting is approaching, a Proxy Administrator representative checks that the vote for MFS Funds and clients holding that security has been recorded in the computer system. If a proxy card has not been received from the client's custodian, the Proxy Administrator calls the custodian requesting that the materials be forwarded immediately. If it is not possible to receive the proxy card from the custodian in time to be voted at the meeting, MFS may instruct the custodian to cast the vote in the manner specified and to mail the proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy cards completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator's system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company's proxy issues, are retained as required by applicable law.
E. REPORTS
MFS FUNDS
MFS will report the results of its voting to the Board of Trustees,
Board of Directors and Board of Managers of the MFS Funds. These reports will
include: (i) a summary of how votes were cast; (ii) a review of situations where
MFS did not vote in accordance with the guidelines and the rationale therefore;
(iii) a review of the procedures used by MFS to identify material conflicts of
interest; and (iv) a review of these policies and the guidelines and, as
necessary or appropriate, any proposed modifications thereto to reflect new
developments in corporate governance and other issues. Based on these reviews,
the Trustees, Directors and Managers of the MFS Funds will consider possible
modifications to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party other than the client or its representatives (unless required by applicable law) because we consider that information to be confidential and proprietary to the client.
MFS UNION STANDARD EQUITY FUND
INSTITUTIONAL SHAREHOLDERS SERVICES TAFT-HARTLEY ADVISORY SERVICES
PROXY VOTING GUIDELINES AND PROCEDURES
The Taft-Hartley Advisory Services Voting Policy is based upon the AFL-CIO Proxy Voting Guidelines, which comply with all the fiduciary standards delineated by the U.S. Department of Labor.
INTRODUCTION
Taft-Hartley client accounts are governed by the Employee Retirement Income Security Act (ERISA). ERISA sets forth the tenets under which pension fund assets must be managed and invested. Proxy voting rights have been declared by the Department of Labor to be valuable plan assets and therefore must be exercised in accordance with the fiduciary duties of loyalty and prudence. The duty of loyalty requires that the voting fiduciary exercise proxy voting authority solely in the economic interest of participants and plan beneficiaries. The duty of prudence requires that decisions be made based on financial criteria and that a clear process exists for evaluating proxy issues.
The Taft-Hartley Advisory Services voting policy was carefully crafted to meet those requirements by promoting long-term shareholder value, emphasizing the "economic best interests" of plan participants and beneficiaries. Taft-Hartley Advisory Services will assess the short-term and long-term impact of a vote and will promote a position that is consistent with the long-term economic best interests of plan members embodied in the principle of a "worker-owner view of value."
Our guidelines address a broad range of issues, including election of directors, executive compensation, proxy contests, auditor ratification, and tender offer defenses - all significant voting items that affect long-term shareholder value. In addition, these guidelines delve deeper into workplace issues that may have an impact on corporate performance, including:
o Corporate policies that affect job security and wage levels;
o Corporate policies that affect local economic development and stability;
o Corporate responsibility to employees and communities; and
o Workplace safety and health issues.
All votes will be reviewed on a case-by-case basis, and no issues will be considered strictly routine. Each issue will be considered in the context of the company under review. In other words, proxy voting guidelines are just that - guidelines. When company-specific factors are taken into account, every proxy voting decision becomes a case-by-case decision. Keeping in mind the concept that no issue is considered "routine", outlined in the following pages are general voting parameters for various types of proxy voting issues (when there are no company-specific reasons for voting to the contrary).
I) BOARD OF DIRECTORS PROPOSALS
Electing directors is the single most important stock ownership right that shareholders can exercise. The board of directors is responsible for holding management accountable to performance standards on behalf of the shareholders. Taft-Hartley Advisory Services holds directors to a high standard when voting on their election, qualifications, and compensation.
Votes on entire board of directors take into account factors that include:
o Company performance relative to its peers;
o Lack of independence of the full board and key board committees (fully
independent audit, compensation, and nominating committees);
o Board diversity;
o Executive compensation-related (excessive salaries/bonuses/pensions, stock
option repricing, misallocation of corporate funds, etc.);
o Failure of board to respond to majority shareholder votes;
o Poor long-term corporate performance record relative to peer, S&P 500 or
Russell 3000 Indices.
Votes on individual director nominees are made on a case-by-case basis, taking into account factors that include:
o Poor attendance;
o Lack of a board that is at least two-thirds (67 percent) independent;
Independence of the key board committees (audit, compensation, and
nominating);
o Performance of the key board committees;
o Failure to establish key board committees; and
o Interlocking and excessive directorships.
NON-INDEPENDENT CHAIRMAN: A principal function of the board is to monitor management, and a fundamental responsibility of the chairman is to monitor the company's CEO. This duty is obviously compromised when the chairman is the CEO. Approximately 60 percent of companies in both the S&P 500 and Russell 3000 have joint chairman and CEO positions. A McKinsey survey of board members at 500 U.S. companies found that nearly 70 percent of directors polled said a CEO should not run the board. As executive compensation is heavily correlated to the managerial power relationship in the boardroom, the separation of the CEO and chairman positions is a critical step in curtailing excessive pay. Indeed, a number of academic studies have demonstrated that executive compensation is twenty to forty percent higher if the CEO is also the chairman of the board. We WITHHOLD votes from non-independent directors who serve as board chairs, and vote FOR proposals calling for non-executive directors who are not former CEOs or senior-level executives to serve as chairman.
INDEPENDENT DIRECTORS: Taft-Hartley Advisory Services believes that a board independent of management is of critical value to safeguard a company and its shareholders. Board independence helps ensure that directors carry out their duties in an objective manner and without manager interference to select, monitor, and compensate management. We will cast votes in a manner consistent with supporting and reinforcing this philosophy. Independence is evaluated upon factors including: past or current employment with the company or its subsidiaries; the provision of consulting services; familial relationships; board interlocks; and service with a non-profit that receives contributions from the company. We vote FOR proposals that request that the board comprise of a two-thirds majority of independent directors, and/or its audit, compensation, and nominating committees be comprised wholly of independent directors. We WITHHOLD votes from non-independent director nominees on boards that are not at least two-thirds (67 percent) independent.
BOARD STRUCTURE: Taft-Hartley Advisory Services supports the principle that all directors should be accountable to shareholder vote on an annual basis. A classified board is a board divided into separate classes (typically three), with only one class of nominees coming up to vote at the annual meeting each year. As a result, shareholders are only able to vote a single director approximately once every three years. A classified board makes it difficult to change control of the board through a proxy contest because typically only one-third of the seats will be at stake. The ultimate result is that classified boards can entrench management and preclude most takeover bids or proxy contests. Good corporate governance practice supports annually elected boards. We vote AGAINST classified boards when the issue comes up for vote.
BOARD AND COMMITTEE SIZE: While there is no hard and fast rule among institutional investors as to what may be an optimal size board, Taft-Hartley Advisory Services believes there is an acceptable range which companies should strive to meet and not exceed. A board that is too large may function inefficiently. Conversely, a board that is too small may allow the CEO to exert disproportionate influence or may stretch the time requirements of individual directors too thin. Given that the preponderance of boards in the U.S. range between five and fifteen directors, we believe this is a useful benchmark for evaluating such proposals. We vote AGAINST any proposal seeking to amend the company's board size to fewer than five seats or more than fifteen seats. On a CASE-BY-CASE basis, we consider WITHHOLDS or other action at companies that have fewer than five directors and more than 15 directors on their board.
FINANCIAL PERFORMANCE TEST FOR BOARDS: Taft-Hartley Advisory Services believes that long-term financial performance should be considered when determining vote recommendations with regard to directors in uncontested elections. When evaluating whether to withhold votes against director nominees, we will look at the company's response to the ongoing performance issues, and consider several factors, including performance improvement in the current year, changes in management or board composition, recent transactions at the company, overall governance practices, particularly any recent changes, and the financial health of the company.
PROPOSALS ON BOARD INCLUSIVENESS: Taft-Hartley Advisory Services votes FOR shareholder proposals asking a company to make efforts to seek more women and minority group members for service on the board. A more diverse group of directors benefits shareholders and the company.
MAJORITY THRESHOLD VOTING REQUIREMENT FOR DIRECTOR ELECTIONS: Taft-Hartley fiduciaries believe shareholders should have a greater voice in regard to the election of directors and view majority threshold voting as a viable alternative to the current deficiencies of the plurality system in the U.S. Shareholders have expressed strong support for resolutions on majority threshold voting. Taft-Hartley Advisory Services supports proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors, provided the proposal includes a carve-out for a plurality voting standard in contested director elections.
CUMULATIVE VOTING: Under a cumulative voting scheme, shareholders are permitted to have one vote per share for each director to be elected and may apportion these votes among the director candidates in any manner they wish. This voting method allows minority shareholders to influence the outcome of director contests by "cumulating" their votes for one nominee, thereby creating a measure of independence from management control. Taft-Hartley Advisory Services votes FOR proposals to allow cumulative voting and votes AGAINST proposals to eliminate it.
POISON PILLS: Shareholder rights plans, more commonly known as poison pills, are warrants issued to shareholders allowing them to purchase shares from the company at a price far below market value when a certain ownership threshold has been reached, thereby effectively preventing a takeover. Poison pills can entrench management and give the board veto power over takeover bids, thereby altering the balance of power between shareholders and management. While we evaluate poison pills on a case-by-case basis depending on a company's particular set of circumstances, Taft-Hartley Advisory Services generally votes FOR proposals to submit a company's poison pill to shareholder vote and/or eliminate or redeem poison pills. We WITHHOLD votes from boards where a dead-hand poison pill provision is in place. From a shareholder perspective, there is no justification for a dead-hand provision.
II) CAPITAL STRUCTURE
INCREASE AUTHORIZED COMMON STOCK: Corporations seek shareholder approval to increase their supply of common stock for a variety of business reasons. We vote FOR proposals to increase authorized common stock when management has provided a specific justification for the increase, evaluating proposals on a case-by-case basis. We believe that an increase of up to 50 percent is enough to allow a company to meet its capital needs. We vote AGAINST proposals to increase an authorization by more than 50 percent unless management provides compelling reasons for the increase.
DUAL CLASS STRUCTURES: Taft-Hartley Advisory Services does not support dual share class structures. Incumbent management can use a dual class structure to gain unequal voting rights. A separate class of shares with superior voting rights can allow management to concentrate its power and insulate itself from the majority of its shareholders. An additional drawback is the added cost and complication of maintaining the two class system. We will vote FOR a one share, one vote capital structure, and we will vote AGAINST the creation or continuation of dual class structures.
III) RATIFYING AUDITORS
Ratifying auditors is no longer a routine procedure. Accounting scandals at companies such as Enron and WorldCom underscore the need to ensure auditor independence in the face of selling consulting services to audit clients. A study by Richard Frankel, Marilyn Johnson, and Karen Nelson found that the ratio of non-audit fees to total fees paid is negatively associated with stock market returns on the filing date, indicating that investors associate non-audit fees "with lower quality audits and, by implication, lower quality earnings." This study also found that companies that pay high non-audit fees are more likely to engage in earnings management.
Auditors are the backbone upon which a company's financial health is measured, and auditor independence is essential for rendering objective opinions upon which investors then rely. When an auditor is paid more in consulting fees than for auditing, its relationship with the company is left open to conflicts of interest. Because accounting scandals evaporate shareholder value, any proposal to ratify auditors is examined for potential conflicts of interest, with particular attention to the fees paid to the auditor, as well as whether the ratification of auditors has been put up for shareholder vote. Failure by a company to present its selection of auditors for shareholder ratification should be discouraged as it undermines good governance and disenfranchises shareholders.
We vote AGAINST ratification of a company's auditor if it receives more than one-quarter of its total fees for consulting and WITHHOLD votes from Audit Committee members when auditor ratification is not included on the proxy ballot and/or when consulting fees exceed audit fees. We support shareholder proposals to ensure auditor independence and effect mandatory auditor ratification.
IV) MERGERS, ACQUISITIONS, AND TRANSACTIONS
Taft-Hartley Advisory Services votes for corporate transactions that take the high road to competitiveness and company growth. Taft-Hartley Advisory Services believes that structuring merging companies to build long-term relationships with a stable and quality work force and preserving good jobs creates long-term company value. We oppose corporate transactions which indiscriminately layoff workers and shed valuable competitive resources.
Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis, taking into account the following factors:
o Impact on shareholder value;
o Changes in corporate governance and their impact on shareholder rights;
o Fairness opinion (or lack thereof);
o Offer price (cost vs. premium);
o Form and mix of payment (i.e. stock, cash, debt, etc.);
o Change-in-control payments to executive officers;
o Perspective of ownership (target vs. acquirer) in the deal;
o Fundamental value drivers behind the deal;
o Anticipated financial and operating benefits realizable through
combined synergies;
o Financial viability of the combined companies as a single entity;
o What are the potential legal or environmental liability risks associated
with the target firm?;
o Impact on community stakeholders and employees in both workforces;
o How will the merger adversely affect employee benefits like pensions and
health care?
REINCORPORATION: Taft-Hartley Advisory Services reviews proposals to change a company's state of incorporation on a case-by-case basis. We vote FOR proposals to reincorporate in another state when the company has provided satisfactory business reasons and there is no significant reduction in shareholder rights. We vote AGAINST proposals to reincorporate that reduce shareholder rights. In cases of offshore reincorporations to tax havens, among other factors, we evaluate the effect upon any and all legal recourse of shareholders in a new jurisdiction, potential harm to company brands and image, and any actual, qualified economic benefit.
V) EXECUTIVE COMPENSATION
STOCK OPTION PLANS: Taft-Hartley Advisory Services supports compensating executives at a reasonable rate and believes that executive compensation should be strongly correlated to performance. Stock option and other forms of compensation should be performance-based with an eye toward improving shareholder value. Well-designed stock option plans align the interests of executives and shareholders by providing that executives benefit when stock prices rise as the company-- and shareholders-- prosper together.
Many plans sponsored by management provide goals so easily attained that executives can realize massive rewards even though shareholder value is not necessarily created. Stock options that are awarded selectively and excessively can dilute shareholders' share value and voting power. In general, Taft-Hartley Advisory Services supports plans that are offered at fair terms to executives who satisfy well-defined performance goals. We evaluate option plans on a case-by-case basis, taking into consideration factors including: offer price, dilution to outstanding share value, dilution to share voting power, stock option expensing, annual burn rate, executive concentration ratios, pay-for-performance and the presence of any repricing provisions. We support plans that retain tax deductibility through the use of performance goals and oppose plans whose award size exceeds the tax deduction limit.
Taft-Hartley Advisory Services votes FOR option plans that provide legitimately challenging performance targets that truly motivate executives in the pursuit of excellent performance. Likewise, we vote AGAINST plans that offer unreasonable benefits to executives that are not available to any other shareholders.
POOR COMPENSATION PRACTICES: Poor disclosure, the absence or non-transparency of disclosure and poor plan design of compensation payouts lead to excessive executive compensation practices that are detrimental to shareholders. Poorly designed plans or those lacking in transparency can be reflective of a poorly performing compensation committee or board. Taft-Hartley Advisory Services will consider WITHHOLDING votes from compensation committee members and/or the CEO on a CASE-BY-CASE basis if the company has poor compensation practices. In addition, we may consider recommending a WITHHOLD from the entire board if the whole board was involved in and contributed to egregious compensation.
PROPOSALS TO LIMIT EXECUTIVE AND DIRECTOR PAY: Taft-Hartley Advisory Services votes FOR shareholder proposals that seek additional disclosure of executive and director pay information. We vote FOR shareholder proposals that seek to eliminate outside directors' retirement benefits. We review on a case-by-case basis all other shareholder proposals that seek to limit executive and director pay. This includes shareholder proposals that seek to link executive compensation to customer, employee, or stakeholder satisfaction.
GOLDEN PARACHUTES: golden parachutes are designed to protect the senior level employees of a corporation in the event of a change-in-control. Under most golden parachute agreements, senior level management employees receive a lump sum pay-out triggered by a change-in-control at usually two to three times base salary. These severance agreements grant extremely generous benefits to well-paid executives and most often offer no value to shareholders. Taft-Hartley Advisory Services votes FOR shareholder proposals to have all golden parachute agreements submitted for shareholder ratification, and we generally vote AGAINST all proposals to ratify golden parachutes.
OPTIONS BACKDATING: Options backdating has serious implications and has resulted in financial restatements, delisting of companies, and/or the termination of executives or directors. When options backdating has taken place, Taft-Hartley Advisory Services may consider WITHHOLDING votes from the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. We adopt a CASE-BY-CASE approach to the options backdating issue to differentiate companies that had sloppy administration vs. those that had committed fraud, as well as those companies that have since taken corrective action. Instances in which companies have committed fraud are more disconcerting, and Taft-Hartley Advisory Services will look to them to adopt formal policies to ensure that such practices will not re-occur in the future.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS): Taft-Hartley Advisory Services generally votes FOR ESOPs which allow a company's employees to acquire stock in the company at a slight discount. Such plans help link employees' self-interest to the interests of the shareholders, thereby benefiting the company, its customers, and shareholders and creating long-term company value.
VI) SOCIAL AND ENVIRONMENTAL ISSUES Increasingly, shareholders are presenting proposals related to company environmental practices, workplace practices, social issues and sustainability goals. Taft-Hartley Advisory Services provides specific narrative explanations for votes on these types of shareholder proposals. Taft-Hartley Advisory Services evaluates shareholder proposals on a case-by-case basis to determine if they are in the best economic interests of the plan participants and beneficiaries. Taft-Hartley Advisory Services' clients select investment strategies and criteria for their portfolios. Taft-Hartley Advisory Services views its responsibility to protect plan beneficiary economic interests through the use of the proxy. To meet this obligation, Taft-Hartley Advisory Services votes consistent with the economic best interests of the participants and beneficiaries to create "high road" shareholder and economic value.
In most cases, Taft-Hartley Advisory Services supports proposals that request management to report to shareholders information and practices that would help in evaluating the company's operations. In order to be able to intelligently monitor their investments, shareholders often need information best provided by the company itself. Taft-Hartley Advisory Services supports proposals that seek management compliance with shareholder interests to ensure that shareholders are fully informed about actions harmful to society with special attention to the company's legal and ethical obligations, impact on company profitability, and the potential negative publicity for disreputable practices.
CERES PRINCIPLES: The CERES Principles, formulated by the Coalition of Environmentally Responsible Economies, require signing companies to address environmental issues, including protection of the biosphere, sustainable use of natural resources, reduction and disposal of wastes, energy conservation, and employee and community risk reduction. Evidence suggests that environmentally conscious companies may realize long-term savings by implementing programs to pollute less and conserve resources while realizing good public relations and new marketing opportunities. Moreover, the reports that are required of signing companies provide shareholders with more information concerning topics they may deem relevant to their company's financial well-being.
Many companies have voluntarily adopted these principles and proven that environmental sensitivity makes good business sense. Taft-Hartley Advisory Services supports proposals that improve a company's public image, reduce exposure to liabilities, and establish standards so that environmentally responsible companies and markets are not at a competitive financial disadvantage. Taft-Hartley Advisory Services votes FOR the adoption of the CERES Principles and FOR reporting to shareholders on environmental issues.
CORPORATE CONDUCT, HUMAN RIGHTS, AND LABOR CODES: Taft-Hartley Advisory Services generally supports proposals that call for the adoption and/or enforcement of clear principles or codes of conduct relating to countries in which there are systematic violations of human rights. These conditions include the use of slave, child, or prison labor, undemocratically elected governments, widespread reports by human rights advocates, fervent pro-democracy protests, and/or economic sanctions and boycotts.
Many proposals refer to the seven core conventions, commonly referred to as the "Declaration on Fundamental Principles and Rights At Work," ratified by the International Labor Organization (ILO). The seven conventions fall under four broad categories: i) Right to organize and bargain collectively; ii) Non-discrimination in employment; iii) Abolition of forced labor; and iv) End of child labor. Each of the 180 member nations of the ILO body are bound to respect and promote these rights to the best of their abilities. Taft-Hartley Advisory Services supports the principles and codes of conduct relating to company investment in countries with patterns of human rights abuses (Northern Ireland, Columbia, Burma, former Soviet Union, and China). Taft-Hartley Advisory Services votes FOR proposals to implement and report on ILO codes of conduct.
PART II - APPENDIX C
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which the initial sales charge (ISC) and/or the CDSC is waived for the MFS funds' share classes. Some of the following information will not apply to certain funds, depending on which classes of shares are offered by the funds. In order to qualify for a sales charge waiver, you must advise MFS that you are eligible for the waiver at the time of purchase and/or redemption. The funds, MFS, and their affiliates reserve the right to eliminate, modify, and add waivers at any time at their discretion.
In addition, transfers, rollovers or other transactions from one account to the same class of the same fund of another account otherwise subject to a CDSC or an ISC will not be charged a CDSC or ISC so long as each account is held in your name or for your benefit (either individually or collectively) by MFSC or an affiliate. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the fund in the first account and the original purchase date of the shares subject to the CDSC.
As used in this Appendix C, the term "ESP" includes employer sponsored plans, the term "SRO" includes salary reduction only plans, and the term "ERISA" refers to the Employment Retirement Income Security Act of 1974, as amended.
In this appendix, all references to Class A Shares shall apply to Class A1 Shares and all references to Class B Shares shall apply to Class B1 Shares.
RETIREMENT PLANS:
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SALES CHARGE WAIVED
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WAIVER CATEGORY CLASS A CLASS A CLASS B CLASS C
ISC CDSC CDSC CDSC
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1. WAIVERS FOR SERVICED PLANS
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o To the extent that redemption proceeds are used V V V
to pay expenses (or certain participant expenses)
of the 401(a) or ESP Plan (e.g., participant
account fees).
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o Shares purchased or redeemed representing V V V V
transfers from, or transfers to, plan investments
other than the MFS funds.
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o Shares acquired pursuant to repayments by V V V V
retirement plan participants of loans from 401(a)
or ESP Plans.
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o By a retirement plan which established an account V
with MFSC on or after July 1, 1996, but before
January 1, 2003 (provided that the plan
establishment paperwork is received by MFSC in good
order on or before December 31, 2002).
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o Transfers from a single account maintained for a V V V
401(a) Plan to multiple accounts maintained by MFSC
on behalf of individual participants of such Plan.
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o All Serviced Plans. V V
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o Transfers due to the eligibility of a Serviced V V V V
Plan to move its investment into a new share class
under certain eligibility criteria established from
time to time by MFD (sales charges waived may vary
depending upon the criteria established by MFD).
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o Transfer or rollover to MFS Prototype IRA from a V V V V
Serviced Plan.
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o Reinvestment of Redemption Proceeds from Class B V V
Shares:
o Shares acquired by a retirement plan whose
account application was received by MFD on or
prior to March 30, 2001 where the purchase
represents the immediate reinvestment of
proceeds from the plan's redemption of its
Class B shares of the MFS funds and is equal to
or exceeds $500,000, either alone or in
aggregate with the current market value of the
plan's existing Class A shares; or
o Shares acquired by a retirement plan whose
account application was received by MFD on or
after April 2, 2001 and before December 31,
2002 where the purchase represents the
immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the
MFS funds and is equal to or exceeds
$1,000,000, either alone or in aggregate with
current market value of the plan's existing
Class A shares.
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2. WAIVERS FOR NON- SERVICED PLANS ("TA PLANS")
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A. 401(A) PLANS AND ESP PLANS
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o Where the retirement plan and/or sponsoring V V
organization demonstrates to the satisfaction of,
and certifies to, MFSC that the retirement plan (or
multiple plans maintained by the same plan sponsor)
has, at the time of certification or will have
pursuant to a purchase order placed with the
certification, a market value of $500,000 or more
(applies only when the certification was received
by MFSC on or prior to March 30, 2001) or
$1,000,000 or more (applies only when the
certification is received by MFSC on or after April
2, 2001), invested in shares of any class or
classes of the MFS funds and aggregate assets of at
least $10 million; provided, however, that the CDSC
will not be waived (i.e., it will be imposed) (a)
with respect to plans which establish an account
with MFSC on or after November 1, 1997, in the
event that the plan makes a complete redemption of
all of its shares in the MFS Family of funds, or
(b) with respect to plans which establish an
account with MFSC prior to November 1, 1997, in the
event that there is a change in law or regulations
which result in a material adverse change to the
tax advantaged nature of the plan, or in the event
that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated
under ERISA or is liquidated or dissolved; or (iii)
is acquired by, merged into, or consolidated with
any other entity.
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o Investment in Class A shares by certain V(1)
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1997 and December 31, 1999;
o The plan records are maintained on a pooled
basis by MFSC; and
o The sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of
purchase, the employer has at least 200
eligible employees and the plan has aggregate
assets of at least $2,000,000.
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3. WAIVERS FOR BOTH SERVICED PLANS AND TA PLANS
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A. BENEFIT RESPONSIVE WAIVERS
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o Distributions made from an IRA or a 403(b) SRO V V V
pursuant to Section 72(t) of the Internal Revenue
Code of 1986, as amended.
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o Death, disability or retirement of 401(a) or ESP V V V
Plan participant, or death or disability of IRA
owner, SRO Plan Participant or SAR-SEP Plan
Participant.
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o Eligible participant distributions, such as V V V
distributions due to death, disability, financial
hardship, retirement and termination of employment
from Serviced Plans and nonqualified deferred
compensation plans (excluding, however, a
termination of a plan).
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o Loan from 401(a) or ESP Plan. V V V
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o Financial hardship (as defined in Treasury V V V
Regulation Section 1.401(k)-l(d)(2), as amended
from time to time) for 401(a) Plans and ESP Plans.
-----------------------------------------------------------------------------------------------------
o Termination of employment of 401(a) or ESP Plan V V V
participant (excluding, however, a termination of
the Plan).
-----------------------------------------------------------------------------------------------------
o Tax-free return of excess 401(a) Plan, ESP Plan V V V
or IRA contributions.
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o Distributions from a 401(a) or ESP Plan that has V V V
invested its assets in one or more of the MFS funds
for more than 10 years from the later to occur of
(i) January 1, 1993 or (ii) the date such 401(a) or
ESP Plan first invests its assets in one or more of
the MFS funds. The sales charges will be waived in
the case of a redemption of all of the 401(a) or
ESP Plan's shares in all MFS funds (i.e., all the
assets of the 401(a) or ESP Plan invested in the
MFS funds are withdrawn), unless immediately prior
to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS funds
(excluding the reinvestment of distributions)
during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets
in the MFS funds, in which case the sales charges
will not be waived.
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o Distributions made on or after the IRA owner, ESP V
participant, SRO Plan participant or 401(a) Plan
participant has attained the age of 591/2 years old.
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o Certain involuntary redemptions and redemptions V V V
in connection with certain automatic withdrawals
from a 401(a) Plan.
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o Distributions made on or after the IRA owner or V V V
the 401(a), ESP, SRO or SAR-SEP Plan participant,
as applicable, has attained the age of 701/2 years
old, but only with respect to the minimum
distribution under Code rules.
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o Investments in Class A shares by certain V(1)
retirement plans subject to ERISA, if, prior to
July 1, 1996,
o The plan had established an account with MFSC;
and
o The sponsoring organization had demonstrated to
the satisfaction of MFD that either:
o The employer had at least 25 employees; or
o The total purchases by the retirement plan of
Class A shares of the MFS funds would be in the
amount of at least $250,000 within a reasonable
period of time, as determined by MFD in its
sole discretion.
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o Investments in Class A shares by certain V(1 )
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1996 and March 30, 2001;
o The plan has, at the time of purchase, either
alone or in aggregate with other plans
maintained by the same plan sponsor, a market
value of $500,000 or more invested in shares of
any class or classes of the MFS funds; and
o The retirement plans will qualify under this
category only if the plans or their sponsoring
organization informs MFSC prior to the
purchases that the plans have a market value of
$500,000 or more invested in shares of any
class or classes of the MFS funds; MFSC has no
obligation independently to determine whether
such plans qualify under this category.
-----------------------------------------------------------------------------------------------------
B. CERTAIN TRANSFERS OF REGISTRATION
-----------------------------------------------------------------------------------------------------
o Transfers to an IRA rollover account where any V V V
sales charges with respect to the shares being
reregistered would have been waived had they been
redeemed.
-----------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan is, at that time, a V V
party to a retirement plan recordkeeping or
administrative services agreement with MFD or one
of its affiliates pursuant to which certain of
those services are provided by Benefit Services
Corporation or any successor service provider
designated by MFD.
-----------------------------------------------------------------------------------------------------
o Where the retirement plan has established an V V
account with MFSC on or after January 1, 2000, and
is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement
with MFD or one of its affiliates pursuant to which
such services are provided with respect to at least
$10 million in plan assets.
-----------------------------------------------------------------------------------------------------
o Shares acquired by retirement plans or trust V V
accounts whose financial intermediaries have
entered into an administrative services agreement
with MFD or one of its affiliates to perform
certain administrative services, subject to certain
operational and minimum size requirements specified
from time to time by MFD or one or more of its
affiliates.
-----------------------------------------------------------------------------------------------------
1 Purchases of Class A shares are not subject to an initial sales charge; however, a
CDSC of 1% will be deducted from redemption proceeds if the redemption is made within
12 months of purchase.
|
WAIVERS FOR 529 TUITION PROGRAMS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS 529A CLASS 529B CLASS 529C
ISC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. CERTAIN SPONSORED PLANS
---------------------------------------------------------------------------------------------------------
o Shares acquired on behalf of a group, association or V V V
employer sponsored plan, pursuant to guidelines created by
MFD from time to time.
---------------------------------------------------------------------------------------------------------
B. INVESTMENT PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS
A, CLASS B AND CLASS C SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases of Class V V V
529A shares, and the CDSC imposed on certain redemptions
of Class A, Class B and Class C shares, are waived where
Class 529A, Class 529B and Class 529C shares are acquired
following the reinvestment of the proceeds of a redemption
of Class A, Class B and Class C shares, respectively, of
the same fund; provided however, that any applicable CDSC
liability on the Class B or Class C shares redeemed will
carry over to the Class 529B or Class 529C shares acquired
and for purposes of calculating the CDSC, the length of
time you have owned your Class 529B or Class 529C shares
will be measured from the date of original purchase of the
Class B or Class C shares redeemed.
---------------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by 529 tuition programs whose sponsors V
or administrators have entered into an administrative
services agreement with MFD or one of its affiliates to
perform certain administrative or investment advisory
services subject to certain operational and minimum size
requirements specified from time to time by MFD or one or
more of its affiliates.
---------------------------------------------------------------------------------------------------------
D. QUALIFIED HIGHER EDUCATION EXPENSES
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the redemption proceeds are used V V
to pay for qualified higher education expenses, which may
include tuition, fees, books, supplies, equipment and room
and board (see the program description for further
information on qualified higher education expenses);
however the CDSC will not be waived for redemptions where
the proceeds are transferred or rolled over to another
tuition program.
---------------------------------------------------------------------------------------------------------
E. SCHOLARSHIP
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the account beneficiary has V V
received a scholarship, up to the amount of the
scholarship.
---------------------------------------------------------------------------------------------------------
F. DEATH OF 529 PLAN BENEFICIARY
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the death of the 529 plan V V
account beneficiary if the shares were held solely for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
GENERAL WAIVERS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
CLASS A/529A CLASS A CLASS B/529B CLASS C/529C
WAIVER CATEGORY ISC CDSC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. DIVIDEND REINVESTMENT
---------------------------------------------------------------------------------------------------------
o Shares acquired through dividend or capital V V V V
gain reinvestment.
---------------------------------------------------------------------------------------------------------
o Shares acquired by automatic reinvestment of V V V V
distributions of dividends and capital gains of
any fund in the MFS funds pursuant to the
Distribution Investment Program.
---------------------------------------------------------------------------------------------------------
B. AFFILIATES OF A MFS FUND/CERTAIN FINANCIAL
ADVISERS
---------------------------------------------------------------------------------------------------------
o Shares acquired by officers, eligible V V V V
directors, employees (including former
employees) and agents of MFS, Sun Life, or any
of their subsidiary companies.
---------------------------------------------------------------------------------------------------------
o Shares acquired by trustees and retired V V V V
trustees of any investment company for which
MFD serves as distributor.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees, directors, V V V V
partners, officers and trustees of any
subadviser to any MFS fund.
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain family members of V V V V
any such individual identified above and their
spouses (or legal equivalent under applicable
state law), and certain trusts, pension,
profit-sharing or other retirement plans for
the sole benefit of such persons, provided the
shares are not resold except to the MFS fund
which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees or registered V V V V
representatives (including former employees) of
financial intermediaries or an employee's
spouse (or legal equivalent under applicable
state law) or employee's children under the age
of 21. For employees or registered
representatives of financial intermediaries who
established an account with MFS prior to May 1,
2006, shares acquired by certain family
members of employees or registered
representatives of financial intermediaries and
their spouses (or legal equivalent under
applicable state law), and certain trusts,
pension, profit-sharing or other retirement
plans for the sole benefit of such persons,
provided the shares are not resold except to
the MFS Fund which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by institutional clients of V V V V
MFS or MFS Institutional Advisors, Inc.
---------------------------------------------------------------------------------------------------------
C. INVOLUNTARY REDEMPTIONS
---------------------------------------------------------------------------------------------------------
o Shares redeemed at a MFS fund's direction due V V V
to the small size of a shareholder's account.
---------------------------------------------------------------------------------------------------------
D. BANK TRUST DEPARTMENTS AND LAW FIRMS
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain bank trust V V
departments or law firms acting as trustee or
manager for trust accounts which have entered
into an administrative services agreement with
MFD and are acquiring such shares for the
benefit of their trust account clients.
---------------------------------------------------------------------------------------------------------
E. INVESTMENT OF PROCEEDS FROM CERTAIN
REDEMPTIONS OF CLASS I SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases V V
of Class A or Class 529A shares and the
contingent deferred sales charge imposed on
certain redemptions of Class A shares, are
waived with respect to Class A or Class 529A
shares acquired of any of the MFS funds through
the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS
funds.
---------------------------------------------------------------------------------------------------------
F. SYSTEMATIC WITHDRAWALS
---------------------------------------------------------------------------------------------------------
o Systematic withdrawals with respect to up to V V
10% per year of the account value (with respect
to Class B and Class 529B shares, determined at
the time of your first withdrawal under the
plan(s) or January 1, 2007, whichever is later
and reset annually thereafter and with respect
to Class C and Class 529 C shares, determined
at the time the plan is established).
---------------------------------------------------------------------------------------------------------
G. DEATH OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on the account of the death V V V
of the account owner (e.g., shares redeemed by
the estate or any transferee of the shares from
the estate) if the shares were held solely in
the deceased individual's name, or for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
H. DISABILITY OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the disability V V
of the account owner if shares are held either
solely or jointly in the disabled individual's
name in a living trust for the benefit of the
disabled individual (in which case a disability
certification form is required to be submitted
to MFSC), or shares redeemed on account of the
disability of the 529 account beneficiary.
---------------------------------------------------------------------------------------------------------
I. WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by investments through V V
certain dealers (including registered
investment advisers and financial planners)
which have established certain operational
arrangements with MFD which include a
requirement that such shares be sold for the
sole benefit of clients participating in a
"wrap" account, mutual fund "supermarket"
account or a similar program under which such
clients pay a fee to such dealer.
---------------------------------------------------------------------------------------------------------
J. INSURANCE COMPANY SEPARATE ACCOUNTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by insurance company separate V V
accounts.
---------------------------------------------------------------------------------------------------------
K. NO COMMISSIONS PAID
---------------------------------------------------------------------------------------------------------
o Shares redeemed where MFD has not paid an up
front commission with respect to the sale of
the shares, provided that such arrangement V V V
meets certain conditions established by MFD
from time to time.
---------------------------------------------------------------------------------------------------------
L. MISCELLANEOUS
---------------------------------------------------------------------------------------------------------
o In connection with settlements reached V
between certain broker/dealers and the NASD,
SEC, and/or other regulatory bodies regarding
sales of Class B and Class C shares in excess
of certain dollar thresholds, the funds will,
at times, permit shareholders who are clients
of these firms to redeem Class B and Class C
shares of the fund and concurrently purchase
Class A shares without paying an initial sales
charge.
---------------------------------------------------------------------------------------------------------
|
PART II - APPENDIX D
FINANCIAL INTERMEDIARY COMPENSATION
Financial intermediaries receive various forms of compensation in connection
with the sale of shares of a Fund and/or the servicing of shareholder accounts.
Financial intermediaries may receive such compensation (i) in the form of
upfront commissions and ongoing asset-based compensation paid by MFD based on
sales charges received and expected to be received by MFD from shareholders, and
Rule 12b-1 ("Distribution Plan") distribution and service payments received by
MFD from the Funds, (ii) in the form of 529 administrative services payments,
retirement plan administrative and service payments, and shareholder servicing
payments paid by MFD and/or one or more of its affiliates (for purposes of this
section only, collectively, "MFD") based on the receipt of such payments by MFD
from the Funds, and (iii) in the form of payments paid from MFD's own additional
resources. In addition, financial intermediaries may benefit from payments made
to other entities for consulting, research, or analytical services.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. The amount of compensation that MFD pays to a financial intermediary can be significant. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular Fund or share class or to recommend MFS Funds instead of other funds that do not pay such compensation or that pay lower amounts of compensation. For calendar year 2006, gross sales of MFS Funds through financial intermediaries who received such compensation from MFD represented 74% of total gross sales of MFS Funds.
Financial intermediaries may charge you additional fees and/or commissions. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries may categorize and disclose these arrangements differently than MFD does. Financial intermediaries that sell Fund shares may also act as a broker or dealer in connection with a MFS Fund's purchase or sale of portfolio securities. However, the Funds and MFS do not consider financial intermediaries' sale of shares of a MFS Fund as a factor when choosing brokers or dealers to effect portfolio transactions for the MFS Funds.
COMMISSIONS AND DISTRIBUTION PLAN PAYMENTS
Class A, Class A1, Class 529A, and Class J Shares - General Provisions
For purchases of Class A, Class A1, Class 529A and Class J shares subject to an initial sales charge, MFD generally pays a portion of the initial sales charge to financial intermediaries as an upfront commission of up to the following amounts:
EQUITY/ASSET ALLOCATION/TOTAL RETURN FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 5.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 4.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
SHORT-TERM BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 2.25%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 2.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 1.75%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 1.50%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.25%
-------------------------------------------------------------------------------
|
The difference between the total amount invested and the sum of (a) the net proceeds to the Funds and (b) the financial intermediary commission, is the amount of the initial sales charge retained by MFD. Because of rounding in the computation of offering price, the portion of the sales charge retained by MFD may vary and the total sales charge may be more or less than the sales charge calculated using the sales charge expressed as a percentage of the offering price or as a percentage of the net amount invested as listed in the Prospectus. From time to time, MFD may pay financial intermediaries up to 100% of the applicable initial sales charge of Class A, Class A1, Class 529A and Class J shares of certain specified Funds sold by financial intermediaries during a specified sales period. In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares. Also, at the discretion of MFD, MFD may pay certain financial intermediaries some or all of the Distribution Plan distribution fee payments of up to 0.10% annually of the average daily net assets of the class with respect to such shares.
Class 529A-Specific Provisions
Except as noted below, for purchases of Class 529A shares not subject to an initial sales charge on or after April 1, 2007, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $10,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $10,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class 529A shares not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class 529A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares not subject to an initial sales charge, MFD may pay financial intermediaries an upfront commission of up to the following:
--------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
--------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
--------------------------------------------------------------------------------
Over $25,000,000 0.25%
--------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares by employer sponsored or payroll deduction 529 plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class A and Class A1-Specific Provisions Effective For Purchases on or After April 1, 2007
Except as noted below, for purchases of Class A and Class A1 shares not subject to an initial sales charge on or after April 1, 2007, by retirement plans (other than Serviced Plans and plans for which Heritage Trust serves as a trustee) that are held by MFSC at the plan or omnibus level ("Investment-Only Retirement Plans"), MFD will generally pay financial intermediaries no upfront commission, but financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases of Class A and Class A1 shares by Investment-Only Retirement Plans not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
Except as noted below, for purchases of Class A and Class A1 shares on or after April 1, 2007, by accounts other than Investment-Only Retirement Plans and Serviced Plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $10,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $10,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 (or with respect to purchases pursuant to a letter of intent signed prior to April 1, 2007) of Class A and Class A1 shares not subject to an initial sales charge other than by Serviced Plans, MFD may pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established prior to April 1, 2001 (including sales to plans for which account establishment paperwork was received in good order by MFD on or prior to March 31, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $2,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $2,000,000 to $3,000,000 plus 0.80%
-------------------------------------------------------------------------------
Over $3,000,000 to $50,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $50,000,000 0.25%
-------------------------------------------------------------------------------
|
Except for Serviced Plans described below, for purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's new investment in Class A and Class A1 shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over a 12-month period (commencing from the date of the first such purchase).
In the case of Serviced Plans whose account establishment paperwork was received in good order after December 31, 1999, purchases prior to April 1, 2007 will be aggregated as described above but the cumulative purchase amount will not be re-set after the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established on or after April 1, 2001 (including, sales to plans for which account establishment paperwork was received in good order by MFD on or after April 1, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class A shares and Class A1, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase except for purchases by Serviced Plans that trade through Princeton Retirement Group for which financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class B, Class B1 and Class 529B Shares
Except as noted below, for purchases of Class B, Class B1 and Class 529B shares, MFD will generally pay an upfront commission to financial intermediaries of up to 3.75% of the amount purchased through such financial intermediaries. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B, Class B1 and Class 529B shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan for which account establishment paperwork was received in good order by MFD between July 1, 1996 and December 31, 1998, MFD will generally pay an upfront commission to financial intermediaries equal to 2.75% of the amount of Class B and Class B1 shares purchased through such financial intermediary. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B and Class B1 shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan which established its account with MFSC between January 1, 1999, and December 31, 2002 (i.e., plan establishment paperwork is received by MFSC in good order by December 31, 2002) and certain other retirement plans as determined by MFD from time to time, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee). This commission structure is not available with respect to a plan with a pre-existing account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper Plus product.
Class C and Class 529C Shares
Except as noted below, for purchases of Class C and Class 529C shares, MFD will generally pay an upfront commission to financial intermediaries of up to 1% of the amount of Class C and Class 529C shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan distribution fee payment of up to 0.75% and some or all of the Distribution Plan service fee payment of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class C shares by Serviced Plans established between January 1, 2003 and March 31, 2005 (i.e., plan establishment paperwork is received by MFSC in good order on or after January 1, 2003), MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee).
For purchases of Class C shares by an Alliance Plan, MFD will pay upfront commissions or asset-based compensation to financial intermediaries under either option discussed above, at the financial intermediary's discretion.
Class R, Class R1, Class R2, Class R3 and Class R4 Shares
Except as noted below, for purchases of the following R share classes, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to the following rates annually of the average daily net assets of the Funds attributable to plan assets (of which up to 0.25% consists of the Distribution Plan service fee), as follows:
------------------------------------------------------------------------------- Class Annual Rate ------------------------------------------------------------------------------- Class R1 0.75% ------------------------------------------------------------------------------- Class R, Class R2, Class R3 0.50% ------------------------------------------------------------------------------- Class R4 0.25% ------------------------------------------------------------------------------- |
In addition, MFD may pay financial intermediaries who sell Class R4 shares an upfront commission of up to 0.25% of up to $25 million of a Serviced Plan's initial investment. MFD generally will not pay financial intermediaries receiving this upfront commission an upfront commission with respect to any subsequent sale of Class R4 shares (subject to MFD waiving this limitation from time to time).
For purchases of Class R shares prior to April 1, 2007 by a Serviced Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to the following:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
-------------------------------------------------------------------------------
|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class R shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class R shares prior to April 1, 2007 by an Alliance Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to 0.60% of the amount of Class R shares purchased through such financial intermediary.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
529 ADMINISTRATIVE SERVICES FEES, RETIREMENT PLAN ADMINISTRATIVE AND SERVICES FEES, AND SHAREHOLDER SERVICING PAYMENTS
Financial intermediaries may receive all or a portion of the following payments: 529 administrative services fees as described in "Management of the Fund - Program Manager"; retirement plan administrative and service fees as described in "Management of the Fund - Administrator"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
OTHER MFD PAYMENTS
Financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS Funds, to cooperate with MFD's promotional efforts, and/or in recognition of their marketing, administrative services, and/or processing support. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary, and the quality of the overall relationship with the financial intermediary.
MFD may make marketing support and/or administrative services payments to financial intermediaries that sell Fund shares or provide services to MFD, the Funds or shareholders of the Funds through the financial intermediary's retail distribution channel and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition to the opportunity to participate in a financial intermediary's retail distribution channel or program, payments may include one or more of the following: business planning assistance; educating financial intermediary personnel about the various MFS Funds; assistance with Fund shareholder financial planning; placement on the financial intermediary's preferred or recommended fund list; access to sales representatives and management representatives of the financial intermediary; administrative and account maintenance services.; participant or shareholder record-keeping; reporting or transaction processing; program administration; fund/investment selection and monitoring; enrollment; and education. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
MFD may make payments to certain financial intermediaries that sell Fund shares to help offset the financial intermediaries' costs associated with client account maintenance support, statement preparation, and transaction processing. The types of payments that MFD may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a financial intermediary, payment of networking fees of up to $6 per shareholder account maintained on certain mutual fund trading systems, or one-time payments for ancillary services such as setting up funds on a financial intermediary's mutual fund trading system.
NASD Member Broker/Dealers Receiving Such Payments from MFD's Own Additional Resources
Set forth below is a list of the member firms of the NASD to which MFD expects as of June 4, 2007 to make such payments from its own additional resources with respect to the Funds. Payments may also be made to affiliates of these firms. Any additions, modifications, or deletions to the broker/dealers identified in this list that have occurred since June 4, 2007 are not reflected. In addition to member firms of the NASD, MFD also makes such payments to other financial intermediaries that sell or provide services to the Funds and shareholders, such as banks, insurance companies, and plan administrators. These firms are not included in this list and may include affiliates of MFD. You should ask your financial intermediary if it receives such payments from MFD.
INTERMEDIARY FIRM NAME: INTERMEDIARY FIRM NAME: 401(K) Investment Services, Inc. Linsco/Private Ledger Corp. AG Edwards & Sons, Inc. Merrill Lynch, Pierce, Fenner & Smith Inc. ADP Broker-Dealer, Inc. Metlife Securities Inc. AIG Financial Advisors, Inc. Mid-Atlantic Securities, Inc. Ameriprise Financial Services, Inc. Morgan Stanley DW Inc. American General Securities Incorporated MSCS Financial Services, LLC Bear, Stearns Securities Corp Multi Financial Services, Inc. Becker & Suffern, LTD. Northwestern Mutual Investment Services Charles Schwab & Co., Inc. Paychex Securities Corporation Chase Investment Services Corp. Piper Jaffray & Co. Citigroup Global Markets Inc. Primevest Financial Services, Inc. Clark Securities, Inc. Princor Financial Services Corporation Commonwealth Financial Network Prudential Investment Management Services LLC CUNA Brokerage Services, Inc. Raymond James & Associates, Inc. Fidelity Brokerage Services LLC Raymond James Financial Services, Inc. Financial Network Investment Corp. RBC Dain Rauscher Inc. H.D. Vest Investment Services State Street Global Markets, LLC Hewitt Financial Services LLC SunTrust Investment Services, Inc. ICMA - RC Services, LLC UBS Financial Services Inc. IFMG Securities, Inc. Wachovia Securities, LLC ING Financial Partners, Inc. Wells Fargo Investments LLC Legg Mason Investor Services, LLC |
From time to time, MFD, from MFD's own additional resources, may make additional payments to financial intermediaries that sell or provide services in connection with the sale of MFS Fund shares or the servicing of shareholder accounts. Such payments by MFD may include payment or reimbursement to, or on behalf of, financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and events, and other sponsored events, and travel expenses, including lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting, retention, and due diligence trips. Other compensation may be offered, including goodwill payments relating to servicing, to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. MFD makes payments for entertainment events it deems appropriate, subject to MFD's policies and applicable law. These payments may vary depending upon the nature of the event.
PART II - APPENDIX E
INVESTMENT STRATEGIES AND RISKS
In addition to the principal investment strategies and the principal risks described in the prospectus, your Fund may employ other investment practices and may be subject to other risks, which are described below. Because the following is a combined description of the investment strategies and risks for all MFS Funds, certain matters described herein may not apply to your Fund.
ASSET-BACKED SECURITIES. Asset-backed securities are securities that represent a participation in, or are secured by and payable from, pools of underlying assets such as debt securities, bank loans, motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (i.e., credit card) agreements and other receivables. These underlying assets are securitized through the use of trusts and special purpose entities. Payment of interest and repayment of principal on asset-backed securities may be largely dependent upon the cash flows generated by the underlying assets backing the securities and, in certain cases, may be supported by letters of credit, surety bonds, or other credit enhancements.
Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate, as a result of the pass-through of prepayments of principal on the underlying assets. The rate of principal payments on asset-backed securities is related to the rate of principal payments on the underlying asset pool and related to the priority of payment of the security with respect to the asset pool. The occurrence of prepayments is a function of several factors, such as the level of interest rates, general economic conditions, the location, and age of the underlying obligations, asset default and recovery rates, and other social and demographic conditions. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, asset-backed securities may have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
The credit quality of asset-backed securities depends primarily on the quality of the underlying assets, the level of credit enhancement, if any, provided for the securities, and the credit quality of the credit-support provider, if any. The value of asset-backed securities may be affected by the various factors described above and other factors, such as changes in interest rates, the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets, or the entities providing the credit enhancement. Because asset-backed securities may not have the benefit of a security interest in the underlying assets that is comparable to a mortgage, asset-backed securities present certain additional risks that are not present with mortgage-backed securities.
BORROWING. If the Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage and may cause a Fund to liquidate investments when it would not otherwise do so. Money borrowed will be subject to interest charges and may be subject to other fees or requirements which would increase the cost of borrowing above the stated interest rate.
COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, or other securities that may be converted into or exchanged for (by the holder or by the issuer) shares of stock (or cash or other securities of equivalent value) of the same or a different issuer at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at prices above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
COUNTRY LOCATION. The issuer of a security or other investment is generally
deemed to be economically tied to a particular country if: (a) the security or
other investment is issued or guaranteed by the government of that country or
any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; (e) the issuer has 50% or more of its assets in that
country; (f) the issuer is included in an index which is representative of that
country; or (g) the issuer is exposed to the economic fortunes and risks of that
country.
DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs, EDRs, or GDRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and may be offered privately in the United States and are generally designed for use in securities markets outside the U.S. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders.
With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and financial information to the depositary receipt holders at the underlying issuer's request.
Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
EMERGING MARKETS. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign markets. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; the risk that a judgment against a foreign government may be unenforceable; and greater price volatility, less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, depository receipts for those securities, securities of investment companies, and other similar interests in an issuer.
FOREIGN CURRENCIES. Foreign securities may be denominated in foreign currencies and international currency units and foreign currencies may be purchased directly. Accordingly, the weakening of these currencies and units against the U.S. dollar would result in a decline in the value of securities denominated in that currency or the value of the currency itself.
While holding currencies permits an investor to take advantage of favorable movements in the applicable exchange rate, this strategy also exposes the investor to risk of loss if exchange rates move in a direction adverse to the investor's position. Such losses could reduce any profits or increase any losses sustained by the investor from the sale or redemption of securities and could reduce the dollar value of interest or dividend payments received.
Some foreign countries have managed currencies, which are not free floating against the U.S. dollar. Managed currencies can experience a steep devaluation relative to the U.S. dollar.
In addition, there is risk that certain foreign countries may restrict the free conversion of their currencies into other currencies. Further, certain currencies may not be internationally traded.
Foreign currency transactions can be made on a spot (i.e., cash) or forward basis (i.e., by entering into forward contracts to purchase or sell foreign currencies). Although foreign exchange dealers generally do not charge a fee for such conversions, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency at one rate, while offering a lesser rate of exchange should the counterparty desire to resell that currency to the dealer. Forward contracts are customized transactions that require a specific amount of a currency to be delivered at a specific exchange rate on a specific date or range of dates in the future. Forward contracts are generally traded in an interbank market directly between currency traders (usually large commercial banks) and their customers. The parties to a forward contract may agree to offset or terminate the contract before its maturity, or may hold the contract to maturity and complete the contemplated currency exchange.
A "settlement hedge" or "transaction hedge" attempts to protect against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. Forward contracts to purchase or sell a foreign currency may also be used in anticipation of future purchases or sales of securities denominated in foreign currency, even if the specific investments have not yet been selected.
Forward contracts can be used to hedge against a decline in the value of existing investments denominated in foreign currency. For example, if an investor owned securities denominated in pounds sterling, the investor could enter into a forward contract to sell pounds sterling in return for U.S. dollars to hedge against possible declines in the pound's value. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. An investor could also hedge the position by selling another currency expected to perform similarly to the pound sterling. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Forward contracts can also be used to shift investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if a Fund had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases.
Swap agreements, indexed securities, hybrid securities and options and futures contracts relating to foreign currencies can be used for the same purposes.
Successful use of currency management strategies will depend on MFS' skill in analyzing currency values. Currency management strategies may increase the volatility of a Fund's returns and could result in significant losses to a Fund if currencies do not perform as MFS anticipates. For example, if a currency's value rose at a time when MFS had hedged a Fund by selling that currency in exchange for dollars, a Fund would not participate in the currency's appreciation. If MFS hedges currency exposure through proxy hedges, a Fund could realize currency losses from both the hedge and the security position if the two currencies do not move in tandem. Similarly, if MFS increases a Fund's exposure to a foreign currency and that currency's value declines, a Fund will realize a loss. There is no assurance that MFS' use of currency management strategies will be advantageous to a Fund or that it will hedge at appropriate times.
FOREIGN MARKETS. Foreign securities and foreign currencies, as well as any securities issued by U.S. entities with substantial foreign operations, may involve significant risks in addition to the risks inherent in U.S. investments. Foreign investments involve risks relating to local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars, or other government intervention. The debt instruments of foreign governments and their agencies and instrumentalities may or may not be supported by the full faith and credit of the foreign government. Additionally, governmental issuers of foreign debt securities may be unwilling to pay interest and repay principal when due and may require that the conditions for payment be renegotiated. In addition, the value of securities denominated in foreign currencies and of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar.
Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading, settlement and custodial practices (including those involving securities settlement where Fund assets may be released prior to receipt of payment) are often less developed than those in U.S. markets, and may result in increased risk or substantial delays in the event of a failed trade or the insolvency of, or breach of duty by, a foreign broker-dealer, securities depository, or foreign subcustodian. In addition, the costs associated with foreign investments, including withholding taxes, brokerage commissions, and custodial costs, are generally higher than with U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers. Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated. Regulatory enforcement may be influenced by economic or political concerns, and investors may have difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions.
FUTURES CONTRACTS. A futures contract is a standardized agreement between two parties to buy or sell in the future a specific quantity of an asset, currency, interest rate, index, instrument or other indicator at a specific price and time. The value of a futures contract typically fluctuates in correlation with the increase or decrease in the value of the underlying indicator. The buyer of a futures contract enters into an agreement to purchase the underlying indicator on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying indicator on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying indicator or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. In the case of physically settled futures, it may not be possible to liquidate or close out the futures contract at any particular time or at an acceptable price. Other financial futures contracts (such as those relating to interest rates, foreign currencies and securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying indicator unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market."
The risk of loss in trading futures contracts can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. Thus, a purchase or sale of a futures contract may result in unlimited losses. In the event of adverse price movements, an investor would continue to be required to make daily cash payments to maintain its required margin. In addition, on the settlement date, an investor may be required to make delivery of the indicators underlying the futures positions it holds.
An investor could suffer losses if it is unable to close out a futures contract because of an illiquid secondary market. Futures contracts may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures position, and an investor would remain obligated to meet margin requirements until the position is closed. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment.
An investor could lose margin payments it has deposited with its futures commission merchant (FCM), if, for example, the FCM breaches its agreement with the investor or becomes insolvent or goes into bankruptcy. In that event, the investor may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the investor.
If MFS attempts to use a futures contract as a hedge against, or as a substitute for, a portfolio investment, the futures position may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Pursuant to a claim of exemption filed with the Commodity Futures Trading Commission (CFTC) on behalf of the MFS Funds that are permitted by their investment objectives and policies to use futures and options on futures contracts, each such MFS Fund is not deemed to be a "commodity pool" or "commodity pool operator" under the Commodity Exchange Act and is not subject to registration or regulation as such under the Commodity Exchange Act.
HYBRID INSTRUMENTS. Hybrid instruments are generally considered derivatives and combine the elements of swaps, futures contracts, or options with those of debt, preferred equity or a depository instrument. A hybrid instrument may be a debt instrument, preferred stock, warrant, convertible security, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, commodities, indexes, economic factors or other measures, including interest rates, currency exchange rates, or commodities or securities indices, or other indicators (collectively, "indicators").
The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, swaps, options, futures and currencies. An investment in a hybrid instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published benchmark. The risks of a particular hybrid instrument will depend upon the terms of the instrument, but may include the possibility of significant changes in the benchmark(s) or the prices of the underlying indicators to which the instrument is linked. Such risks generally depend upon factors unrelated to the operations or credit quality of the issuer of the hybrid instrument, which may not be foreseen by the purchaser, such as economic and political events, the supply and demand of the underlying indicators and interest rate movements. Hybrid instruments may be highly volatile.
Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular hybrid instrument, changes in a benchmark, underlying asset or indicator may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument. Also, the prices of the hybrid instrument and the benchmark, underlying asset or indicator may not move in the same direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, hybrid instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain). The latter scenario may result if "leverage" is used to structure the hybrid instrument. Leverage risk occurs when the hybrid instrument is structured so that a given change in a benchmark or underlying indicator is multiplied to produce a greater value change in the hybrid instrument, thereby magnifying the risk of loss as well as the potential for gain.
If MFS attempts to use a hybrid instrument as a hedge against, or as a substitute for, a portfolio investment, the hybrid instrument may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving hybrid instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Hybrid instruments may also carry liquidity risk since the instruments are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt instruments. Under certain conditions, the redemption value of such an investment could be zero. In addition, because the purchase and sale of hybrid investments could take place in an over-the-counter market without the guarantee of a central clearing organization, or in a transaction between the Fund and the issuer of the hybrid instrument, hybrid instruments are subject to the creditworthiness of the issuer of the hybrid instrument, and their values may decline substantially if the issuer's creditworthiness deteriorates. Hybrid instruments also may not be subject to regulation by the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.
INFLATION-INDEXED BONDS. Inflation-indexed bonds are debt instruments whose principal value is adjusted periodically according to a rate of inflation (usually a consumer price index). Two structures are most common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the inflation accruals as part of a semiannual coupon.
U.S. Treasury Inflation Protected Securities (TIPS) currently are issued with maturities of five, ten, or thirty years, although it is possible that securities with other maturities will be issued in the future. The principal amount of TIPS adjusts for inflation, although the inflation-adjusted principal is not paid until maturity. Semi-annual coupon payments are determined as a fixed percentage of the inflation-adjusted principal at the time the payment is made.
If the rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. At maturity, TIPS are redeemed at the greater of their inflation-adjusted principal or at the par amount at original issue. If an inflation-indexed bond does not provide a guarantee of principal at maturity, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. For example, if inflation were to rise at a faster rate than nominal interest rates, real interest rates would likely decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates would likely rise, leading to a decrease in value of inflation-indexed bonds.
While these securities, if held to maturity, are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If nominal interest rates rise due to reasons other than inflation (for example, due to an expansion of non-inflationary economic activity), investors in these securities may not be protected to the extent that the increase in rates is not reflected in the bond's inflation measure.
The inflation adjustment of TIPS is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of price changes in the cost of living, made up of components such as housing, food, transportation, and energy. There can be no assurance that the CPI-U will accurately measure the real rate of inflation in the prices of goods and services.
INVERSE FLOATING RATE OBLIGATIONS. Inverse floating rate obligations have variable interest rates that typically move in the opposite direction from movements in prevailing interest rates, most often short-term rates. Accordingly, the value of inverse floating rate obligations or other obligations or certificates structured to have similar features generally moves in the opposite direction as interest rates. The value of an inverse floating rate instrument can be considerably more volatile than the value of other debt instruments of comparable maturity and quality. Inverse floating rate obligations incorporate varying degrees of leverage. Generally, greater leverage results in greater price volatility for any given change in interest rates. Inverse floating rate obligations may be subject to legal or contractual restrictions on resale and therefore may be less liquid than other types of securities.
LENDING OF PORTFOLIO SECURITIES. Portfolio securities will be lent to qualified investors such as member firms of the New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the Federal Reserve System, and would be required to be secured by collateral in cash, an irrevocable letter of credit, or U.S. Government securities maintained on a current basis at an amount at least equal to the market value of the securities loaned. When one party lends portfolio securities to another party, the lender has the right to call the loan and obtain the securities loaned at any time on customary industry settlement notice (which will not usually exceed five business days). For the duration of a loan, the borrower pays the lender an amount equal to any interest or dividends received on the securities loaned. The lender also receives a fee from the borrower or compensation from the investment of the collateral, less a fee paid to the borrower (if the collateral is in the form of cash). The lender does not, however, have the right to vote any securities having voting rights during the existence of the loan, but it can 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. A Fund's performance will continue to reflect changes in the value of the securities loaned and will also reflect the receipt of interest, through investment of cash collateral by the Fund or a fee. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, the lender could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If the lender is not able to recover the securities loaned, the lender may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased.
LOANS AND OTHER DIRECT INDEBTEDNESS. Loans and other direct indebtedness are interests in amounts owed by corporations, governmental or other borrowers to lenders or lending syndicates (loans and loan participations), to suppliers of goods and services (trade claims and other receivables), or to other parties. Some loans may be unsecured in part or in full. Loans may be in default at the time of purchase. Loans that are fully secured should protect the purchaser to a greater extent than unsecured loans in the event of nonpayment of scheduled interest or principal. However, there can be no assurance that the liquidation of collateral acquired in connection with the default of a secured loan would satisfy the borrower's obligation, or that such collateral could be liquidated.
Loans generally are made to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs or other corporate activities. Such loans typically are originated, negotiated and structured by a syndicate of lenders represented by an agent lender that has negotiated and structured the loan and that is responsible for collecting interest and principal payments and other amounts due on behalf of all of the lenders in the syndicate, and for enforcing the lenders' rights against the borrower. Typically, the agent is given broad discretion in monitoring the borrower's performance and is obligated to use the same care it would use in the management of its own property. Upon an event of default, the agent typically will enforce the loan agreement after instruction from the lenders. The borrower compensates the agent for these services. This compensation may include special fees paid when the loan is structured or funded and other fees paid on a continuing basis. The typical practice of an agent or a lender to rely exclusively or primarily on reports from the borrower involves a risk of fraud by the borrower.
If an agent becomes insolvent, or has a receiver, conservator or similar official appointed for it by an appropriate authority, or if it becomes a debtor in a bankruptcy proceeding, the agent's appointment may be terminated, and a successor agent typically may be appointed by the lenders. If an appropriate authority determines that assets held by the agent for the benefit of lenders or purchasers of loans are subject to the claims of the agent's general or secured creditors, then such lenders or purchasers might incur certain costs and delays in realizing payment on a loan or suffer a loss of principal and/or interest. Furthermore, in the event of the borrower's bankruptcy or insolvency, the borrower's obligation to repay a loan may be subject to certain defenses that the borrower can assert as a result of improper conduct by the agent.
Loans may be acquired by participating directly in a lending syndicate as a lender. Alternatively, loans or an interest in loans may be acquired by novation, by assignment or by participation from members of the lending syndicate or from other participants. In a novation or an assignment, the acquirer assumes all of the rights of the lender in the loan or of the participant in the participants' portion of the loan and, in the case of a novation or an assignment from a member of the lending syndicate, becomes a party of record with respect to the loan. In a participation, the acquirer purchases a portion of the lender's or the participants' interest in the loan, but has no direct contractual relationship with the borrower. An investment in a loan by participation gives rise to several risks. The acquirer must rely on another party not only for the enforcement of the acquirer's rights against the borrower, but also for the receipt and processing of principal, interest or other payments due under the loan and may be subject to the credit risk of the other party in addition to the borrower. The acquirer may be subject to delays, expenses, and risks that are greater than those that would be involved if the acquirer could enforce its rights directly against the borrower. In addition, under the terms of a participation agreement, the acquirer may be regarded as a creditor of the seller of the participation interest (rather than of the borrower), so that the acquirer also may be subject to the risk that such seller could become insolvent. A participation agreement also may limit the rights of the acquirer to vote on changes that may be made to the underlying loan agreement, such as waiving a breach of a covenant.
Direct indebtedness includes trade or other claims against companies, which generally represent monies owed by such companies to suppliers of goods or services. Such claims may be purchased when such companies are in default.
The ability to receive payments of principal and interest on loans and other direct indebtedness will depend primarily on the financial condition of the borrower. Because an acquirer may be required to rely on another party to collect and to pass on to it amounts payable with respect to the loan or other direct indebtedness and to enforce the acquirer's rights under the loan or other direct indebtedness, an insolvency, bankruptcy or reorganization of such other party may delay or prevent the acquirer from receiving such amounts. The highly leveraged nature of many loans and other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions.
Revolving credit facilities and other standby financing commitments obligate the purchaser to fund additional cash on a certain date or on demand. A revolving credit facility differs from other types of financing commitments in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit facility. These commitments may have the effect of requiring a purchaser to increase its investment in a company at a time when the purchaser 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).
Floating rate loans generally are subject to legal or contractual restrictions on resale. Floating rate loans currently are not listed on any securities exchange or automatic quotation system. As a result, no active market may exist for some floating rate loans, and to the extent a secondary market exists for other floating rate loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Additionally, the supply of floating rate loans may be limited from time to time due to a lack of sellers in the market for existing floating rate loans or to the number of new floating rate loans currently being issued. As a result, the floating rate loans available for purchase may be of lower quality or may have a higher price.
With respect to its management of investments in bank loans, MFS will normally seek to avoid receiving material, non-public information ("MNPI") about the issuers of bank loans being considered for acquisition by the Fund or held in the Fund's portfolio. In many instances, borrowers may offer to furnish MNPI to prospective investors, and to holders, of the issuer's loans. MFS' decision not to receive MNPI may place MFS at a disadvantage relative to other investors in loans (which could have an adverse effect on the price the Fund pays or receives when buying or selling loans). Also, in instances where holders of loans are asked to grant amendments, waivers or consent, MFS' ability to assess their significance or desirability may be adversely affected. For these and other reasons, it is possible that MFS' decision not to receive MNPI under normal circumstances could adversely affect the Fund's investment performance.
Notwithstanding its intention generally not to receive MNPI with respect to its management of investments in loans, MFS may from time to time come into possession of MNPI about the issuers of loans that may be held in the Fund's portfolio. Possession of such information may in some instances occur despite MFS' efforts to avoid such possession, but in other instances MFS may choose to receive such information (for example, in connection with participation in a creditors' committee with respect to a financially distressed issuer). As, and to the extent, required by applicable law, MFS' ability to trade in these loans for the account of the Fund could potentially be limited by its possession of such information. Such limitations on MFS' ability to trade could have an adverse effect on the Fund by, for example, preventing the Fund from selling a loan that is experiencing a material decline in value. In some instances, these trading restrictions could continue in effect for a substantial period of time.
LOWER QUALITY DEBT INSTRUMENTS. Lower quality debt instruments are considered speculative with respect to the issuer's continuing ability to meet principal and interest payments and, while generally expected to provide greater income than investments in higher quality debt instruments, will involve greater risk of principal and income (including the possibility of default or bankruptcy of the issuers of such instruments) and may involve greater volatility of price (especially during periods of economic uncertainty or change) than higher quality debt instruments. In addition, because yields vary over time, no specific level of income can ever be assured. These lower quality debt instruments generally tend to reflect economic changes (and the outlook for economic growth), short-term corporate and industry developments and the market's perception of their credit quality to a greater extent than higher quality debt instruments, which react primarily to fluctuations in the general level of interest rates (although these lower quality debt instruments are also affected by changes in interest rates). In the past, economic downturns or an increase in interest rates have, under certain circumstances, resulted in a higher incidence of default by the issuers of these instruments and may do so in the future, especially in the case of highly leveraged issuers. The prices for these instruments may be affected by legislative and regulatory developments. The market for these lower quality debt instruments may be less liquid than the market for investment grade debt instruments. Furthermore, the liquidity of these lower quality debt instruments may be affected by the market's perception of their credit quality.
Instruments in the lowest tier of investment-grade debt instruments, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade securities.
See Appendix H for a description of bond ratings.
MONEY MARKET INSTRUMENTS. Money market instruments, or short-term debt instruments, consist of obligations such as commercial paper, bank obligations (e.g., certificates of deposit and bankers' acceptances), repurchase agreements, and various government obligations, such as Treasury bills. Money market instruments may be structured to be, or may employ a trust or other form so that they are, eligible investments for money market funds. For example, put features can be used to modify the maturity of a security or interest rate adjustment features can be used to enhance price stability. If a structure fails to function as intended, adverse tax or investment consequences may result. Neither the Internal Revenue Service (IRS) nor any other regulatory authority has ruled definitively on certain legal issues presented by certain structured securities. Future tax or other regulatory determinations could adversely affect the value, liquidity, or tax treatment of the income received from these securities. Commercial paper is a money market instrument issued by banks or companies to raise money for short-term purposes. Unlike some other debt obligations, commercial paper is typically unsecured. Commercial paper may be issued as an asset-backed security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that represent direct or indirect participation in, or are collateralized by and payable from, mortgage loans secured by real property or instruments derived from such loans. Mortgage-backed securities include various types of securities such as pass-throughs, stripped mortgage-backed securities, and collateralized mortgage obligations. There are a wide variety of mortgage types underlying these securities, including mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
Generally, mortgage-backed securities represent interests in pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association (GNMA), by government-related organizations, such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), as well as by private issuers, such as commercial banks, savings and loan institutions and mortgage bankers. Government mortgage-backed securities are backed by the full faith and credit of the United States as to payment of principal and interest. GNMA, the principal U.S. guarantor of these securities, is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Government-related mortgage-backed securities are not backed by the full faith and credit of the United States. Issuers of government-related mortgage-backed securities include FNMA and FHLMC. FNMA is a congressionally chartered corporation owned entirely by private stockholders, and is subject to general regulation by the Secretary of Housing and Urban Development. Private mortgage-backed securities may be less liquid than government or government-related mortgage-backed securities.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. FHLMC is a stockholder-owned government-sponsored enterprise established by Congress. Participation certificates representing interests in mortgages from FHLMC's national portfolio are guaranteed as to the timely payment of interest and principal by FHLMC. Private mortgage-backed securities represent interest in pass-through pools consisting principally of conventional residential mortgage loans created by non-government issuers, such as commercial banks and savings and loan associations and private mortgage insurance companies. Private, government, or government-related entities may create mortgage loan pools offering pass-through investments in addition to those described above. Interests in pools of mortgage-related securities differ from other forms of debt instruments, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities typically provide a monthly payment which consists of both interest and principal payments. In effect, these payments generally are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs incurred.
Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. Prepayments of principal by mortgagors or mortgage foreclosures shorten the term of the mortgage pool underlying the mortgage-backed security. The occurrence of prepayments is a function of several factors, including interest rates, general economic conditions, the location of the mortgaged property, the age of the mortgage or other underlying obligations, and other social and demographic conditions. Because prepayment rates of individual mortgage pools vary widely, the average life of a particular pool is difficult to predict. A Fund's ability to maintain positions in mortgage-backed securities is affected by the reductions in the principal amount of such securities resulting from prepayments. The values of mortgage-backed securities vary with changes in market interest rates generally and the differentials in yields among various kinds of U.S. government securities, mortgage-backed securities, and asset-backed securities. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgages supporting a mortgage-backed security. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase thereby shortening the average life of such a pool. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, mortgage-backed securities typically have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
Collateralized mortgage obligations (CMOs) are mortgage-backed securities that are collateralized by whole loan mortgages or mortgage pass-through securities. The bonds issued in a CMO transaction are divided into groups, and each group of bonds is referred to as a "tranche." Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the CMO bondholders. The bonds issued under a traditional CMO structure are retired sequentially as opposed to the pro-rata return of principal found in traditional pass-through obligations. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds. Under a CMO structure, the repayment of principal among the different tranches is prioritized in accordance with the terms of the particular CMO issuance. The "fastest-pay" tranches of bonds, as specified in the prospectus for the issuance, would initially receive all principal payments. When those tranches of bonds are retired, the next tranche, or tranches, in the sequence, as specified in the prospectus, receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate, and long final maturities, as well as varied expected average lives and risk characteristics. In recent years, new types of CMO tranches have evolved. These include floating rate CMOs, parallel pay CMOs planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these new structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-backed securities.
A primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) will affect the yield, average life, and price of CMOs. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other securities.
Stripped mortgage-backed securities (SMBSs) are derivative multi-class mortgage-backed securities. SMBSs may be issued by agencies or instrumentalities of the U.S. 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 entities formed or sponsored by any of the foregoing. SMBSs may be less liquid than other types of mortgage-backed securities.
SMBSs are usually structured with two classes that receive different proportions of the interest and principal distributions on 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 price and yield-to-maturity on an IO class 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 a Fund's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to recoup some or all of its initial investment in these securities, even if the security is in one of the highest rating categories. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. In mortgage "dollar roll" transactions, the investor sells mortgage-backed securities for delivery in the future and simultaneously contracts to repurchase substantially similar securities on a specified future date. During the roll period, the investor foregoes principal and interest paid on the mortgage-backed securities. The lost interest is compensated by the difference between the current sales price and the lower price for the future purchase (often referred to as the "drop") as well as by the interest earned on, and gains from, the investment of the cash proceeds of the initial sale. A commitment fee may also be received for participation in such transaction.
If the income and capital gains from the investment of the cash from the initial sale do not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will result in a lower return than would have been realized without the use of the dollar rolls. Dollar roll transactions involve the risk that the market value of the securities that are required to be purchased in the future may decline below the agreed upon repurchase price of those securities. If the party to whom the securities are sold becomes insolvent, the right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the investor's ability to correctly predict interest rates and prepayments.
A dollar roll can be viewed as a borrowing. If a Fund makes additional investments while a dollar roll is outstanding, this may be considered a form of leverage.
MUNICIPAL INSTRUMENTS. Debt instruments issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies or instrumentalities, are known as "municipal instruments." Generally, interest received on municipal instruments is exempt from federal income tax. The tax-exempt nature of the interest on a municipal instrument is generally the subject of a bond counsel opinion delivered in connection with the issuance of the instrument. There is no assurance that the IRS will agree with bond counsel's opinion that such interest is tax-exempt or that the interest payments on such municipal instruments will continue to be tax exempt for the life of the municipal instrument. Issuers or other parties generally enter into covenants requiring continuing compliance with federal tax requirements to preserve the tax-free status of interest payments over the life of the municipal instrument. If at any time the covenants are not complied with, or if the IRS otherwise determines that the issuer did not comply with relevant tax requirements, interest payments from a municipal instrument could become federally taxable, possibly retroactively to the date the municipal instrument was issued and an investor may need to file an amended income tax return. Certain types of structured securities are designed so that tax exempt interest from municipal instruments held by the underlying entity will pass through to the holders of the structured security. There is no assurance that the IRS will agree that such interest is tax exempt.
The value of municipal instruments can be affected by changes in their actual or perceived credit quality. The credit quality of municipal instruments can be affected by, among other things, the financial condition of the issuer or guarantor, the issuer's future borrowing plans and sources of revenue, the economic feasibility of the revenue bond project or general borrowing purpose, political or economic developments in the region where the instrument is issued and the liquidity of the security. Municipal instruments generally trade in the over-the-counter market.
General obligation bonds are backed by the issuer's pledge of its full faith and credit and taxing power for the repayment of principal and the payment of interest. Issuers of general obligation bonds include states, counties, cities, towns, and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads, and water and sewer systems. The rate of taxes that can be levied for the payment of debt service on these bonds may be limited. Additionally, there may be limits as to the rate or amount of special assessments or taxes that can be levied to meet these obligations.
Some general obligation bonds are backed by both a pledge of a specific revenue source, such as a special assessment or tax and an issuer's pledge of its full faith and credit and taxing power. Debt service from these general obligation bonds is typically paid first from the specific revenue source and second, if the specific revenue source is insufficient, from the general taxing power.
Revenue bonds are generally backed by the net revenues derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source, such as a state's or local government's proportionate share of the payments from the Tobacco Master Settlement Agreement. Revenue bonds are issued to finance a wide variety of capital projects. Examples include electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Industrial development bonds, a type of revenue bond, are issued by or on behalf of public authorities to raise money to finance various privately operated facilities for a variety of purposes, including economic development, solid waste disposal, transportation, and pollution control. Although the principal security for revenue bonds is typically the revenues of the specific facility, project, company or system, many revenue bonds are secured by additional collateral in the form of a mortgage on the real estate comprising a specific facility, project or system, a lien on receivables and personal property, as well as the pledge of various reserve funds available to fund debt service, working capital, capital expenditures or other needs. Net revenues and other security pledged may be insufficient to pay principal and interest due which will cause the price of the bonds to decline. In some cases, revenue bonds issued by an authority are backed by a revenue stream unrelated to the issuer, such as a hotel occupancy tax, a sales tax, or a special assessment. In these cases, the ability of the authority to pay debt service is solely dependent on the revenue stream generated by the special tax. Furthermore, the taxes supporting such issues may be subject to legal limitations as to rate or amount.
Municipal insurance policies typically insure, subject to the satisfaction of the policy conditions, timely and scheduled payment of all principal and interest due on the underlying municipal instruments. The insurance may be obtained by either (i) the issuer at the time the municipal instrument is issued, commonly referred to as primary market insurance or (ii) another party after the municipal instrument has been issued, commonly referred to as secondary market insurance. The financial strength of the companies issuing the bond insurance can vary.
In general, municipal insurance does not insure any risk other than nonpayment.
Municipal insurance does not insure against market fluctuations which affect the
price of a security. In addition, a municipal insurance policy will not insure
(i) the payment of regularly scheduled debt service payments until maturity if
an issuer redeems the municipal bonds prior to maturity in accordance with the
call provisions of the municipal instrument; (ii) over the loss of prepayment or
other acceleration payment which at any time may become due in respect of any
instrument, (except for a mandatory sinking fund redemption; (iii) the payment
of a prepayment or acceleration premium; or (iv) nonpayment of principal or
interest caused by negligence or bankruptcy of the paying agent. A municipal
insurance policy often reserves to the insurer the exclusive right to accelerate
the instruments upon a payment default.
Because a significant portion of the municipal instruments issued and outstanding are insured by a small number of insurance companies, an event involving one or more of these insurance companies could have a significant adverse effect on the value of the securities insured by that insurance company and on the municipal market as a whole.
Education. In general, there are two types of education-related bonds: (i) those issued to finance projects for public and private colleges and universities, charter schools and private schools, and (ii) those representing pooled interests in student loans. Bonds issued to supply educational institutions with funding are subject to many risks, including the risks of unanticipated revenue decline, primarily the result of decreasing student enrollment, decreasing state and federal funding, or a change in general economic conditions. Additionally, higher than anticipated costs associated with salaries, utilities, insurance or other general expenses could impair the ability of a borrower to make annual debt service payments. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which may be supported by reserves or other forms of credit enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous factors, including the rate of student loan defaults, seasoning of the loan portfolio, and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Electric Utilities. The electric utilities industry has been experiencing increased competitive pressures. Federal and state legislation in recent years has been moving the industry toward opening transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel, (b) the availability and cost of capital, (c) the effects of conservation on energy demand, (d) the effects of rapidly changing environmental, safety, and licensing requirements, and other federal, state, and local regulations, (e) timely and sufficient rate increases thereby assisting utilities in recovering increasing energy costs, and (f) opposition to nuclear power.
Health Care. The health care industry is subject to regulatory action by a number of governmental agencies, including federal, state, and local governmental agencies. A major source of revenues for the health care industry is payments from the Medicare and Medicaid programs. As a result, the industry is sensitive to legislative changes and reductions in governmental spending for such programs. A second major source of revenues for the health care industry is payments from private insurance companies and health maintenance organizations. As such, any changes to and reductions in reimbursement rates from these entities for services provided could be detrimental to the revenues of the providers. Numerous other factors may affect the industry, such as general and local economic conditions; demand for services; expenses (including for example, labor, malpractice insurance premiums and pharmaceutical products); and competition among health care providers. In the future, the following factors may adversely affect health care facility operations: adoption of legislation proposing a national health insurance program; other state or local health care reform measures; medical and technological advances which dramatically alter the need for health services or the way in which such services are delivered; changes in medical coverage which alter the traditional fee-for-service revenue stream; and efforts by employers, insurers, and governmental agencies to reduce the costs of health insurance and health care services.
Housing. Housing revenue bonds typically are issued by a state, county, or local housing authority and are secured by the revenues of mortgages originated by the authority using the proceeds of the bond issue. These bonds may be used to make mortgage loans for single-family housing, multi-family housing, or a combination of the two. Because of the impossibility of precisely predicting demand for mortgages from the proceeds of such an issue, there is a risk that the proceeds of the issue will be in excess of demand, which would result in early retirement of the bonds by the issuer. Moreover, such housing revenue bonds depend for their repayment upon the cash flow from the underlying mortgages, which cannot be precisely predicted when the bonds are issued. Any difference in the actual cash flow from such mortgages from the assumed cash flow could have an adverse impact upon the ability of the issuer to make scheduled payments of principal and interest on the bonds, or could result in early retirement of the bonds. Additionally, such bonds depend in part for scheduled payments of principal and interest upon reserve funds established from the proceeds of the bonds, assuming certain rates of return on investment of such reserve funds. If the assumed rates of return are not realized because of changes in interest rate levels or for other reasons, the actual cash flow for scheduled payments of principal and interest on the bonds may be inadequate. The financing of multi-family housing projects is affected by a variety of factors which may impact the borrower's ability to pay debt service and may impair the value of the collateral securing the bonds, if any. These factors include 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. Some authorities provide additional security for the bonds in the form of insurance, subsidies, additional collateral, or state pledges (without obligation) to make up deficiencies.
Transportation. Transportation debt may be issued to finance the construction of airports, toll roads, highways, or other transit facilities. Airport bonds are dependent on the economic conditions of the airport's service area and may be affected by the business strategies and fortunes of specific airlines. They may also be subject to competition from other airports and modes of transportation. Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs, transportation taxes and fees, and availability of fuel also affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public transportation.
Tobacco Settlement Revenue Bonds. Tobacco settlement revenue bonds are secured by a single source of revenue --a state or jurisdiction's proportionate share of periodic payments made by tobacco companies under the Master Settlement Agreement (the "MSA") entered into by participating cigarette manufacturers, 46 states, and other jurisdictions in November of 1998 in settlement of certain smoking-related litigation. Annual payments on the bonds are dependent on the receipt by the issuer of future settlement payments under the MSA. These annual payments are subject to numerous adjustments. The actual amount of future settlement payments depends on annual domestic cigarette shipments, inflation, market share gains by non-participating cigarette manufacturers, and other factors. MSA adjustments may cause bonds to be repaid faster or slower than originally projected. Tobacco bonds are subject to additional risks, including the risk that cigarette consumption declines, that a tobacco company defaults on its obligation to make payments to the state or that the MSA or state legislation enacted pursuant to the MSA is void or unenforceable.
Water and Sewer. Water and sewer revenue bonds are generally secured by the fees charged to each user of the service. The issuers of water and sewer revenue bonds generally enjoy a monopoly status and latitude in their ability to raise rates. However, lack of water supply due to insufficient rain, run-off, or snow pack can be a concern and has led to past defaults. Further, public resistance to rate increases, declining numbers of customers in a particular locale, costly environmental litigation, and Federal environmental mandates are challenges faced by issuers of water and sewer bonds.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations and participations in municipal leases are undivided interests in a portion of an obligation in the form of a lease or installment purchase or conditional sales contract which is issued by a state, local government, or a municipal financing corporation to acquire land, equipment, and/or facilities (collectively hereinafter referred to as "lease obligations"). Generally lease obligations do not constitute general obligations of the municipality for which the municipality's taxing power is pledged. Instead, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate, and make the payments due under the lease obligation. As a result of this structure, municipal lease obligations are generally not subject to state constitutional debt limitations or other statutory requirements that may apply to other municipal securities.
Lease obligations may contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. If the municipality does not appropriate in its budget enough to cover the payments on the lease obligation, the lessor may have the right to repossess and relet the property to another party. Depending on the property subject to the lease, the value of the property may not be sufficient to cover the debt.
In addition to the risk of "non-appropriation," municipal lease securities may not have as highly liquid a market as conventional municipal bonds. Furthermore, municipal lease obligations have the same risk characteristics as Municipal Instruments do generally.
OPTIONS. An option is a contract which conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific amount or value of a particular underlying interest at a specific price (called the "exercise" or "strike" price) at one or more specific times before the option expires. The underlying interest of an option contract can be a security, currency, index, future, swap or other type of financial instrument. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option purchaser is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date.
Options can be traded either through established exchanges ("exchange traded options") or privately negotiated transactions (over-the-counter or "OTC options"). Exchange traded options are standardized with respect to, among other things, the underlying interest, expiration date, contract size and strike price. The terms of OTC options are generally negotiated by the parties to the option contract which allows the parties greater flexibility in customizing the agreement, but OTC options are generally less liquid than exchange traded options.
All option contracts involve credit risk if the counterparty to the option contract fails to perform. Credit risk is low in exchange traded options because the performance of the contract by the counterparty is backed by the clearing agency for the exchange on which the options are traded. The credit risk in OTC options is dependent on the credit worthiness of the individual counterparty to the contract and may be greater than the credit risk associated with exchange traded options.
When purchasing a put option, the purchaser obtains the right (but not the obligation) to sell a specific amount or value of a particular interest to the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical put option can expect to realize a gain if the price of the underlying interest falls. However, if the underlying interest's price does not fall enough to offset the cost of purchasing the option, the purchaser of a put option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The purchaser of a put option may terminate its position by allowing the option to expire, exercising the option or closing out its position in the secondary market at the option's current price, if a liquid secondary markets exists. If the option is allowed to expire, the purchaser will lose the entire premium. If the option is exercised, the purchaser would complete the sale of the underlying interest to the option writer at the strike price.
When purchasing a call option, the purchaser obtains the right (but not the obligation) to purchase a specified amount or value of a particular interest from the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical call option can expect to realize a gain if the price of the underlying interest rises. However, if the underlying interest's price does not rise enough to offset the cost of purchasing the option, the buyer of a call option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The writer of a put or call option takes the opposite side of the transaction from the option's purchaser. In return for receipt of the premium, the writer assumes the obligation to buy or sell (depending on whether the option is a put or a call) a specified amount or value of a particular interest at the strike price if the purchaser of the option chooses to exercise it.
Generally, an option writer sells options with the goal of obtaining the premium paid by the option purchaser. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" when the option is exercised. A call option is in-the-money if the value of the underlying interest exceeds the strike price of the option. A put option is in-the-money if the strike price of the option exceeds the value of the underlying interest. Generally, any profit realized by an option purchaser represents a loss for the option writer. The writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option in the same manner as if the writer were entering into a futures contract.
The writer of a put option may seek to terminate a position in the put option before exercise by closing out the option in the secondary market at its current price. If the secondary market is not liquid for a put option, however, the writer must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes.
A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put) of the underlying interest when the option is exercised. A cash-settled option gives its owner the right to receive a cash payment based on the difference between a determined value of the underlying interest at the time the option is exercised and the fixed exercise price of the option. In the case of physically settled options, it may not be possible to terminate the position at any particular time or at an acceptable price. A cash-settled call conveys the right to receive a cash payment if the determined value of the underlying interest at exercise exceeds the exercise price of the option, and a cash-settled put conveys the right to receive a cash payment if the determined value of the underlying interest at exercise is less than the exercise price of the option.
Combination option positions are positions in more than one option at the same time. A spread involves being both the buyer and writer of the same type of option on the same underlying interest but different exercise prices and/or expiration dates. A straddle consists of purchasing or writing both a put and a call on the same underlying interest with the same exercise price and expiration date.
The principal factors affecting the market value of a put or call option include supply and demand, interest rates, the current market price of the underlying interest in relation to the exercise price of the option, the volatility of the underlying interest and the remaining period to the expiration date.
If a trading market in particular options were to become unavailable, investors in those options would be unable to close out their positions until trading resumes, and option writers may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. Exchanges or other facilities on which options are traded may establish limitations on options trading, may order the liquidation of positions in excess of these limitations, or may impose other sanctions that could adversely affect parties to an options transaction.
Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a Fund.
PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer and is therefore subject to the same risks as other equity securities. Preferred stock has precedence over common stock in the event the issuer is liquidated or declares bankruptcy, but is junior to the interests of the debt instruments of the issuer. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. The value of preferred stock is sensitive to changes in interest rates and to changes in the issuer's credit quality.
REAL ESTATE RELATED INVESTMENTS. Investment in real estate related investments are subject to similar risks to those associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning or applicable tax law; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; and changes in interest rates.
Real estate investment trusts ("REITs") are pooled investment vehicles that invest primarily in income producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs, or a combination of equity and mortgage REITs. Equity REITs invest most of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest most of their assets in real estate mortgages and derive income from interest payments. An investor will indirectly bear its proportionate share of any expenses (such as operating expenses and advisory fees) paid by REITs in which it invests in addition to the expenses paid by the investor.
Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skills of the REIT's manager and generally are not diversified. Equity and mortgage REITs are also subject to heavy cash flow dependency, borrower default, and self-liquidation.
Mortgage REITs are also subject to different combinations of prepayment, extension, interest rate and other market risks. The real estate mortgages underlying mortgage REITs are generally subject to a faster rate of principal repayments in a declining interest rate environment and to a slower rate of principal repayments in an increasing interest rate environment.
In addition, a REIT may be unable to obtain financing to satisfy income and gain distributions required by federal tax law, may fail to qualify for the federal tax exemption for distributed income, or may be adversely affected by changes in federal tax law, for example, by limiting their permissible businesses or investments.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a buyer would acquire a security for a relatively short period of time (usually not more than a week) subject to the obligation of the seller to repurchase and the buyer to resell such security at a fixed time and price (representing the buyer's cost plus interest). The buyer bears the risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the buyer is delayed or prevented from exercising its rights to dispose of the collateral. This risk includes the risk of procedural costs or delays in addition to a loss on the securities if their value should fall below their repurchase price.
RESTRICTED SECURITIES. Restricted securities are securities that are subject to legal restrictions on their re-sale. Difficulty in selling securities may result in a loss or be costly to an investor. Restricted securities generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, the holder of a registered security may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the holder might obtain a less favorable price than prevailed when it decided to seek registration of the security.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, an investor sells securities and receives cash proceeds, subject to its agreement to repurchase the securities at a later date for a fixed price reflecting a market rate of interest. There is a risk that the counter party to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the investor. Unless the appreciation and income on assets purchased with proceeds from reverse repurchase agreements exceed the costs associated with them, the investor's performance is lower than it otherwise would have been. A reverse repurchase agreement can be viewed as a borrowing. If a Fund makes additional investments while a reverse repurchase agreement is outstanding, this may be considered a form of leverage.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment companies include shares of closed-end investment companies, unit investment trusts, exchange-traded funds, and open-end investment companies, represent interests in professionally managed portfolios that may invest in any type of interest. Investing in other investment companies involves substantially the same risks as investing directly in the underlying interests, but involve additional expenses at the investment company-level, such as a proportionate share of portfolio management fees and operating expenses. Certain types of investment companies, such as closed-end investment companies and exchange-traded funds, trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value (NAV) per share. The extent to which a Fund can invest in securities of other investment companies is limited by the Investment Company Act of 1940.
SHORT SALES. A seller may make short sales that are made "against the box" and also those that are not made "against the box." A short sale that is not made "against the box" is a transaction in which a party sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the seller must borrow the security to make delivery to the buyer. The seller then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. It may not be possible to liquidate or close out the short sale at any particular time or at an acceptable price. The price at such time may be more or less than the price at which the security was sold by the seller. Until the security is replaced, the seller is required to repay the lender any dividends or interest which accrue during the period of the loan. To borrow the security, the seller also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. The seller also will incur transaction costs in effecting short sales.
The seller will incur a loss as a result of the short sale if the price of the security or index increases between the date of the short sale and the date on which the seller replaces the borrowed security. Such loss may be unlimited. The seller will realize a gain if the price of the security declines between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends or interest the seller may be required to pay in connection with a short sale.
A seller may also make short sales "against the box," i.e., when a security identical to one owned by the seller is borrowed and sold short. If the seller enters into a short sale against the box, it is required to hold securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) while the short sale is outstanding. The seller will incur transaction costs, including interest, in connection with opening, maintaining, and closing short sales against the box and will forgo an opportunity for capital appreciation in the security.
SOVEREIGN DEBT OBLIGATIONS. Sovereign debt obligations are issued or guaranteed by foreign governments or their agencies, including debt of developing countries. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of developing countries may involve a high degree of risk, and may be in default or present the risk of default. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and pay interest when due, and may require renegotiation or rescheduling of debt payments. In addition, prospects for repayment of principal and payment of interest may depend on political as well as economic factors. Although some sovereign debt, such as Brady Bonds, is collateralized by U.S. Government securities, repayment of principal and payment of interest is not guaranteed by the U.S. Government.
SWAPS AND RELATED DERIVATIVES. A swap is an agreement between two parties pursuant to which each party agrees to make one or more payments to the other, based on different interest rates, currency exchange rates, security or commodity prices, the prices or rates of other types of financial instruments, assets, the levels of specified indices, or other indicators. Swaps can be closed out by physical delivery of the underlying indicator(s) or payment of the cash settlement on settlement date, depending on the terms of the particular agreement. For example, in a typical credit default swap on a specific security, in the event of a credit event one party agrees to pay par on the security while the other party agrees to deliver the security. In the case of physically settled swaps, it may not be possible to close out the swap at any particular time or at an acceptable price. For example, in a typical interest rate swap, one party agrees to pay a fixed rate of interest determined by reference to a specified interest rate or index multiplied by a specified amount (the "notional amount"), while the other party agrees to pay an amount equal to a floating rate of interest determined by reference to an interest rate or index which is reset periodically and multiplied by the same notional amount. On each payment date, the obligations of parties are netted against each other, with only the net amount paid by one party to the other.
Swap agreements are typically individually negotiated and structured to provide exposure to a variety of different types of investments or market factors. Swap agreements may be entered into for hedging or non-hedging purposes. Swap agreements can take many different forms and are known by a variety of names and other types of swap agreements may be available.
Other types of over-the-counter derivatives, such as "caps," "floors," "collars" and options on swaps, or "swaptions," may be entered into for the same types of hedging or non-hedging purposes as swaps. A "cap" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the amount by which a specified fixed or floating rate or other indicator exceeds another rate or indicator (multiplied by a notional amount). A "floor" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the excess, if any, of a specified rate or other indicator over a different rate or indicator (multiplied by a notional amount). A "collar" transaction is a combination of a cap and a floor in which one party pays the floating amount on the cap and the other party pays the floating amount on the floor. A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into the underlying swap on the agreed-upon terms.
The most significant factor in the performance of swaps, caps, floors, and collars is the change in the underlying price, rate, index level or other indicator that determines the amount of payments to be made under the arrangement.
If MFS attempts to use a swap or related investment as a hedge against, or as a substitute for, a portfolio investment, the swap or related derivative may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving swaps and related derivatives can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Swaps and related derivatives may also be subject to liquidity risk since the derivatives are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such derivatives in the secondary market may be smaller than that for more traditional debt instruments. The swaps market is largely unregulated. It is possible that developments in the swaps market, including potential government regulations, could adversely affect an investor's ability to terminate its existing swap agreements or to realize amounts received under such agreements.
In addition, because the purchase and sale of swap and related derivatives takes place in an over-the-counter market, swaps and related derivatives are subject to the creditworthiness of the counterparty to the swap or related derivative, and their values may decline substantially if the counterparty's creditworthiness deteriorates. If the counterparty defaults, the other party's risk of loss consists of the net amount of payments that the non-defaulting party is contractually entitled to receive. The counterparties may be able to eliminate or reduce their exposure under these arrangements by assignment or other disposition or by entering into an offsetting agreement with the same or another counterparty.
TEMPORARY DEFENSIVE POSITIONS. In response to market, economic, political, or other conditions, MFS may depart from its investment strategies for a Fund by temporarily investing for defensive purposes. MFS may invest a large portion or all of a Fund's assets in cash (including foreign currency) or cash equivalents, including, but not limited to, obligations of banks (including certificates of deposit, bankers' acceptances, time deposits and repurchase agreements), commercial paper, short-term notes, U.S. Government Securities and related repurchase agreements.
TENDER OPTION BONDS. Tender option bonds, also known as put bonds or puttable securities, give the bondholder the right to require the issuer or a specified third party acting as agent for the issuer to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. These securities may be floating or variable rate securities. The issuer or third party agent may be unable to purchase the bonds on the purchase date due to a variety of circumstances, which may result in a loss of value of the bonds.
WARRANTS. Warrants are instruments which entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued or delivered as anticipated. If a Fund makes additional investments while a delayed delivery purchase is outstanding, this may result in a form of leverage.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities are debt instruments that provide for periodic adjustments in the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that may change with changes to the level of prevailing interest rates or the issuer's credit quality. There is a risk that the current interest rate on variable and floating rate securities may not accurately reflect current market interest rates or adequately compensate the holder for the current creditworthiness of the issuer. Some variable or floating rate securities are structured with liquidity features such as (1) put options or tender options that permit holders (sometimes subject to conditions) to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries or (2) auction rate features, remarketing provisions, or other maturity-shortening devices designed to enable the issuer to refinance or redeem outstanding debt securities (market-dependent liquidity features). The market-dependent liquidity features may not operate as intended as a result of the issuer's declining creditworthiness, adverse market conditions, or other factors or the inability or unwillingness of a participating broker-dealer to make a secondary market for such securities. As a result, variable or floating rate securities that include market-dependent liquidity features may lose value and the holders of such securities may be required to retain them for an extended period of time or until maturity.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS. Zero coupon and deferred interest bonds are debt instruments which are issued at a discount from face value. The discount approximates the total amount of interest the instruments 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 instrument 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. Bonds on which the interest is payable in kind are known as "PIK bonds." PIK bonds are debt instruments which provide that the issuer may, at its option, pay interest on such instruments in cash or in the form of additional debt instruments. Such instruments 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 instruments may experience greater volatility in market value than debt instruments which make regular payments of interest.
PART II - APPENDIX F
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions which cannot be changed without the approval of a Majority Shareholder Vote.
As fundamental investment restrictions, the Fund may not:
(1) borrow money except to the extent such borrowing is not prohibited by the Investment Company Act of 1940, as amended (the "1940 Act") and exemptive orders granted under such Act;
(2) underwrite securities issued by other persons, except that all or any portion of the assets of the Fund may be invested in one or more investment companies, to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act, and except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933, as amended, in selling a portfolio security;
(3) issue any senior securities except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; for purposes of this restriction, collateral arrangements with respect to any type of swap, option, Forward Contracts and Futures Contracts and collateral arrangements with respect to initial and variation margin are not deemed to be the issuance of a senior security;
(4) make loans except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; and
(5) purchase or sell real estate (excluding securities secured by real estate or interests therein and securities of companies, such as real estate investment trusts, which deal in real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (excluding currencies and any type of option, Futures Contracts and Forward Contracts) in the ordinary course of its business; the Fund reserves the freedom of action to hold and to sell real estate, mineral leases, commodities or commodity contracts (including currencies and any type of option, Futures Contracts and Forward Contracts) acquired as a result of the ownership of securities.
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FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that this restriction shall not apply to securities or obligations issued or guaranteed by banks or bank holding companies, finance companies or utility companies.
FOR THE MFS FLOATING RATE HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry. For purposes of this restriction, loan participations will be considered investments in the industry of the underlying borrower, rather than that of the seller of the loan participation.
FOR THE MFS HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund may invest up to 40% of the value of its assets in each of the electric utility and telephone industries.
FOR THE MFS UTILITIES FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the utilities industry.
FOR THE MFS TECHNOLOGY FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the securities of issuers principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements.
FOR ALL OTHER FUNDS:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry.
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In addition, the Funds have adopted the following non-fundamental policies, which may be changed without shareholder approval.
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 10% of the Fund's net assets (taken at market value) would be invested in such securities; repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities; securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 10% limitation.
FOR ALL OTHER FUNDS:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 15% of the Fund's net assets (taken at market value) would be invested in such securities. Repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities. Securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 15% limitation.
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FOR ALL FUNDS:
Except for investment restriction no. 1 and the Fund's non-fundamental policy on investing in illiquid securities, these investment restrictions are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy. In the event the investments exceed the percentage specified in the Fund's non-fundamental policy on illiquid investments, the Fund will reduce the percentage of its assets invested in illiquid investments in due course, taking into account the best interests of shareholders.
For purposes of investment restriction no. 6, investments in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and tax-exempt obligations issued or guaranteed by a U.S. territory or possession, a state or local government, or a political subdivision of any of the foregoing, are not considered an investment in any particular industry.
For purposes of investment restriction no. 6, investments in other investment companies are not considered an investment in any particular industry and portfolio securities held by an underlying fund in which the Fund may invest are not considered to be securities purchased by the Fund.
For purposes of investment restriction no. 6 for MFS Technology Fund, MFS considers an issuer to be principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements if at least 50% of any issuer's assets, income, sales, or profits are committed to, or derived from, such activities, or a third party has given the issuer an industry or sector classification consistent with such activities.
FOR MFS LIFETIME RETIREMENT INCOME FUND, MFS LIFETIME 2010 FUND, MFS LIFETIME 2020 FUND, MFS LIFETIME 2030 FUND, MFS LIFETIME 2040 FUND, MFS INTERNATIONAL DIVERSIFICATION FUND, MFS AGGRESSIVE GROWTH ALLOCATION FUND, MFS CONSERVATIVE ALLOCATION FUND, MFS GROWTH ALLOCATION FUND AND MFS MODERATE ALLOCATION FUND:
In accordance with the Fund's investment program as set forth in its Prospectus, the Fund may invest more than 25% of its assets in any one underlying fund. Although the Fund does not have a policy to concentrate its investments in a particular industry, 25% or more of the Fund's total assets may be indirectly exposed to a particular industry or group of related industries through its investment in one or more underlying funds.
PART II - APPENDIX G
RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS NAME OF RECIPIENT PURPOSE OF DISCLOSURE MSCI BARRA, Inc. Analytical Tool Bloomberg L.P. Analytical Tool Board of Trustees Fund Governance Bowne Typesetting and Printing Services CDS/Computer Software Vendor Checkfree Software Vendor eA Data Automation Services, LLC Data Formatting and Organization Service Eagle Investment Systems Corp. Accounting System Ernst & Young LLP Independent Registered Public Accounting Firm FactSet Research Systems Inc. Analytical Tool GainsKeeper, Inc. Accounting System GFP Acquisition Company, Inc. D.B.A. GCom2 Solutions Software Vendor G.H. Dean Co. Typesetting and Printing Services Institutional Shareholder Services Inc. Proxy Service Provider Investor Tools Perform Analytical Tool ITG, Inc. Analytical Tool JPMorgan Chase Bank Fund Custodian Lipper Inc. Publication Preparation The MacGregor Group Software Vendor Massachusetts Financial Services Co. Fund Management MFS Fund Distributors, Inc. Fund Distribution OMGEO LLC Software Vendor Plexus Analytical Tool Radianz Software Vendor Ropes & Gray LLP Legal Counsel Saloman Analytics Inc. Analytical Tool Siemens Business Services, Inc. IT Client Services and Desktop Architecture Sir Speedy Printing/Copying Services Standard & Poor's Securities Evaluations Services Fund Pricing State Street Bank and Trust Company Custodian Sun Capital Advisers LLC* Fund Management Wilshire Analytics/Axiom Analytical Tool Valley Forge Capital Advisors, Inc.** Fund Management * Sun Capital Advisers LLC receives non-public portfolio holdings disclosure regarding the portion of the MFS Diversified Income Fund for which it serves as sub-adviser. ** Valley Forge Capital Advisors, Inc., receives non-public portfolio holdings disclosure regarding the MFS Sector Rotational Fund for which it serves as sub-adviser. |
This list is current as of May 31, 2007, and any additions, modifications or deletions to the list that have occurred since May 31, 2007 are not reflected.
PART II - APPENDIX H
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of various debt instruments. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE
Moody's long-term obligation ratings are opinions of the relative credit risk of fixed income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.
AAA: Obligations rated "Aaa" are judged to be of the highest quality, with minimal credit risk.
AA: Obligations rated "Aa" are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated "A" are considered upper-medium grade and are subject to low credit risk.
BAA: Obligations rated "Baa" are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
BA: Obligations rated "Ba" are judged to have speculative elements and are subject to substantial credit risk.
B: Obligations rated "B" are considered speculative and are subject to high credit risk.
CAA: Obligations rated "Caa" are judged to be of poor standing and are subject to very high credit risk.
CA: Obligations rated "Ca" are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations rated "C" are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's applies numerical modifiers "1", "2" and "3" to each generic rating classification from "Aa" through "Caa." The modifier "1" indicates that the obligation ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
Issue credit ratings are based, in varying degrees, on the following considerations: (1) likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, AND C: Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the applicable rating category.
N.R.: Not rated.
FITCH RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR).
Investment Grade
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. "A" ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. "BB" ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC: Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.
CC: Default of some kind appears probable.
C: Default is imminent.
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation, or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated "D" upon a default. Defaulted and distressed obligations typically are rated along the continuum of "C" to "B" ratings categories, depending upon their recovery prospects and other relevant characteristics.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
The modifiers "+" or "-`' may be appended to a rating to denote relative status within major ratings categories. Such suffixes are not added to the "AAA" Long-term ratings category, to categories below "CCC," or to Short-term ratings other than "F1." (The +/- modifiers are only used to denote issues within the "CCC" category, whereas issuers are only rated "CCC" without the use of modifiers.)
INVESTMENT ADVISER
MFS Investment Management
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 55824, Boston, MA 02205-5824
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street, Boston, MA 02116 MFS-PART2-SAI-7/07
Class A Shares Class 529A Shares Class R Shares Class R3 Shares Class B Shares Class 529B Shares Class R1 Shares Class R4 Shares Class C Shares Class 529C Shares Class R2 Shares Class R5 Shares Class I Shares |
MFS INTERNATIONAL DIVERSIFICATION FUND
PROSPECTUS OCTOBER 1, 2007
The Prospectus describes the MFS International Diversification Fund. The investment objective of the fund is to seek capital appreciation.
RISK RETURN SUMMARY 1 EXPENSE SUMMARY 8 CERTAIN INVESTMENT POLICIES AND RISKS 11 MANAGEMENT OF THE FUND 12 DESCRIPTION OF SHARE CLASSES 16 HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES 26 OTHER INFORMATION 37 FINANCIAL HIGHLIGHTS 41 The Securities and Exchange Commission has not approved or disapproved the fund's shares or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. |
RISK RETURN SUMMARY
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
The fund is designed to provide diversification within the international asset class by investing the majority of its assets in other MFS mutual funds, referred to as underlying funds. The underlying funds are selected by the quantitative group of the fund's investment adviser, Massachusetts Financial Services Company (referred to as MFS or the adviser) based on underlying fund classifications, historical risk, performance, and other factors. MFS seeks to diversify the fund's investments in terms of market capitalization (by including large, mid, and/or small cap underlying funds), by style (by including both growth and value underlying funds), and by geographic region (by including developed and emerging market underlying funds).
Following is the list of underlying funds and their associated target weightings as of October 1, 2007:
MFS Research International Fund 35% MFS International New Discovery Fund 10% MFS International Value Fund 25% MFS International Growth Fund 25% MFS Emerging Markets Equity Fund 5% |
The underlying funds and their target weightings have been selected for investment over longer time periods, but may be changed without shareholder approval or notice. The target weightings can deviate over the short term due to market movements and cash flows. MFS periodically rebalances the fund's investments in the underlying funds. The target weightings do not reflect the fund's working cash balance; some portion of the fund's portfolio will be held in cash due to purchase and redemption activity and other short term cash needs.
A description of the underlying funds is included in Appendix A of this prospectus.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
PRINCIPAL INVESTMENT TYPES OF THE UNDERLYING FUNDS
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, and depository receipts for those securities.
DERIVATIVES: Derivatives are financial instruments whose value is based on the value of one or more indicators, such as a security, asset, currency, interest rate, credit rating or index. Derivatives often involve a counterparty to the transaction. Derivatives include futures, forward contracts, options, structured notes, inverse floating rate instruments, swaps, caps, floors, and collars.
PRINCIPAL RISKS
As with any mutual fund, you could lose money on your investment in the fund. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The principal risks of investing in the fund are:
STOCK MARKET RISK: The price of an equity security fluctuates in response to issuer, market, economic, industry, political, and regulatory developments. Prices can decrease significantly in response to these developments, and these developments can affect a single issuer, issuers within a broad market sector, industry or geographic region, or the market in general. Different parts of the market and different types of securities can react differently to these developments. For example, the stocks of growth companies can react differently from the stocks of value companies, and the stocks of large cap companies can react differently from the stocks of small cap companies. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events, can have a dramatic adverse effect on stock markets.
COMPANY RISK: Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of an investment. The price of securities of smaller, less well-known companies can be more volatile than the price of securities of larger companies or the market in general.
FOREIGN RISK: Investments in securities of foreign companies, securities of companies with significant foreign exposure, and foreign currencies can involve additional risks relating to market, economic, political, or regulatory conditions and developments. Political, social, and economic instability, the imposition of currency or capital controls, or the expropriation or nationalization of assets in a particular country can cause dramatic declines in that country's economy. Less
stringent regulatory, accounting, and disclosure requirements for issuers and markets are more common in certain foreign countries. Enforcing legal rights can be difficult, costly, and slow in certain foreign countries, and can be particularly difficult against foreign governments. Additional risks of foreign investments include trading, settlement, custodial, and other operational risks, and withholding and other taxes. These factors can make foreign investments, especially those in emerging markets, more volatile and less liquid than U.S. investments. In addition, foreign markets can react differently to market, economic, political, or regulatory developments than the U.S. market.
EMERGING MARKETS RISK: Emerging markets investments can involve additional and greater risks than the risks associated with investments in developed foreign markets securities. Emerging markets typically have less economic development, market structure and depth and regulatory oversight than developed countries. Emerging markets can also be subject to greater political, social, and economic instability. These factors can make emerging market investments more volatile and less liquid than investments in developed markets.
CURRENCY RISK: A decline in the value of a foreign currency relative to the U.S. dollar reduces the value of the foreign currency and investments denominated in that currency. In addition, the use of foreign exchange contracts to reduce foreign currency exposure can eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. The value of foreign currencies relative to the U.S. dollar fluctuates in response to, among other factors, interest rate changes, intervention (or failure to intervene) by U.S. or foreign governments, central banks, or supranational entities such as the International Monetary Fund, the imposition of currency controls, and other political or regulatory developments in the U.S. or abroad. Foreign currency values can decrease significantly both in the short term and over the long term in response to these and other developments.
DERIVATIVES RISK: Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicator(s). Gains or losses from derivatives can be substantially greater than the derivatives' original cost, and therefore, can involve leverage. Derivatives can be complex instruments and can involve analysis that differs from that required for other investment types used by the fund. If the value of a derivative does not correlate well with the particular market or other asset class the derivative is intended to provide exposure to, the derivative may not have the effect anticipated. Derivatives can also reduce the opportunity for gain or result in losses by offsetting positive returns in other investments. Derivatives can be less liquid than other types of investments.
ALLOCATION RISK: MFS' assessment of the mix of general risk and return characteristics of asset classes and underlying funds, and the resulting allocation among asset classes and underlying funds, can be incorrect or can lead to an investment focus that results in the fund underperforming other funds with similar investment strategies and/or asset classes.
AFFILIATED FUND RISK: MFS may be subject to potential conflicts of interest in selecting and substituting underlying funds because it is also the adviser to the underlying funds (e.g., the management fees paid by some underlying funds are higher than the management fees paid by other underlying funds). However, MFS is legally obligated to act in the best interests of the fund when selecting and substituting underlying funds.
INVESTMENT SELECTION RISK: The MFS analysis of an investment can be incorrect and its selection of investments can lead to an investment focus that results in the fund underperforming other funds with similar investment strategies and/or underperforming the markets in which the fund invests.
COUNTERPARTY AND THIRD PARTY RISK: Transactions involving a counterparty other than the issuer of the instrument, or a third party responsible for servicing the instrument, are subject to the credit risk of the counterparty or third party, and to the counterparty's or third party's ability to perform in accordance with the terms of the transaction.
LIQUIDITY RISK: Certain investments and types of investments are subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. As a result, it may not be possible to sell the investment at any particular time or at an acceptable price.
LEVERAGING RISK: Certain transactions, including when-issued, delayed-delivery, and forward commitment purchases, and the use of some derivatives, can result in leverage. Leverage involves investment exposure in an amount exceeding the initial investment. In transactions involving leverage, a relatively small market movement or change in other underlying indicator can lead to significantly larger losses to the fund. Leverage can cause increased volatility by magnifying gains or losses on underlying investments.
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of the risks of investing in the fund by showing changes in the fund's performance over time. The performance table also shows:
- how the fund's performance over time compares with that of a broad measure of market performance, and
- returns before the deduction of taxes and returns after the deduction of certain taxes for Class A shares.
The chart and table provide past performance information. The fund's past performance (before and after taxes) does not necessarily indicate how the fund will perform in the future. The performance information in the chart and table is based upon calendar year periods, while the performance information presented under the caption "Financial Highlights" and in the fund's shareholder reports is based upon the fund's fiscal year. Therefore, these performance results may differ.
BAR CHART. The bar chart will show changes over time in the annual total return of Class A shares for ten calendar years, and assumes the reinvestment of distributions. The chart and related notes do not take into account any sales charges (loads) that you may be required to pay upon purchase or redemption of the fund's shares. If these sales charges were included, they would reduce these returns. The return of the fund's other classes of shares will differ from the Class A share returns shown in the bar chart, depending upon the expenses of those classes.
[CHART]
CALENDAR GAIN OR YEAR LOSS (%) -------- ------- 2005 16.65% 2006 27.11% |
The total return for the six month period ended June 30, 2007 was 10.33%. During the periods shown in the bar chart, the highest quarterly return was 12.38% (for the calendar quarter ended September 30, 2005) and the lowest quarterly return was (1.14)% (for the calendar quarter ended June 30, 2005).
PERFORMANCE TABLE. This table shows how the average annual total returns of each class of the fund, before the deduction of taxes ("Returns Before Taxes"), compare to a broad measure of market performance, and assumes the deduction of the maximum applicable sales loads (initial sales charge and/or contingent deferred sales charge (CDSC), as applicable), and the reinvestment of distributions. In addition, for Class A shares, this table shows Class A average annual total returns:
- after the deduction of taxes on distributions made on Class A shares, such as capital gains and income distributions ("Class A Shares' Return After Taxes on Distributions "), and
- after the deduction of taxes on both distributions made on Class A shares and on redemption of Class A shares, assuming that the shares are redeemed at the end of the periods for which returns are shown
("Class A Shares' Return After Taxes on Distributions and Sale of Class A Shares").
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIOD ENDED DECEMBER 31, 2006)
SHARE CLASS 1 YEAR LIFE* ------------------------------------------------------------------------------- RETURNS BEFORE TAXES B Shares, with CDSC (Declining Over Six Years from 4% to 0%) 22.23% 24.84% C Shares, with CDSC (1% for 12 Months) 25.29% 25.83% I Shares, at Net Asset Value 27.50% 27.06% 529A Shares, with Initial Sales Charge (5.75%) 19.50% 23.03% 529B Shares, with CDSC (Declining Over Six Years From 4% to 0%) 22.03% 24.51% 529C Shares, with CDSC (1% for 12 months) 24.98% 25.52% R Shares, at Net Asset Value 26.88% 26.47% R1 Shares, at Net Asset Value 26.21% 25.74% R2 Shares, at Net Asset Value 26.70% 26.10% R3 Shares, at Net Asset Value 26.69% 26.19% R4 Shares, at Net Asset Value 27.12% 26.61% R5 Shares, at Net Asset Value 27.40% 26.92% A Shares, with Initial Sales Charge (5.75%) 19.80% 23.38% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, with Initial Sales Charge (5.75%) 18.43% 22.21% A Shares' Return After Taxes on Distributions and Sale of Class A Shares, with Initial Sales Charge (5.75%) 13.64% 19.71% BENCHMARK COMPARISON (RETURNS BEFORE TAXES) MSCI All Country World (ex-US) Index +** 27.16% 27.48% |
* Life refers to the period from the commencement of the fund's investment operations on September 30, 2004, through December 31, 2006.
+ Source: FactSet Research Systems Inc.
** Morgan Stanley Capital International (MSCI) All Country World (ex-US) Index is a market capitalization index that is designed to measure equity performance in the developed and emerging markets, excluding the U.S.
All performance results reflect any applicable fee and expense waivers in effect during the periods shown; without these, the results would have been lower.
After-tax returns are calculated using the historical highest individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your own tax situation, and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns are shown for only one of the fund's classes of shares, and after-tax returns for the fund's other classes of shares will vary from the returns shown.
The fund commenced investment operations on September 30, 2004, with the offering of Class A, Class B, Class C, Class I, Class 529A, Class 529B, Class 529C, Class R, and Class R3 shares and subsequently offered Class R1, Class R2, Class R4 and Class R5 shares on April 1, 2005.
Performance for Class R4 and R5 shares includes the performance of the fund's Class A shares for periods prior to their offering. Performance for R1 and R2 shares includes the performance of the fund's Class B shares for periods prior to their offering. Blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class specific operating expenses (such as Rule 12b-1 fees). Compared to performance these share classes would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance for share classes with higher operating expenses than those of the share class to which they are blended, and lower performance for share classes with lower operating expenses than those of the share class to which they are blended.
EXPENSE SUMMARY
EXPENSE TABLE
The following tables describe the fees and expenses that you may pay when you buy, redeem, and hold shares of the fund. In addition to the fees and expenses which you bear directly, you will indirectly bear the fund's pro rata share of the fees and expenses of the underlying funds in which the fund invests.
The annual fund operating expenses shown in the fund's fee table below are based on expenses incurred during the fund's most recently completed fiscal year adjusted to reflect annualized expenses and current fee arrangements, and a weighted average of the total annual operating expenses (as reported in each underlying fund's most recent shareholder report) of, and the fee charged by (if any), the underlying funds in which the fund invested during the fund's most recently completed fiscal year. The fund's annual operating expenses may vary in future years.
Shareholder Fees (fees paid directly from your investment):
A AND B AND C AND
SHARE CLASS 529A 529B 529C I ALL R
----------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) 5.75% N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever
is less) See Below(#) 4.00% 1.00% N/A N/A
|
Annual Fund Operating Expenses (expenses that are deducted from fund assets):
SHARE CLASS A B C I
---------------------------------------------------------------------------
Management Fee N/A N/A N/A N/A
Distribution and/or Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A
Other Expenses(2) 0.05% 0.05% 0.05% 0.05%
Acquired (Underlying) Fund Fees and Expenses(2) 1.10% 1.10% 1.10% 1.10%
---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.50% 2.15% 2.15% 1.15%
SHARE CLASS 529A 529B 529C
--------------------------------------------------------------------
Management Fee N/A N/A N/A
Distribution and/or Service (12b-1) Fees(1) 0.35% 1.00% 1.00%
Other Expenses(2) 0.30% 0.30% 0.30%
Acquired (Underlying) Fund Fees and Expenses(2) 1.10% 1.10% 1.10%
---- ---- ----
Total Annual Fund Operating Expenses(2) 1.75% 2.40% 2.40%
|
SHARE CLASS R R1 R2
--------------------------------------------------------------------
Management Fee N/A N/A N/A
Distribution and/or Service (12b-1) Fees(1) 0.50% 0.75% 0.50%
Other Expenses(2) 0.05% 0.40% 0.30%
Acquired (Underlying) Fund Fees and Expenses(2) 1.10% 1.10% 1.10%
---- ---- ----
Total Annual Fund Operating Expenses(2) 1.65% 2.25% 1.90%
SHARE CLASS R3 R4 R5
--------------------------------------------------------------------
Management Fee N/A N/A N/A
Distribution and/or Service (12b-1) Fees(1) 0.50% 0.25% N/A
Other Expenses(2) 0.20% 0.20% 0.15%
Acquired (Underlying) Fund Fees and Expenses(2) 1.10% 1.10% 1.10%
---- ---- ----
Total Annual Fund Operating Expenses(2) 1.80% 1.55% 1.25%
|
# A contingent deferred sales charge (referred to as a CDSC) of 1% may be deducted from your redemption proceeds if you buy $1 million or more of Class A shares or if you are investing through a retirement plan and your Class A purchase meets certain requirements and you redeem your investment within 12 months of your purchase. Class 529A shares are not subject to any CDSC.
(1) The fund's Rule 12b-1 plan permits it to pay distribution and/or service fees to support the sale and distribution of the fund's Class A, Class B, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3 and Class R4 shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "Distribution and Service Fees."
(2) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Total Annual Fund Operating Expenses" would be lower. A portion of the expenses of the fund may be paid by the underlying funds in which the fund invests. See "Management of the Fund - Special Servicing Agreement." For the 529 classes only, "Other Expenses" also include the program management fee described under "Management of the Fund." In addition, qualified tuition program accounts for which MFD serves as program manager are generally subject to a $25 annual account maintenance fee. Other qualified tuition program accounts may be subject to other account fees. Please see the program description and materials available from your financial intermediary for details about these account fees. For the Class R share classes only, "Other Expenses" also include an annual retirement plan administration and services fee paid by the fund from assets attributable to the respective class to MFS for the provision by MFS, either directly or through other affiliated and/or unaffiliated entities, of various administrative, recordkeeping and communication/educational services in an amount equaling 0.35% for Class R1, 0.25% for Class R2, 0.15% for Class R3, 0.15% for Class R4 and 0.10% for Class R5 shares.
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you redeem your shares at the end of the time periods (unless otherwise indicated);
- Your investment has a 5% return each year and dividends and other distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your costs would be:
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------------------------------- A Shares $719 $1,022 $1,346 $2,263 B Shares(1) Assuming redemption at end of period $618 $ 973 $1,354 $2,318 Assuming no redemption $218 $ 673 $1,154 $2,318 C Shares Assuming redemption at end of period $318 $ 673 $1,154 $2,483 Assuming no redemption $218 $ 673 $1,154 $2,483 I Shares $117 $ 365 $ 633 $1,398 529A Shares $743 $1,094 $1,469 $2,519 529B Shares(1) Assuming redemption at end of period $643 $1,048 $1,480 $2,575 Assuming no redemption $243 $ 748 $1,280 $2,575 529C Shares Assuming redemption at end of period $343 $ 748 $1,280 $2,736 Assuming no redemption $243 $ 748 $1,280 $2,736 R Shares $168 $ 520 $ 897 $1,955 R1 Shares $228 $ 703 $1,205 $2,585 R2 Shares $193 $ 597 $1,026 $2,222 R3 Shares $183 $ 566 $ 975 $ 2116 R4 Shares $158 $ 490 $ 845 $1,845 R5 Shares $127 $ 397 $ 686 $1,511 |
(1) Class B shares and Class 529B shares convert to Class A shares and Class 529A shares, respectively, approximately eight years after purchase; therefore, years nine and ten reflect Class A and Class 529A expenses, respectively.
CERTAIN INVESTMENT POLICIES AND RISKS
TURNOVER
MFS may engage in active and frequent trading in pursuing the fund's principal investment strategies. Frequent trading increases transaction costs, which may reduce the fund's return. Frequent trading can also result in the realization of a higher percentage of short-term capital gains and a lower percentage of long-term capital gains as compared to a fund that trades less frequently. Because short-term capital gains are distributed as ordinary income, this would generally increase your tax liability unless you hold your shares through a tax-deferred or exempt vehicle.
TEMPORARY DEFENSIVE POLICY
In response to market, economic, political, or other conditions, MFS may depart from the fund's, as well as each underlying fund's, principal investment strategies by temporarily investing for defensive purposes. When MFS invests defensively, different factors could affect the fund's, as well as each underlying fund's, performance and the fund may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Information about investment strategies and investment types not described in the Prospectus and the risks associated with those investment strategies and investment types are described in the fund's Statement of Additional Information ("SAI").
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS"), located at 500 Boylston Street, Boston, Massachusetts, serves as the investment adviser for the fund. Subject to the supervision of the Board of Trustees, MFS is responsible for managing the fund's investments, executing transactions and providing related administrative services and facilities under an Investment Advisory Agreement between the fund and MFS.
The fund pays no management fee to MFS; however the underlying funds pay management fees to MFS which are reflected in the "Expense Table."
MFS has agreed in writing to bear the fund's expenses such that "Other Expenses" do not exceed 0.10% annually for each of Class A, Class B, Class C, Class I and Class R shares, 0.45% annually for Class R1 shares, 0.35% annually for each of Class R2, Class 529A, Class 529B and Class 529C shares, 0.25% annually for each of Class R3 and Class R4 shares, and 0.20% for Class R5 shares. This written agreement excludes management fees, distribution and service fees, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, and will continue until at least September 30, 2008.
A discussion regarding the basis for the Board of Trustees' approval of the Investment Advisory Agreement is available in the fund's most recent semi-annual report for the six-month period that ends November 30.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $202 billion as of June 30, 2007.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of the MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, and inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries with respect to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The lawsuits assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940, the Employee Retirement Income Security Act of 1974 (ERISA), as well as
fiduciary duties and other violations of common law. The lawsuits variously have been commenced as class actions or individual actions on behalf of investors who purchased, held, or redeemed shares of the MFS funds during specified periods, as ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (IN re MUTUAL FUNDS INVESTMENT
LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER),
NO. 1:04-md-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS funds include RIGGS V. MFS et al., CASE NO. 04-CV-01162-JFM
(direct), HAMMERSLOUGH V. MFS et al., CASE NO. 04-md-01620 (derivative), ANITA
WALKER V. MFS et al., CASE NO. 1:04-CV-01758 (ERISA), and REAVES V. MFS SERIES
TRUST I, et al., CASE NO. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District of
Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., et al., NO. 04cv10584 (GAO)
(a consolidated action, first filed on March 25, 2004) and MARCUS DUMOND, et al.
V. MASSACHUSETTS FINANCIAL SERVS. CO., et al., NO. 04cv11458 (GAO) (filed on May
4, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages,
punitive damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. Insofar as any of the actions is appropriately
brought derivatively on behalf of any of the MFS funds, any recovery will inure
to the benefit of the MFS funds. Several claims of the various lawsuits have
been dismissed; MFS and the other named defendants continue to defend the
various lawsuits.
DISCLOSURE OF PORTFOLIO HOLDINGS. The MFS funds have established a policy with respect to the disclosure of fund portfolio holdings. A description of this policy is provided in the SAI. In addition, by clicking on a fund name under "Select a fund" on the MFS Web site (MFS.COM), the following information is generally available to you:
INFORMATION APPROXIMATE DATE OF POSTING TO WEB SITE -------------------------------------------------------------------------------- Fund's top 10 securities holdings as of each month's end 14 days after month end Fund's full securities holdings as of each month's end 24 days after month end |
If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for funds that primarily invest in shares of the other MFS funds, all
securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the funds or MFS may suspend the posting of this information or modify the elements of this web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
PORTFOLIO MANAGER(S)
Information regarding the portfolio manager(s) of the fund is set forth below. Further information regarding the portfolio manager(s), including other accounts managed, compensation, ownership of fund shares, and possible conflicts of interest, is available in the fund's SAI. The portfolio manager is primarily responsible for the day-to-day management of the fund unless otherwise specified.
PORFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
-------------------------------------------------------------------------------------------------------------------------------
Thomas Melendez Portfolio Manager, General Oversight 2004 Investment Officer of MFS; employed in the investment
of a Team of Quantitative Professionals management area of MFS since 2002; Emerging Market Product
Specialist at Schroders North America prior to 2002.
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ADMINISTRATOR
MFS provides the fund with certain financial, legal, and other administrative services under a Master Administrative Services Agreement between the fund and MFS. Under the Agreement, MFS is paid an annual fee for providing these services.
In addition, MFS provides, either directly or through affiliated and/or unaffiliated entities, certain administrative, recordkeeping, and communication/educational services to the retirement plans and retirement plan participants which invest in Class R1, Class R2, Class R3, Class R4 and Class R5 shares under a Master Class R Administration and Services Agreement. Under the Agreement, the fund pays an annual fee to MFS for these services at the following percentages of the average daily net assets attributable to that class of shares: 0.35% for Class R1; 0.25% for Class R2; 0.15% for Class R3; 0.15% for Class R4; and 0.10% for Class R5 shares.
DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of the fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance,
transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. MFSC may receive a fee based on the costs it incurs in providing these services plus a target profit margin, including payments made to affiliated and unaffiliated service providers that provide certain sub-accounting and other shareholder services (shareholder servicing payments) and out-of-pocket expenses.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, the underlying funds and the fund, each underlying fund may pay a portion of the transfer-agent-related expenses of the fund, including sub-accounting fees payable to financial intermediaries, to the extent that such payments are less than the amount of the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the fund.
PROGRAM MANAGER(S)
MFD serves as program manager for a qualified tuition program under Section 529 of the Internal Revenue Code through which 529 share classes of the fund are included as investment options to program participants. MFD provides recordkeeping, tax reporting, and account services, as well as services designed to maintain the program's compliance with the Internal Revenue Code (the "Code") and other regulatory requirements under a Master 529 Administrative Services Agreement. The fund's 529 share classes may also be offered through qualified tuition programs for which MFD does not serve as program manager.
Under the Agreement, the fund pays MFD an annual fee of up to 0.35% of the average daily net assets attributable to each 529 share class. The current annual fee has been established at 0.25% of the average daily net assets attributable to each 529 share class up to $10 billion in assets, 0.225% from $10 billion in assets up to $20 billion in assets, and 0.20% from $20 billion in assets and above. The fee may only be increased with the approval of the fund's Board of Trustees. MFD may pay a portion of this fee to program managers of other qualified tuition programs which provide similar services to those programs.
Please consult the program description for your particular qualified tuition program for a discussion of the fees paid to and services received from the program manager.
DESCRIPTION OF SHARE CLASSES
The fund offers Class A, Class B, Class C, Class I, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4 and Class R5 through this prospectus.
Class I shares generally are available only to the following eligible investors:
- certain retirement plans established for the benefit of employees and former employees of MFS or its affiliates;
- retirement plans, endowments or foundations that: (i) have, at the time of purchase of Class I shares, aggregate assets of at least $100 million; and (ii) invest at least $10 million in Class I shares of the fund and other MFS funds;
- bank trust departments or law firms acting as trustee or manager for trust accounts which, on behalf of their clients (i) initially invest at least $100,000 in Class I shares of the fund, or (ii) have, at the time of purchase of Class I shares, aggregate assets of at least $10 million invested in Class I shares of the fund and other MFS funds; and
- certain retirement plans offered, administered, or sponsored by insurance companies, as permitted by MFD based on their overall relationship with MFS.
In addition, MFD may accept, in its sole discretion, investments in Class I shares from purchasers not listed above or that do not meet these qualification requirements.
Class 529A, Class 529B and Class 529C shares are generally only available to
qualified tuition programs (tuition programs) established in accordance with
Section 529 of the Code.
Class R shares are available for purchase only by retirement plans that held Class R shares of a fund on March 31, 2005, and by retirement plans (other than plans for which MFS or an affiliate provides participant recordkeeping, and plans for which MFS Heritage Trust Company serves as a trustee) that are held by MFSC at the plan or omnibus level.
Class R1, Class R2, Class R3, Class R4 and Class R5 shares generally are available only to 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans, defined benefit plans and non-qualified deferred compensation plans (eligible retirement plans). Class R1, Class R2, Class R3, Class R4 and Class R5 shares generally are available to retirement plans only if either MFS or one of its affiliates is responsible for providing participant recordkeeping services (Serviced Plan) or MFS or one of its affiliates has entered into an administrative arrangement with a third party to provide certain recordkeeping and/or administrative services (Alliance Plan). Class R1, Class R2, Class R3, Class R4 and Class R5 shares are not generally available to retail non-
retirement accounts, traditional and Roth IRAs, Coverdell Educational Savings Accounts, SEPs, SAR-SEPs, SIMPLE IRAs, individual 403(b) plans, and 529 tuition plans.
A Serviced Plan will be limited as to which class of shares it will be eligible to purchase under the terms of the service agreement between MFS or an affiliate and the sponsor of the retirement plan. Currently only Class R1, Class R2, Class R3, Class R4, Class R5, and Class I shares are offered to Serviced Plans; provided that Serviced Plans that held certain other classes of shares of a fund on June 30, 2005 (March 31, 2005 with respect to Class R shares), may purchase additional shares of the same class of the fund and may exchange their shares for shares of the same class of any other fund.
SALES CHARGES AND WAIVERS OR REDUCTIONS
You may be subject to an initial sales charge when you purchase Class A or Class 529A shares, or a CDSC when you redeem Class A, Class B, Class C, Class 529B or Class 529C shares. These sales charges are paid to MFD.
In the circumstances described below, you may qualify for a sales charge waiver or reduction for purchases or redemptions of Class A, Class B, Class C, Class 529A, Class 529B, and Class 529C shares. In addition, other sales charge waivers or reductions may apply to certain transactions by retirement plans, section 529 tuition programs, and certain other groups (e.g., affiliated persons of MFS) and with respect to certain types of investment programs (e.g., certain wrap accounts or fund supermarket investments). Details regarding the types of investment programs and categories of investors eligible for these waivers or reductions are provided in the SAI, which is available to you free of charge, and on the fund's Web site at MFS.COM. Some of these programs and waivers or reductions may not be available to you if your shares are held through certain types of accounts, such as retirement accounts and 529s plans, or certain accounts that you may have with your financial intermediary. Waivers or reductions may be eliminated, modified, and added at any time without providing advance notice.
CLASS A AND CLASS 529A SHARES. You may purchase Class A and Class 529A shares at the offering price (which includes the applicable initial sales charge). In some cases, you may purchase Class A and Class 529A shares without an initial sales charge; in these cases, for Class A shares only, you will generally be subject to a 1% CDSC upon redemption within 12 months of your purchase.
The amount of the initial sales charge you pay when you buy Class A or Class 529A shares differs depending upon the amount you invest, as follows:
GROSS PURCHASE AMOUNT
AMOUNT OF PURCHASE (OFFERING PRICE*) NET AMOUNT INVESTED
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Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1,000,000 2.00% 2.04%
$1,000,000 or more None** None**
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* Offering price is calculated by dividing the net asset value of a share by the difference between 1 and the initial sales charge percentage. Because the offering price is rounded to two decimal places, actual sales charges you pay may be more or less than those calculated using these percentages.
** For Class A shares only, a 1% CDSC will generally apply to such purchases.
You pay no initial sales charge when you invest $1 million or more in Class A and Class 529A shares (or, with respect to certain retirement plans, if MFD determines in its sole discretion that the total purchases by the retirement plan (or by multiple plans maintained by the same plan sponsor) will equal or exceed within a reasonable period of time a specified threshold determined by MFD). However, for Class A shares, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS B AND CLASS 529B SHARES. You may purchase Class B and Class 529B shares at net asset value without an initial sales charge, but if you redeem your shares within the first six years after purchase, you may be subject to a CDSC (declining from 4% during the first year to 0% after six years).
The CDSC is imposed according to the following schedule:
If you hold Class B or Class 529B shares for approximately eight years, they will convert to Class A or Class 529A shares of the fund, respectively. All Class B or Class 529B shares you acquire through the reinvestment of dividends and distributions will be held in a separate sub-account. Each time any Class B or Class 529B shares in your account convert to Class A or Class 529A shares, a proportionate number of the Class B or Class 529B shares in the sub-account will also convert to Class A or Class 529A shares, respectively.
CLASS C AND CLASS 529C SHARES. You may purchase Class C or Class 529C shares at net asset value without an initial sales charge. However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS I SHARES. Eligible investors may purchase Class I shares at net asset value without an initial sales charge or a CDSC upon redemption.
CLASS R, CLASS R1, CLASS R2, CLASS R3, CLASS R4, AND CLASS R5 SHARES. Eligible retirement plans may purchase Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares at net asset value without an initial sales charge or a CDSC upon redemption.
SALES CHARGE WAIVERS OR REDUCTIONS. Below is a summary of certain investor programs whereby the applicable sales charge may be waived or reduced. You or your financial intermediary must inform MFSC upon purchasing fund shares of your intention to invest in a fund under one of the programs below. You can provide this information in your account application or through a separate document provided by your financial intermediary.
INVESTMENTS ELIGIBLE FOR:
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WAIVED
PROGRAM WAIVED INITIAL SALES CHARGE REDUCED INITIAL SALES CHARGE CDSC
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Letter of Intent X
Right of Accumulation X
Automatic Exchange Plan X*
Exchange Privilege X*
Systematic Withdrawal Plan X**
Distribution Reinvestment X
Distribution Investment Program X
Other Sales Charge Waivers X X
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* Investments under the Automatic Exchange Plan or certain other exchanges under the Exchange Privilege may be subject to a sales charge in certain cases.
** Not available for Class A shares and limited for Class B, Class C, Class 529B or Class 529C shares.
- LETTER OF INTENT (LOI). You may pay a reduced or no initial sales charge on purchases of Class A or Class 529A shares if you intend to invest a specific dollar amount, based on the gross amount of your investment (including the amount of any sales charge paid), including investments through any linked accounts in any class of any MFS fund (and the MFS Fixed Fund, a bank collective investment trust) within a 13-month period (36 months for a $1 million commitment). Distributions reinvested in additional shares of the fund or distributions from other MFS funds automatically invested in shares of the fund will not apply toward the satisfaction of the LOI.
For each purchase you make under the LOI you will pay the initial sales charge rate applicable to the total amount you intended to purchase. If, however, you do not purchase the intended amount within the relevant time period, your account will be adjusted by redemption of the amount of shares needed to pay the higher initial sales charge level for the amount actually purchased.
To establish a LOI, you may complete the Letter of Intent section of your account application or service application. In order to benefit
from the LOI, you or your financial intermediary must inform MFSC that the LOI is in effect each time shares of a fund are purchased.
- RIGHT OF ACCUMULATION (ROA). Under the ROA, you may pay a reduced or no initial sales charge on purchases of Class A or Class 529A shares by aggregating the total dollar amount of your investment with your existing investments or any linked accounts in any class of any MFS fund (and the MFS Fixed Fund), based on the current maximum public offering price of the funds. For example, you will pay a sales charge on your current purchase at the rate applicable to the total value of all eligible accounts based on the sales charge schedule above.
- LINKING ACCOUNTS FOR LOI AND ROA. For purposes of obtaining reduced sales charges under the LOI and ROA, you may combine the value of your current purchase of shares of an MFS fund with the value of existing accounts held with the MFS funds (or the MFS Fixed Fund) by you, your spouse (or legal equivalent under applicable state law), and your children under the age of 21.
Eligible accounts that you may link under a LOI and ROA may include:
- Individual accounts;
- Joint accounts;
- Trust accounts of which you, your spouse (or legal equivalent under applicable state law), or child under the age of 21 is the grantor;
- MFS 529 College Savings Plan accounts;
- Certain single-participant retirement plan accounts;
- Certain Individual Retirement Accounts;
- Uniform Gifts/Transfers to Minor Acts accounts; and
- Accounts held in the name of your financial intermediary on your behalf, except accounts investing in Class W shares of certain MFS funds.
In order to link such accounts under a LOI or ROA, the broker/dealer at the time of your current purchase must be the broker/dealer (or the clearing broker/dealer for your broker/dealer so long as your account is not aggregated by the clearing broker/dealer with other accounts) for any additional accounts to be linked. MFS fund shares held as follows cannot be combined with your current purchase for purposes of a LOI or ROA:
- Shares held indirectly through financial intermediaries other than the broker/dealer for your current purchase (for example, shares held in a different broker/dealer's brokerage account or with a
bank, an insurance company separate account or an investment adviser); or
- Shares held directly in a MFS fund account on which the broker/dealer is different than the broker/dealer for your current purchase.
It is your responsibility to inform the broker/dealer for each current purchase of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. If you have not designated a broker/dealer, you should inform MFSC directly of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. You should provide your financial intermediary (including MFSC if you have not designated a broker/dealer) with certain supporting information at the time of each purchase regarding accounts held with the MFS funds that are eligible to be combined for purposes of a LOI or ROA. Such information may include shareholder identification numbers or applicable account numbers or account statements. You should request that your financial intermediary provide this information to the funds or their agents when placing each purchase order.
SPECIAL NOTE FOR LOI OR ROA ELIGIBLE ACCOUNTS LINKED PRIOR TO MAY 1, 2006. Any LOI or ROA eligible accounts linked prior to May 1, 2006, will remain linked to the extent the broker/dealer information for such accounts is not modified. In the event you change the broker/dealer for any such account, your accounts will no longer be eligible to be linked under a LOI or ROA. In addition, you will not be able to link additional accounts to the extent they do not meet the criteria discussed above.
- AUTOMATIC EXCHANGE PLAN (not available for R share classes). If you have an account balance of at least $2,000 in the fund, you may participate in the automatic exchange plan, a dollar-cost averaging program. This plan permits you to make automatic periodic exchanges from your account in the fund for shares of the same class of other MFS funds. Exchanges will generally be made at net asset value without any sales charges. If you exchange shares out of the MFS Money Market Fund or MFS Government Money Market Fund, or if you exchange Class A or Class 529A shares out of the MFS Cash Reserve Fund into Class A or Class 529A shares of any other MFS fund, you will pay an initial sales charge if you have not already paid this charge on these shares.
- SYSTEMATIC WITHDRAWAL PLAN. If you have an account balance of at least $5,000 in your account in the fund, you may elect to receive (or designate someone else to receive) regular periodic payments (of at least $50 if by check) through an automatic redemption of Class A, Class B, Class C, Class I, Class 529A, Class 529B, Class 529C, Class R,
Class R1, Class R2, Class R3, Class R4, or Class R5. For Class B, Class C, Class 529B or Class 529C shares, you may incur a CDSC when Class B, Class C, Class 529B or Class 529C shares are redeemed under the plan (or plans if more than one plan is established) if amounts greater than 10% of the value of your account are withdrawn under the plan(s) in any one year (with respect to Class B or Class 529B shares, determined at the time of your first withdrawal under the plan(s) or January 1, 2007, whichever is later and reset annually thereafter and with respect to Class C or Class 529C shares, determined at the time the plan is established). For Class A shares, you may incur a CDSC when Class A shares are redeemed under this plan.
- DISTRIBUTION REINVESTMENT. You may automatically reinvest dividend and capital gain distributions in the same fund without paying an initial sales charge.
- DISTRIBUTION INVESTMENT PROGRAM. You may automatically reinvest dividend and capital gain distributions into the same class of another MFS fund without paying a CDSC or an initial sales charge.
CALCULATION OF CDSC. As discussed above, certain investments in Class A, Class B, Class C, Class 529B and Class 529C shares are subject to a CDSC. For purposes of calculating the CDSC, purchases made on any day during a calendar month will age one month on the last day of that month, and on the last day of each subsequent month. For example, a 1% CDSC on Class A shares purchased on August 10 will expire at the close of business on July 31 of the following calendar year, and a redemption of those shares made on or after August 1 of the following calendar year will not be subject to the CDSC.
Shares acquired through reinvestment of distributions are not subject to a CDSC. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. For purposes of determining the CDSC, if you sell only some of your shares, shares not subject to a CDSC are sold first, followed by shares held the longest.
DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"). Under the Distribution Plan, the fund pays distribution and service fees to MFD to support the sale and distribution of Class A, Class B, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3 and Class R4 shares, as well as shareholder servicing and account maintenance activities. The fund has not adopted a Rule 12b-1 plan with respect to its Class I or Class R5 shares. These distribution and service fees equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
MAXIMUM TOTAL
MAXIMUM DISTRIBUTION DISTRIBUTION AND
CLASS FEE MAXIMUM SERVICE FEE SERVICE FEE
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Class A 0.10% 0.25% 0.35%
Class B 0.75% 0.25% 1.00%
Class C 0.75% 0.25% 1.00%
Class 529A 0.25% 0.25% 0.50%
Class 529B 0.75% 0.25% 1.00%
Class 529C 0.75% 0.25% 1.00%
Class R 0.25% 0.25% 0.50%
Class R1 0.50% 0.25% 0.75%
Class R2 0.25% 0.25% 0.50%
Class R3 0.25% 0.25% 0.50%
Class R4 N/A 0.25% 0.25%
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These fees are paid out of fund assets of the applicable class of shares. Because these fees are an ongoing expense of the fund, they increase the cost of your investment over time and may cost you more than other types of sales charges.
A portion of the Class 529A distribution fee equal to 0.10% is currently in effect; the remaining portion is currently not in effect but may be implemented on such date as the Board of Trustees may determine.
FINANCIAL INTERMEDIARY COMPENSATION
The term "financial intermediary" includes any broker/dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administrator, insurance company, and any other institutions having a selling, administration, or any similar agreement with MFD, MFS, or one of its affiliates.
Financial intermediaries receive various forms of compensation in connection with the sale of shares of a fund and/or the servicing of shareholder accounts. Financial intermediaries may receive such compensation (i) in the form of up front commissions and ongoing asset-based compensation paid by MFD based on sales charges received and expected to be received by MFD from shareholders and Distribution Plan distribution and service payments received by MFD from the fund, (ii) in the form of 529 administrative services payments, retirement plan administrative and service payments, and shareholder servicing payments paid by MFD and/or one or more of its affiliates (for purposes of this section only, collectively, "MFD") based on the receipt of such payments by MFD from the fund, and (iii) in the form of payments paid by MFD from MFD's own additional resources.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-
referenced categories and such payments can be significant to the financial intermediary. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular fund or share class.
Financial intermediaries may receive up front commissions of up to the following percentage amounts for sales of the following share classes:
UP FRONT COMMISSION AS A
SHARE CLASS PERCENTAGE OF OFFERING PRICE
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Class A or Class 529A 5.75%
Class B or Class 529B 3.75%
Class C or Class 529C 1.00%
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Financial intermediaries may also receive all or a portion of the following payments: Distribution Plan distribution and service fees as described in "Description of Share Classes - Distribution and Service Fees"; 529 administrative services fees as described in "Management of the Fund - Program Manager(s)"; retirement plan administration and service fees as described in "Management of the Fund - Administrator"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
In addition, financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS funds, to cooperate with MFD's promotional efforts and/or in recognition of their marketing, administrative services, and/or processing support. This compensation from MFD is not reflected in the fees and expenses listed in the fee table section of the fund's prospectus. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary and the quality of the overall relationship with the financial intermediary.
These additional payments by MFD may take the form of payments to financial intermediaries that provide marketing support and administrative services to MFD with respect to fund shares sold or held through the financial intermediary's retail distribution network and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. MFD may also make payments to financial intermediaries to help offset the cost associated with client account maintenance support, statement preparation, and transaction processing. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, MFD may make other payments or allow other promotional incentives or payments to financial intermediaries.
You can find further details in the SAI about the payments made by MFD and the services provided by financial intermediaries. Financial intermediaries may charge you additional fees and/or commissions other than those disclosed in this prospectus. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries that sell fund shares may also act as a broker/dealer in connection with a MFS fund's purchase or sale of portfolio securities. However, the fund and MFS do not consider financial intermediaries' sales of shares of a MFS fund as a factor when choosing broker/dealers to effect portfolio transactions for the MFS funds.
HOW TO PURCHASE, REDEEM, AND EXCHANGE SHARES
You may purchase, redeem, and exchange shares of the fund in the manner described below. If you buy or sell shares of a fund through a retirement account, 529 plan, or financial intermediary, the procedures for buying, selling, and exchanging shares of the fund and the features, policies and fees may differ from those discussed in this prospectus.
HOW TO PURCHASE SHARES
Your shares will be bought at the offering price (the net asset value per share plus any applicable initial sales charge) next calculated after your purchase order is received in proper form. MFSC reserves the right to reject any purchase order that is not in proper form. The specific requirements for proper form vary among account types and transactions. Certain restrictions apply to the use of a transfer on death registration. You or your financial intermediary should contact MFSC to obtain a Transfer on Death registration form and for information regarding MFSC's other requirements for transfer on death registrations.
The fund may reject for any reason, or cancel as permitted or required by law, any purchase orders, including exchanges. The fund may stop offering shares completely, or may offer shares only on a limited basis, for a period of time or permanently.
The fund is required by law to obtain from you certain personal information that will be used to verify your identify. If you do not provide the information, the fund may not be able to open your account. The fund must also take certain steps to verify that the account information you provide is correct.
CLASS A, CLASS B, AND CLASS C SHARES. With respect to Class A, Class B, and Class C shares, you can establish an account by having your financial intermediary process your purchase. The minimum initial investment is generally $1,000, except for: fee-based and wrap accounts offered through certain financial intermediaries, for which there is no minimum initial investment; and IRAs, for which the minimum initial investment is generally $250 ($200 for rollovers from certain Serviced Plans). In addition, the minimum initial investment is $50 for automatic investment or exchange plans. MFSC waives or lowers the initial investment minimum for certain types of investors and investments.
Purchases of Class B shares are subject to a total account value limitation at the time of purchase of $99,999, and purchases of Class C shares are subject to a total account value limitation at the time of purchase of $999,999. If your existing accounts for all share classes held with the MFS funds have a total value equal to $99,999 for Class B share purchases or $999,999 for Class C share purchases, you will not be able to purchase Class B or Class C shares, as applicable. For the purpose of determining your total account value, existing accounts for all share classes held with the MFS funds that are linked under a LOI or ROA will be included.
The fund or its agents may at their discretion accept a purchase request for Class B shares or Class C shares that would otherwise exceed the total account value limitation of $99,999 and $999,999, respectively, under certain circumstances, including, but not limited to, purchases by certain types of group retirement plans sponsored or serviced by MFS or an affiliate.
You may have your financial intermediary process your subsequent purchases or you may contact MFS directly. Generally, there is no minimum for subsequent investments except there is generally a $50 minimum for subsequent investments by check and through automatic exchange plans.
- ADDITIONAL PURCHASES DIRECTLY THROUGH MFSC.
- BY MAIL. You may purchase additional shares by mailing a check with the returnable portion of your statement to MFSC.
- BY TELEPHONE. You may purchase additional shares by transferring money by phone from your pre-designated bank account. You must elect this privilege on your account application or service application.
- ELECTRONICALLY. You may purchase additional shares from a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- BY WIRE. To purchase additional shares by wire, call MFSC for instructions.
- AUTOMATIC INVESTMENT PLAN. You may purchase additional shares by automatically investing a designated amount from your checking or savings account on any day of the month. You must elect this privilege on your account application or service application.
- ADDITIONAL PURCHASES THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary purchase shares on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
CLASS I SHARES. With respect to Class I shares, you can establish an account through your MFD representative, by contacting MFSC directly, or by having your financial intermediary process your purchase. Generally, there are no initial or subsequent investment minimums except as may be required to be an eligible purchaser of Class I shares.
R SHARE CLASSES. With respect to the R share classes, you can establish an account through your financial intermediary or by contacting MFSC directly. Generally, there are no initial or subsequent investment minimums except as may be required to be an eligible purchaser of such class of shares.
Class R shares are available for purchase only by retirement plans that held Class R shares of a fund on March 31, 2005, and by retirement plans (other than plans for which MFS or an affiliate provides participant recordkeeping, and plans for which MFS Heritage Trust Company serves as a trustee) that are held by MFSC at the plan or omnibus level.
529 SHARE CLASSES. With respect to the 529 share classes, you can establish an account by having your financial intermediary process your purchase. Generally, the minimum initial investment is $250. MFSC waives or lowers the initial investment minimums for certain types of investors and investments.
You may have your financial intermediary process your subsequent purchases or you may contact MFSC directly. Generally, there is no minimum for subsequent investments except there is generally a $50 minimum for subsequent investments by check and through automatic exchange plans.
Purchases of Class 529B shares are subject to a total account value limitation at the time of purchase of $99,999, and purchases of Class 529C shares are subject to a total account value limitation at the time of purchase of $999,999. If your existing accounts for all share classes held with the MFS funds have a total value equal to $99,999 for Class 529B share purchases or $999,999 for Class 529C share purchases, you will not be able to purchase Class 529B or Class 529C shares, as applicable. For the purpose of determining your total account value, existing accounts for all share classes held with the MFS funds that are linked under a LOI or ROA will be included.
In addition, the Code and tuition programs impose a maximum total contribution limitation for designated beneficiaries on behalf of whom assets under tuition programs are held, which may result in a limitation on your ability to purchase the fund's 529 share classes. Please see the program description for details concerning the maximum contribution limitation and its application. An account owner of a newly-established account under a tuition program in which the designated beneficiary is age 12 or older will not be permitted to purchase Class 529B shares, unless the newly established account results from a transfer of registration from another MFS fund account. Please see the program description for details and additional restrictions.
- ADDITIONAL PURCHASES DIRECTLY THROUGH MFSC.
- BY MAIL. You may purchase additional shares by mailing a check with the returnable portion of your statement to MFSC.
- BY TELEPHONE. You may purchase additional shares by transferring money by phone from your pre-designated bank account. You must elect this privilege on your account application or service application.
- ELECTRONICALLY. You may purchase additional shares from a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or
service application and establish a personal identification number (PIN) on MFS Access to use this service.
- BY WIRE. To purchase additional shares by wire, call MFSC for instructions.
- AUTOMATIC PURCHASE PLAN. You may purchase additional shares by automatically investing a designated amount from your checking or savings account on any day of the month. You must elect this privilege on your account application or service application.
- ADDITIONAL PURCHASES THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary purchase shares on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
HOW TO REDEEM SHARES
Your shares will be sold at the net asset value per share next calculated after your redemption order is received in proper form, minus any applicable CDSC. MFSC reserves the right to reject any redemption request that is not in proper form. The specific requirements for proper form vary among types of accounts and transactions. In certain circumstances, you may need to have your signature guaranteed and/or submit additional documentation to redeem your shares. In general, no signature guarantee is required for a redemption order for up to $100,000 that is signed by all owners or fiduciaries identified in the account registration, paid as registered, and mailed to the address of record.
The fund normally sends out your redemption proceeds within seven days after your request is received in proper form. Under unusual circumstances, such as when the New York Stock Exchange is closed, trading on the Exchange is restricted, or as permitted by the SEC, the fund may suspend redemptions or postpone payment for more than seven days. Redemption proceeds (other than exchanges) may be delayed until money from prior purchases sufficient to cover your redemption has been received and collected. This can take up to seven days after a purchase.
You may redeem your shares either by having your financial intermediary process your redemption or by contacting MFSC directly.
REDEEMING DIRECTLY THROUGH MFSC.
- BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the name of the fund, your account number, and the number of shares or dollar amount to be redeemed.
- BY TELEPHONE. If a signature guarantee is not required, you can call MFSC to have shares redeemed from your account and proceeds mailed to the address of record on the account. You can also call MFSC
to have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account. You must elect this privilege on your account application or service application if you wish to have proceeds wired to your bank account.
- ELECTRONICALLY. You can have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- SYSTEMATIC WITHDRAWAL PLAN. For Class A, Class B, Class C, Class I, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, or Class R5 shares, you may elect to automatically receive (or designate someone else to receive) regular periodic payments through an automatic redemption of such classes. Please contact MFSC for details.
REDEEMING THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary process a redemption on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. If a signature guarantee is required, your signature may be guaranteed by an eligible bank, broker/dealer, credit union, national securities exchange, registered securities association, clearing agency, or savings association. MFSC may require additional documentation for certain types of registrations and under certain circumstances. Signature guarantees and this additional documentation shall be accepted in accordance with policies established by MFSC, and MFSC may, at its discretion, make certain exceptions to these requirements. Please contact MFSC with any questions and for the requirements for your particular situation.
SHARE CERTIFICATES. If certificates are outstanding for your shares, you may only redeem such shares by mailing the certificates to MFSC. Telephone, electronic, and systematic withdrawal plan redemptions and checkwriting are not available if certificates are outstanding for your shares.
REDEMPTIONS IN KIND. If, during any 90-day period, you redeem shares in an amount greater than the lesser of $250,000 or 1% of fund net assets, the fund has the right to pay the redemption amount above such threshold by a distribution in-kind of portfolio securities (redemption in kind). In the event that the fund makes a redemption in kind, you should expect to incur brokerage and other transaction charges when converting the securities to cash, and the securities may increase or decrease in value before you sell them.
INVOLUNTARY REDEMPTIONS. Because it is costly to maintain small accounts, the MFS funds have reserved the right to redeem your shares without your permission when your account contains less than $500 due to your redemptions
or exchanges. Before the fund makes such a redemption, you will be notified and given 60 days to increase your investment to at least $500.
In addition, the MFS funds have reserved the right to redeem your shares without your permission in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Any applicable CDSC will be assessed upon redemption of your shares.
HOW TO EXCHANGE SHARES
An exchange involves the redemption of shares of one fund and the purchase of shares of another fund.
EXCHANGE PRIVILEGE. You can exchange your shares for shares of the same class of most other MFS funds by having your financial intermediary process your exchange request or by contacting MFSC directly. Your shares will be bought at the net asset value next calculated after your exchange order is received in proper form.
You can exchange your Class A shares and your Class I shares for shares of the MFS Money Market Fund or the MFS Government Money Market Fund.
Eligible qualified retirement plans other than Serviced Plans can exchange their Class R, Class R1, Class R2, Class R3, Class R4 and Class R5 shares for shares of the MFS Money Market Fund. In addition, Serviced Plans holding Class R or Class R3 shares on March 31, 2005, can exchange their Class R or Class R3 shares for shares of the MFS Money Market Fund.
Certain qualified retirement plans may make certain exchanges between the MFS funds and the MFS Fixed Fund. With respect to Class C shares subject to a CDSC, you will only be eligible to make the exchange to the MFS Fixed Fund if the CDSC would have been waived had the Class C shares been redeemed. Contact MFSC for information concerning transactions involving the MFS Fixed Fund.
Your ability to exchange your Class 529A, Class 529B, or Class 529C shares of the fund for corresponding Class 529A, Class 529B, and Class 529C shares of other MFS funds may be limited under Section 529 of the Code and the tuition program through which your investment in the MFS funds is made. Please see the program description for details.
The MFS funds allow certain financial intermediaries to place exchange orders on behalf of a group of their discretionary investment advisory clients ("group exchange orders"). As with any exchange request, the funds and their agents reserve the right to reject any group exchange order, and the funds' agents will generally reject any group exchange order received by the funds or their agents after 1 p.m., Eastern time. In addition, MFD has agreements with certain financial intermediaries which set forth the terms and conditions under which group exchange orders may be placed by these financial intermediaries. These conditions may be more restrictive than those applicable to individual exchange
orders, and may include the requirement to provide the funds or their agents with advance notice of group exchange orders.
Except with respect to the R share classes, the minimum exchange amount is generally $1,000 (generally $50 for exchanges made under the automatic exchange plan) or all the shares in an account. MFSC waives or lowers the minimum exchange amount for certain types of investors and investments. There is no minimum exchange amount for the R share classes.
Shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged fund and the original purchase date of the shares subject to the CDSC.
Other funds may have different exchange restrictions. You should read the prospectus of the MFS fund into which you are exchanging and consider the differences in objectives, policies, and risks before making any exchange. The exchange privilege may be changed or discontinued at any time, and all exchanges are subject to certain limitations and MFS funds' policies concerning excessive trading practices, which are designed to protect the funds and their shareholders from the harmful effects of frequent trading.
OTHER CONSIDERATIONS
FREQUENT TRADING
- RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. The Board of Trustees of the MFS funds has adopted the purchase and exchange limitation policies described below, which it believes are reasonably designed to discourage frequent fund share transactions. MFSC seeks to monitor and enforce these policies, subject to oversight by the Board of Trustees, pursuant to procedures approved by the Board of Trustees. The MFS funds may alter their policies at any time without notice to shareholders.
- GENERAL PURCHASE AND EXCHANGE LIMITATION POLICIES. The MFS funds reserve the right to restrict, reject, or cancel (with respect to cancellations, within one business day of the order), without any prior notice, any purchase or exchange order, including transactions believed to represent frequent trading activity. For example, MFSC may in its discretion restrict, reject, or cancel a purchase or exchange order even if the transaction is not subject to specific exchange or other limitations described in this prospectus if MFSC determines that accepting the order could interfere with the efficient management of a fund's portfolio, increase costs to the fund, dilute the value of an investment in the fund to long-term shareholders, or otherwise not be in the fund's best interests. In the event that MFSC rejects or cancels an exchange request, neither the redemption nor the purchase side of the exchange will be processed. Each MFS fund reserves the right to delay for one
business day the processing of exchange requests in the event that, in MFSC's judgment, such delay would be in the fund's best interest, in which case both the redemption and purchase side of the exchange will receive the fund's net asset values at the conclusion of the delay period.
- SPECIFIC EXCHANGE AND PURCHASE LIMITATION POLICIES. Under the MFS Funds' purchase and exchange limitation policy, MFSC will generally restrict, reject or cancel purchase and exchange orders if MFSC determines that an accountholder has made two exchanges, each in an amount of $5,000 or more, out of an account in an MFS fund during a calendar quarter ("two exchange limit"). This policy does not apply to exchanges:
- out of the MFS money market funds; or
- initiated by a retirement plan trustee or sponsor rather than by a plan participant, and other similar non-discretionary exchanges (e.g., in connection with fund mergers/acquisitions/liquidations).
In circumstances where shareholders hold shares through financial intermediaries, the MFS funds may rely upon the financial intermediary's policy to restrict frequent trading and its monitoring of such policy in lieu of the MFS funds' two-exchange limit if MFSC believes that the financial intermediary's policy is reasonably designed to identify and curtail trading activity that is not in the best interest of the fund.
In addition, MFSC may make exceptions to this policy if, in its judgment, the transaction does not represent frequent trading activity, such as purchases made through systematic purchase plans or payroll contributions. In applying this policy, MFSC considers the information available to it at the time and reserves the right to consider trading multiple accounts under common ownership, control, or influence to be trading out of a single account.
Exchanges made on the same day in the same account are aggregated for purposes of counting the number and dollar amount of exchanges made by the accountholder (e.g., a shareholder who on the same day exchanges $6,000 from one MFS fund into two other MFS funds, by exchanging $3,000 into each of the two MFS funds, will be viewed as having made one exchange transaction exceeding $5,000 in value).
- LIMITATIONS ON THE ABILITY TO DETECT AND CURTAIL FREQUENT TRADING PRACTICES. Shareholders seeking to engage in frequent trading practices may deploy a variety of strategies to avoid detection, and, despite the efforts of MFSC to prevent frequent trading, there is no assurance that MFSC will be able to identify such shareholders or curtail their trading practices. The ability of MFSC to detect and curtail frequent trading practices may also be limited by operational systems and technological limitations.
MFSC receives purchase, exchange, and redemption orders through certain financial intermediaries that hold omnibus accounts with an MFS fund. Omnibus account arrangements are common forms of holding shares of MFS funds, particularly among certain financial intermediaries such as brokers, retirement and 529 plans, investment advisors, and variable insurance products. A financial intermediary's policy restricting frequent trading may be more or less restrictive than the MFS funds' policies, may permit certain transactions not permitted by the MFS funds' policies, or prohibit transactions not subject to the MFS funds' policies.
MFSC is generally not able to identify trading by a particular underlying shareholder within an omnibus account, which makes it difficult or impossible to determine if a particular underlying shareholder has violated the two exchange limit or is otherwise engaged in frequent trading. However, MFSC reviews trading activity at the omnibus level to detect suspicious trading activity. If MFSC detects suspicious trading activity at the omnibus level it will contact the financial intermediary to request underlying shareholder level activity to determine whether there is underlying shareholder level frequent trading. In certain instances, a financial intermediary may be unwilling or unable to provide MFSC with information about underlying shareholder level activity.
If frequent trading is identified, MFSC will take appropriate action. MFSC's ability to monitor and deter frequent trading in omnibus accounts at the underlying shareholder level is dependent upon the capability and cooperation of the financial intermediary. Accordingly, depending upon the composition of a fund's shareholder accounts, the level of cooperation provided by the financial intermediary and in light of efforts made by certain shareholders to evade these limitations, MFSC may not be in a position to monitor and deter frequent trading with respect to a significant percentage of a fund's shareholders. You should consult your financial intermediary regarding the application of these limitations and whether your financial intermediary imposes any additional or different limitations.
- FREQUENT TRADING RISKS. To the extent that the MFS funds or their agents are unable to curtail excessive trading practices in a fund, these practices may interfere with the efficient management of the fund's portfolio, may result in increased transaction and administrative costs, and may adversely impact the fund's performance.
In addition, to the extent that the fund invests in foreign securities, the interests of long-term shareholders may be diluted as a result of time-zone arbitrage, a short-term trading practice that seeks to exploit changes in the value of the fund's investments that result from events occurring after the close of the foreign markets on which the investments trade, but prior to the time the fund determines its net
asset value. The fund's use of fair valuation can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that the fund's fair valuation policies and procedures will prevent dilution of the fund's net asset value by short-term traders.
To the extent that the fund invests in securities that trade infrequently or are difficult to value, such as the securities of smaller companies, high yield debt instruments, and floating rate loans, the interests of long-term shareholders may be diluted as a result of price arbitrage, a short-term trading strategy that seeks to exploit perceived pricing inefficiencies in the fund's investments. Such short-term trading strategies may interfere with efficient management of the fund's portfolio to a greater degree than funds that invest in more frequently traded or liquid securities, in part because the fund may have difficulty selling these portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage may also cause dilution in the value of fund shares held by other shareholders.
UNAUTHORIZED TRANSACTIONS. MFS will not be responsible for losses that result from unauthorized transactions unless MFSC does not follow procedures reasonably designed to verify your identity. If an account has more than one owner or authorized person, MFSC will accept telephone and online instructions from any one owner or authorized person. It is important that you contact MFSC immediately about any transactions you believe to be unauthorized.
ABILITY TO CONTACT MFSC. Certain methods of contacting MFSC, such as by mail, telephone, or electronically, may be unavailable or delayed (for example, after natural disasters or during periods of significant/major political, social, or economic instability).
RESERVATION OF OTHER RIGHTS. In addition to the rights expressly stated elsewhere in this prospectus, MFSC reserves the right to: 1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; and 2) freeze any account or suspend account services when MFSC has received reasonable notice (written or otherwise) of a dispute between registered or beneficial account owners or when MFSC believes a fraudulent transaction may occur or has occurred.
ANTI-MONEY LAUNDERING RESTRICTIONS. Federal law requires the fund to implement policies and procedures reasonably designed to prevent, detect and report money laundering and other illegal activity. The fund, consistent with applicable federal law, may redeem your shares and close your account; suspend, restrict or cancel purchase and redemption orders; process redemption requests and withhold your proceeds; and take other action if it is unable to verify your identity within a reasonable time or conduct required due diligence on your account or as otherwise permitted by its anti-money laundering policies and
procedures. Any applicable CDSC will be assessed upon redemption of your shares.
CONFIRMATIONS IN QUARTERLY STATEMENTS. Transactions made under certain periodic investment and withdrawal programs (including reinvestment plans) will be confirmed on quarterly account statements.
OTHER INFORMATION
VALUATION
The price of each class of the fund's shares is based on its net asset value. The net asset value of each class of shares is determined each day the New York Stock Exchange (the Exchange) is open for trading as of the close of regular trading on the Exchange (generally 4:00 p.m. Eastern time). However, net asset value may be calculated earlier as permitted by the SEC. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. On days when the Exchange is closed (such as week-ends and holidays), net asset value is not calculated, and the fund does not transact purchase and redemption orders. To the extent the fund's assets are traded in other markets on days when the fund does not price its shares, the value of the underlying funds' assets may change when you will not be able to purchase or redeem shares.
To determine net asset value, underlying funds are generally valued at their net asset value per share. Underlying funds' investments for which reliable market quotations are readily available are valued at market value, except that underlying funds' investments in certain short term debt instruments and a money market fund's investments are valued at amortized cost.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the underlying funds' investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees.
Under the underlying funds' valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. These valuations can be based on both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as a foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign
markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund's net asset value may differ from quoted or published prices for the same investments.
DISTRIBUTIONS
The fund intends to declare and pay a dividend to shareholders at least annually.
Any capital gains are distributed at least annually.
DISTRIBUTION OPTIONS
The following distribution options are generally available:
- Dividend and capital gain distributions reinvested in additional shares (THIS OPTION WILL BE ASSIGNED IF NO OTHER OPTION IS SPECIFIED);
- Dividend distributions in cash; capital gain distributions reinvested in additional shares;
- Dividend and capital gain distributions in cash; or
- Dividend and capital gain distributions reinvested into the same class of shares of another MFS Fund.
Dividends and capital gain distributions for Class R, Class R1, Class R2, Class R3, Class R4, Class R5, Class 529A, Class 529B, and Class 529C will automatically be reinvested in additional shares of the fund.
The distribution option for accounts with dividend distributions of less than $10 will generally be changed to reinvestment in additional shares of the fund. If you have elected to receive distributions in cash, and the postal service is unable to deliver checks to your address of record, or you do not respond to mailings from MFSC with regard to uncashed distribution checks, your distribution option may be converted to having all distributions reinvested in additional shares. You should contact MFSC to change your distribution option, and your request to do so must be received by MFSC before the record date for a distribution in order to be effective for that distribution. No interest will accrue on amounts represented by uncashed distribution checks.
TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in the fund may have on your particular tax situation, including possible foreign, state, and local taxes. Also, this discussion does not apply to shares of the fund held through tax-exempt retirement plans.
The fund expects to distribute substantially all of its income and gains annually. Distributions from the fund are taxable whether you receive them in cash or reinvest them in additional shares. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Any gain resulting from the sale or exchange of your shares will generally also be subject to tax.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the fund owned the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains from the sale of investments that the fund owned for more than one year and that are properly designated by the fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the fund owned for one year or less will be taxable as ordinary income. For taxable years beginning before January 1, 2011, if some or all of the fund's income derives from "qualified dividend income" and if you are an individual who meets holding period and other requirements with respect to the fund's shares, those distributions that are properly designated by the fund as derived from "qualified dividend income" are taxed at the rates applicable to long-term capital gains.
Long-term capital gain rates applicable to most individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
Under current law, a fund of funds cannot pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying fund. A fund is permitted to elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and securities at the close of its taxable year. Foreign securities held indirectly through an underlying fund do not contribute to this 50% threshold.
Investing in underlying funds could affect the amount, timing, and character of distributions from the fund, and, therefore, may increase the amount of taxes payable by shareholders.
The Form 1099 that is mailed to you every January details your distributions and how they are treated for federal tax purposes.
SPECIAL CONSIDERATIONS FOR 529 SHARE CLASSES. In addition to the tax considerations discussed above, please note the following tax considerations that
apply specifically to the ownership of the fund's 529 share classes through a tuition program that qualifies under Section 529 of the Code.
The fund is an investment option under one or more tuition programs designed to qualify under Section 529 so that earnings on investments are not subject to federal income tax (to either a contributor to the tuition program or a designated beneficiary) until the earnings are withdrawn. Withdrawals of earnings that are used to pay "qualified higher education expenses" are tax-free for federal income tax purposes. State and local income taxes may still apply. These tax benefits are not available to 529 shares that are not owned through a qualifying Section 529 tuition program.
Withdrawals of earnings that are not used for the designated beneficiary's qualified higher education expenses generally are subject not only to federal income tax but also to a 10% penalty tax (unless such amounts are transferred within sixty (60) days to another tuition program for the same designated beneficiary or another designated beneficiary who is a member of the family of the designated beneficiary with respect to which the distribution was made and certain other conditions are satisfied). The 10% penalty tax will not apply to distributions made under certain circumstances, including certain distributions made after the designated beneficiary dies, becomes disabled, or receives a scholarship or other tax-free payment for educational expenses that does not exceed the amount of the distribution. Distributions attributable to contributions to the tuition program (including the portion of any rollover from another tuition program that is attributable to contributions to that program) are not subject to tax.
You are urged to consult your own tax adviser for information about the federal, state, and local tax consequences of your investment in the fund's 529 share classes.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS AND PROSPECTUSES
The fund produces financial reports every six months and updates its prospectus annually. To avoid sending duplicate copies of materials to households, only one copy of the fund's annual and semiannual report and prospectus will be mailed to shareholders having the same residential address on the fund's records. However, any shareholder may contact MFSC (please see back cover for address and telephone number) to request that copies of these reports and prospectuses be sent personally to that shareholder.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a fund's financial performance for the past five years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent registered public accounting firm, whose report, together with the fund's financial statements, are included in the fund's Annual Report to shareholders. The fund's Annual Report is available upon request by contacting MFS Service Center, Inc. (please see back cover for address and telephone number). The financial statements contained in the Annual Report are incorporated by reference into the SAI. The fund's independent registered public accounting firm is Deloitte & Touche LLP.
YEARS ENDED 5/31
--------------------------------
2007 2006 2005(c)
CLASS A
Net asset value, beginning of period $ 14.28 $ 11.18 $ 10.00
---------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.15 $ 0.04 $ 0.04
Net realized and unrealized gain (loss) on investments 3.46 3.44 1.22
---------- -------- --------
Total from investment operations $ 3.61 $ 3.48 $ 1.26
---------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.51) $ (0.32) $ (0.08)
From net realized gain on investments (0.33) (0.06) --
---------- -------- --------
Total distributions declared to shareholders $ (0.84) $ (0.38) $ (0.08)
---------- -------- --------
Net asset value, end of period $ 17.05 $ 14.28 $ 11.18
========== ======== ========
Total return (%) (r)(t) 25.87 31.48 12.61(n)
---------- -------- --------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.48 0.52 0.71(a)
Expenses after expense reductions (f)(h) (z) 0.43 0.35 0.35(a)
Net investment income 0.96 0.34 0.51(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $1,368,870 $588,469 $170,485
|
YEARS ENDED 5/31
-----------------------------
2007 2006 2005(c)
CLASS B
Net asset value, beginning of period $ 14.18 $ 11.14 $ 10.00
-------- -------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.05 $ (0.04) $ (0.01)
Net realized and unrealized gain (loss) on investments 3.45 3.42 1.23
-------- -------- -------
Total from investment operations $ 3.50 $ 3.38 $ 1.22
-------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.43) $ (0.28) $ (0.08)
From net realized gain on investments (0.33) (0.06) --
-------- -------- -------
Total distributions declared to shareholders $ (0.76) $ (0.34) $ (0.08)
-------- -------- -------
Net asset value, end of period $ 16.92 $ 14.18 $ 11.14
======== ======== =======
Total return (%) (r)(t) 25.16 30.58 12.14(n)
-------- -------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.12 1.17 1.36(a)
Expenses after expense reductions (f)(h) (z) 1.07 1.00 1.00(a)
Net investment income (loss) 0.32 (0.30) (0.16)(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $235,926 $149,728 $46,305
|
YEARS ENDED 5/31
------------------------------
2007 2006 2005(c)
CLASS C
Net asset value, beginning of period $ 14.17 $ 11.13 $ 10.00
-------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.05 $ (0.04) $ (0.02)
Net realized and unrealized gain (loss) on investments 3.44 3.42 1.22
-------- -------- --------
Total from investment operations $ 3.49 $ 3.38 $ 1.20
-------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.43) $ (0.28) $ (0.07)
From net realized gain on investments (0.33) (0.06) --
-------- -------- --------
Total distributions declared to shareholders $ (0.76) $ (0.34) $ (0.07)
-------- -------- --------
Net asset value, end of period $ 16.90 $ 14.17 $ 11.13
======== ======== ========
Total return (%) (r)(t) 25.15 30.63 12.03(n)
-------- -------- --------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.12 1.17 1.36(a)
Expenses after expense reductions (f)(h) (z) 1.07 1.00 1.00(a)
Net investment income (loss) 0.31 (0.31) (0.21)(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $664,046 $374,652 $103,225
|
YEARS ENDED 5/31
---------------------------
2007 2006 2005(c)
CLASS I
Net asset value, beginning of period $ 14.32 $ 11.20 $10.00
------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.21 $ 0.07 $ 0.06
Net realized and unrealized gain (loss) on investments 3.48 3.46 1.23
------- ------- ------
Total from investment operations $ 3.69 $ 3.53 $ 1.29
------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.55) $ (0.35) $(0.09)
From net realized gain on investments (0.33) (0.06) --
------- ------- ------
Total distributions declared to shareholders $ (0.88) $ (0.41) $(0.09)
------- ------- ------
Net asset value, end of period $ 17.13 $ 14.32 $11.20
======= ======= ======
Total return (%) (r) 26.37 31.88 12.85(n)
------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.12 0.17 0.36(a)
Expenses after expense reductions (f)(h) (z) 0.07 0.00 0.00(a)
Net investment income 1.34 0.53 0.79(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $65,697 $33,556 $3,442
|
YEARS ENDED 5/31
----------------------------
2007 2006 2005(c)
CLASS 529A
Net asset value, beginning of period $14.25 $11.16 $10.00
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.10 $(0.00)(w) $ 0.08
Net realized and unrealized gain (loss) on investments 3.47 3.44 1.15
------ ------ ------
Total from investment operations $ 3.57 $ 3.44 $ 1.23
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.49) $(0.29) $(0.07)
From net realized gain on investments (0.33) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.82) $(0.35) $(0.07)
------ ------ ------
Net asset value, end of period $17.00 $14.25 $11.16
====== ====== ======
Total return (%) (r)(t) 25.60 31.16 12.29(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.73 0.77 0.97(a)
Expenses after expense reductions (f)(h) (z) 0.68 0.60 0.61(a)
Net investment income (loss) 0.65 (0.01) 1.15(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $1,479 $ 550 $ 144
|
YEARS ENDED 5/31
---------------------------
2007 2005 2005(c)
CLASS 529B
Net asset value, beginning of period $14.27 $11.13 $10.00
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.00(w) $(0.08) $ 0.04
Net realized and unrealized gain (loss) on investments 3.47 3.43 1.15
------ ------ ------
Total from investment operations $ 3.47 $ 3.35 $ 1.19
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.40) $(0.15) $(0.06)
From net realized gain on investments (0.33) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.73) $(0.21) $(0.06)
------ ------ ------
Net asset value, end of period $17.01 $14.27 $11.13
====== ====== ======
Total return (%) (r)(t) 24.83 30.28 11.84(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.37 1.42 1.62(a)
Expenses after expense reductions (f)(h) (z) 1.32 1.25 1.26(a)
Net investment income (loss) 0.01 (0.63) 0.58(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $ 488 $ 257 $ 123
|
YEARS ENDED 5/31
---------------------------
2007 2006 2005(c)
CLASS 529C
Net asset value, beginning of period $14.21 $11.14 $10.00
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.00(w) $(0.08) $ 0.02
Net realized and unrealized gain (loss) on investments 3.45 3.43 1.18
------ ------ ------
Total from investment operations $ 3.45 $ 3.35 $ 1.20
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.41) $(0.22) $(0.06)
From net realized gain on investments (0.33) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.74) $(0.28) $(0.06)
------ ------ ------
Net asset value, end of period $16.92 $14.21 $11.14
====== ====== ======
Total return (%) (r)(t) 24.78 30.30 11.95(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.38 1.42 1.62(a)
Expenses after expense reductions (f)(h) (z) 1.32 1.25 1.26(a)
Net investment income (loss) 0.01 (0.59) 0.31(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $1,365 $ 651 $ 305
|
YEARS ENDED 5/31
-------------------------
2007 2006 2005(c)
CLASS R
Net asset value, beginning of period $14.25 $11.17 $10.00
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.14 $ 0.03 $ 0.01
Net realized and unrealized gain (loss) on investments 3.45 3.42 1.24
------ ------ ------
Total from investment operations $ 3.59 $ 3.45 $ 1.25
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.48) $(0.31) $(0.08)
From net realized gain on investments (0.33) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.81) $(0.37) $(0.08)
------ ------ ------
Net asset value, end of period $17.03 $14.25 $11.17
====== ====== ======
Total return (%) (r) 25.75 31.25 12.46(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.62 0.67 0.86(a)
Expenses after expense reductions (f)(h) (z) 0.57 0.50 0.50(a)
Net investment income 0.93 0.22 0.15(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $7,524 $7,067 $2,558
|
YEARS ENDED 5/31
-------------------------
2007 2006 2005(i)
CLASS R1
Net asset value, beginning of period $14.14 $11.14 $11.41
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.03 $(0.06) $(0.02)
Net realized and unrealized gain (loss) on investments 3.43 3.42 (0.25)(g)
------ ------ ------
Total from investment operations $ 3.46 $ 3.36 $(0.27)
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.45) $(0.30) $ --
From net realized gain on investments (0.33) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.78) $(0.36) $ --
------ ------ ------
Net asset value, end of period $16.82 $14.14 $11.14
====== ====== ======
Total return (%) (r) 25.01 30.42 (2.37)(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 1.30 1.37 1.56(a)
Expenses after expense reductions (f)(h) (z) 1.18 1.11 1.20(a)
Net investment income (loss) 0.22 (0.48) (1.19)(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $3,424 $ 801 $ 59
|
YEARS ENDED 5/31
-------------------------
2007 2006 2005(i)
CLASS R2
Net asset value, beginning of period $14.20 $11.14 $11.41
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.06 $(0.03) $(0.02)
Net realized and unrealized gain (loss) on investments 3.47 3.45 (0.25)(g)
------ ------ ------
Total from investment operations $ 3.53 $ 3.42 $(0.27)
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.47) $(0.30) $ --
From net realized gain on investments (0.33) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.80) $(0.36) $ --
------ ------ ------
Net asset value, end of period $16.93 $14.20 $11.14
====== ====== ======
Total return (%) (r) 25.43 31.00 (2.37)(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.99 1.07 1.26(a)
Expenses after expense reductions (f)(h) (z) 0.83 0.77 0.90(a)
Net investment income (loss) 0.40 (0.24) (0.89)(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $2,667 $ 799 $ 49
|
YEARS ENDED 5/31
------------------------------
2007 2006 2005(c)
CLASS R3
Net asset value, beginning of period $ 14.21 $11.16 $10.00
------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.09 $ 0.00(w) $ 0.08
Net realized and unrealized gain (loss) on investments 3.45 3.43 1.15
------- ------ ------
Total from investment operations $ 3.54 $ 3.43 $ 1.23
------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.50) $(0.32) $(0.07)
From net realized gain on investments (0.33) (0.06) --
------- ------ ------
Total distributions declared to shareholders $ (0.83) $(0.38) $(0.07)
------- ------ ------
Net asset value, end of period $ 16.92 $14.21 $11.16
======= ====== ======
Total return (%) (r) 25.51 31.07 12.25(n)
------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.85 0.92 1.12(a)
Expenses after expense reductions (f)(h) (z) 0.74 0.66 0.76(a)
Net investment income 0.55 0.02 1.05(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $20,847 $2,938 $ 120
|
YEARS ENDED 5/31
--------------------------
2007 2006 2005(i)
CLASS R4
Net asset value, beginning of period $ 14.25 $11.18 $ 11.44
------- ------ -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.15 $ 0.04 $ (0.01)
Net realized and unrealized gain (loss) on investments 3.45 3.43 (0.25)(g)
------- ------ -------
Total from investment operations $ 3.60 $ 3.47 $(0.26)
------- ------ -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.51) $(0.34) $ --
From net realized gain on investments (0.33) (0.06) --
------- ------ -------
Total distributions declared to shareholders $ (0.84) $(0.40) $ --
------- ------ -------
Net asset value, end of period $ 17.01 $14.25 $ 11.18
======= ====== =======
Total return (%) (r) 25.89 31.37 (2.27)(n)
------- ------ -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.53 0.57 0.76(a)
Expenses after expense reductions (f)(h) (z) 0.48 0.40 0.40(a)
Net investment income (loss) 0.97 0.31 (0.39)(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $34,260 $9,492 $ 49
|
YEARS ENDED 5/31
-------------------------
2007 2006 2005(i)
CLASS R5
Net asset value, beginning of period $14.30 $11.19 $11.44
------ ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.20 $ 0.08 $(0.00)(w)
Net realized and unrealized gain (loss) on investments 3.46 3.43 (0.25)(g)
------ ------ ------
Total from investment operations $ 3.66 $ 3.51 $(0.25)
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.54) $(0.34) $ --
From net realized gain on investments (0.33) (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.87) $(0.40) $ --
------ ------ ------
Net asset value, end of period $17.09 $14.30 $11.19
====== ====== ======
Total return (%) (r) 26.21 31.73 (2.19)(n)
------ ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f)(h) 0.23 0.27 0.46(a)
Expenses after expense reductions (f)(h) (z) 0.18 0.10 0.10(a)
Net investment income (loss) 1.24 0.63 (0.09)(a)
Portfolio turnover 2 1 0(u)
Net assets at end of period (000 omitted) $1,451 $ 64 $ 49
|
Any redemption fees charged by the fund during the 2005 fiscal year resulted in a per share impact of less than $0.01.
(a) Annualized.
(c) For the period from the commencement of the fund's investment operations, September 30, 2004 through the stated period end.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(g) The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because of the timing of sales of fund shares and the per share amount of realized and unrealized gains and losses at such time.
(h) In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the fund invests. Because the underlying funds have varied expense and fee levels and the fund may own different proportions of the underlying funds at different times, the amount of fees and expenses incurred indirectly by the fund will vary.
(i) For the period from the class' inception, April 1, 2005 (Classes R1, R2, R4, and R5) through the stated period end.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(t) Total returns do not include any applicable sales charges.
(u) Portfolio turnover is less than 1%.
(w) Per share amount was less than $0.01.
(z) For the years ended May 31, 2005, and May 31, 2006, and for the period June 1, 2006 through September 30, 2006, 0.10% of the expense reduction was voluntary.
APPENDIX A
DESCRIPTION OF UNDERLYING FUNDS
Further information about each underlying fund, including a copy of an underlying fund's most recent Prospectus, SAI, and Annual and Semi-Annual Reports, may be obtained on-line at mfs.com, or by contacting MFSC.
MFS RESEARCH INTERNATIONAL FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
In selecting investments for the fund, MFS is not constrained to any particular investment style. MFS may invest the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies), in the stocks of companies it believes are undervalued compared to their perceived worth (value companies), or in a combination of growth and value companies.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
A team of investment research analysts selects investments for the fund. MFS allocates the fund's assets to analysts by broad market sectors.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS INTERNATIONAL NEW DISCOVERY FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
While MFS may invest the fund's assets in companies of any size, MFS generally focuses on companies with small capitalizations.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS INTERNATIONAL VALUE FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies that it believes are undervalued compared to their perceived worth (value companies). Value companies tend to have stock prices that are low relative to their earnings, dividends, assets, or other financial measures.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS INTERNATIONAL GROWTH FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors
considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS EMERGING MARKETS EQUITY FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests at least 80% of the fund's net assets in equity securities of issuers that are tied economically to emerging market countries. Emerging market countries may include countries determined to have emerging market economies, taking into account a number of factors, including whether a particular country has a low to middle economy according to the International Bank for Reconstruction and Development (the World Bank), the country's foreign currency debt rating, its political and economic stability, and the development of its financial and capital markets. Such countries are located in Latin America, Asia, Africa, the Middle East, and the developing countries of Europe, primarily Eastern Europe.
MFS may invest the fund's assets in companies of any size.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS may invest a relatively high percentage of the fund's assets in a single issuer or a small number of issuers.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
MFS INTERNATIONAL DIVERSIFICATION FUND
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF TRUSTEES. The Board of Trustees of the MFS funds has adopted procedures by which shareholders may send communications to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [fund name], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116-3741, Attention: Frank Tarantino, Independent Chief Compliance Officer of the Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the MFS fund to which they relate and (iii) identify the class and number of shares held by the shareholder.
IF YOU WANT MORE INFORMATION ABOUT MFS INTERNATIONAL DIVERSIFICATION FUND, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's actual investments. Annual reports discuss the effect of recent market conditions and investment strategies on the fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated October 1, 2007, provides more detailed information about the fund and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: mfs.com
Information about the fund (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other information about the fund are available on the Edgar Database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-4492.
[MFS(R) INVESTMENT MANAGEMENT LOGO] STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 2007
MFS INTERNATIONAL DIVERSIFICATION FUND
A SERIES OF MFS SERIES TRUST X
500 BOYLSTON STREET, BOSTON, MA 02116
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This Statement of Additional Information ("SAI") contains additional information about the Fund and should be read in conjunction with the Fund's Prospectus dated October 1, 2007. The Fund's financial statements are incorporated into this SAI by reference to the Fund's most recent Annual Report to shareholders. A copy of the Annual Report accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual Report without charge by contacting the Fund's transfer agent, MFS Service Center, Inc. (please see the back cover of Part II of this SAI for address and telephone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains information that is particular to the Fund, while Part II contains information that generally applies to all of the funds in the MFS Family of Funds (the "MFS Funds"). Each part of this SAI has a variety of appendices which can be found at the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION (SAI) - PART I
Part I of this SAI contains information that is particular to the Fund.
DEFINITIONS 1 MANAGEMENT OF THE FUND 1 SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS 2 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS 3 TAX CONSIDERATIONS 3 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS 3 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS 3 APPENDIX A - TRUSTEE COMPENSATION AND COMMITTEES A-1 APPENDIX B - SHARE OWNERSHIP B-1 APPENDIX C - PORTFOLIO MANAGER(S) C-1 APPENDIX D - CERTAIN SERVICE PROVIDER COMPENSATION D-1 APPENDIX E - SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS E-1 APPENDIX F - PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS F-1 |
DEFINITIONS
"Fund" - MFS International Diversification Fund.
"Trust" - MFS Series Trust X, a Massachusetts business trust organized in 1985. The Trust was previously known as MFS Government Mortgage Fund (prior to June 2, 1995), MFS Government Income Plus Fund (prior to March 1, 1993), MFS Government Income Plus Trust (prior to August 3, 1992), and MFS Government Securities High Yield Trust (prior to October 16, 1989).
"MFS" or "Adviser" - Massachusetts Financial Services Company, a Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the fund, dated October 1, 2007, as amended or supplemented from time to time.
MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. The Trust is an open-end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the Trust are set forth in APPENDIX A to Part II of this SAI.
TRUSTEE COMPENSATION AND COMMITTEES
Compensation paid to the non-interested Trustees for certain specified periods, as well as information regarding committees of the Board of Trustees, is set forth in APPENDIX A to this Part I.
SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and officers of the Trust as a group, as well as the dollar value range of each Trustee's share ownership in the Fund and, on an aggregate basis, in all MFS Funds overseen by the Trustee, by investors who are deemed to "control" the Fund, if any, and by investors who own 5% or more of any class of Fund shares, if any, is set forth in APPENDIX B to this Part I.
Part I-1
PORTFOLIO MANAGER(S)
Information regarding the Fund's portfolio manager(s), including other accounts managed, compensation, ownership of Fund shares, and possible conflicts of interest, is set forth in APPENDIX C to this Part I.
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to certain of its service providers for advisory services, administrative services, retirement plan administration and services, program management services, and transfer agency services, for certain specified periods, are set forth in APPENDIX D to this Part I.
CUSTODIAN
State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, serves as the custodian of the assets of the fund (the "Custodian"). The Custodian is responsible for safekeeping and controlling the fund's cash and securities, handling the receipt and delivery of securities, collecting interest and dividends on the fund's investments, serving as the fund's foreign custody manager, providing reports on foreign securities depositaries, maintaining books of original entry and other required books and accounts for the fund, and calculating the daily net asset value of each class of shares of the fund. The fund may invest in securities of the Custodian and may deal with the Custodian as principal in securities transactions.
The fund has an expense offset arrangement that reduces the fund's custodian fees based upon the amount of cash maintained by the fund with its custodian.
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid for certain specified periods in connection with the purchase and sale of the Fund's shares are set forth in APPENDIX E to this Part I.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Fund's plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"), for the Fund's most recent fiscal year, are set forth in APPENDIX E to this Part I.
Part I-2
INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS
INVESTMENT STRATEGIES AND RISKS
Certain investment strategies and risks are described in APPENDIX E to Part II of this SAI.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which are described in APPENDIX F of Part II of this SAI.
TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, information concerning purchases by the Fund of securities issued by its regular broker/dealers for its most recent fiscal year, and information concerning the amount of transactions and related commissions to broker/dealer firms that MFS has determined provide valuable research for the Fund's most recent fiscal year, are set forth in APPENDIX F to this Part I. Portfolio transactions and brokerage commissions are more fully described in Part II of this SAI under the heading "Portfolio Transactions and Brokerage Commissions."
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS
Deloitte & Touche LLP is the Independent Registered Public Accounting Firm, providing audit services, tax return review, and other related services and assistance in connection with the review of various Securities and Exchange Commission filings.
The Fund's Financial Statements and Financial Highlights for the fiscal year ended May 31, 2007, are incorporated by reference into this SAI from the Fund's Annual Report to shareholders and have been audited by Deloitte & Touche LLP, independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon reports of such firm, given upon their authority as experts in accounting and auditing. A copy of the Fund's Annual Report accompanies this SAI.
Part I-3
PART I - APPENDIX A
TRUSTEE COMPENSATION AND COMMITTEES
The Fund pays the non-interested Trustees an annual fee plus a fee for each meeting attended. In addition, the non-interested Trustees are reimbursed for their out-of-pocket expenses.
TRUSTEE COMPENSATION TABLE
TRUSTEE RETIREMENT BENEFITS TOTAL TRUSTEE FEES
FEES FROM ACCRUED AS PART OF FROM FUND AND FUND
TRUSTEE NAME FUND(1) FUND EXPENSE COMPLEX(2)
------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $2,842 N/A $210,289
Lawrence H. Cohn, M.D $2,842 $ 0 $208,289
David H. Gunning $3,019 N/A $219,642
William R. Gutow $2,842 N/A $208,289
Michael Hegarty $2,842 N/A $209,289
J. Atwood Ives $3,785 $792 $285,289
Lawrence T. Perera $2,932 $869 $228,289
J. Dale Sherratt $3,344 $ 0 $250,289
Laurie J. Thomsen $3,003 N/A $209,289
Robert W. Uek $3,124 N/A $227,789
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(1) For the fiscal year ended May 31, 2007.
(2) Information provided is for calendar year 2006. Each Trustee receiving compensation served as Trustee of 97 funds within the MFS Fund complex (having aggregate net assets at December 31, 2006 of approximately $102 billion).
Retirement Benefit Deferral Plan-- Under a Retirement Benefit Deferral Plan, certain Trustees have deferred benefits from a prior retirement plan. The value of the benefits is periodically readjusted as though the Trustee had invested an equivalent amount in Class A shares of the Fund(s) designated by such Trustee. The value of the deferred benefits will be paid to the Trustees upon retirement or thereafter. The plan does not obligate a Fund to retain the services of any Trustee or pay any particular level of compensation to any Trustee. The plan is not funded and a Fund's obligation to pay the Trustee's deferred compensation is a general unsecured obligation.
Part I-A-1
COMMITTEES
The Board has established the following Committees:
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
------------------------------------------------------------------------------------------------------------------------------------
AUDIT COMMITTEE 8 Oversees the accounting and auditing procedures of the Butler*, Gutow*, Sherratt*,
Fund and, among other duties, considers the selection of Thomsen*, and Uek*
the independent accountants for the Fund and the scope
of the audit, and considers the effect on the
independence of those accountants of any non-audit
services such accountants provide to the Fund and any
audit or non-audit services such accountants provide to
other MFS Funds, MFS and/or certain affiliates. The
Committee is also responsible for establishing
procedures for the receipt, retention, and treatment of
complaints received by the Fund regarding accounting,
internal accounting controls, or auditing matters and
the confidential, anonymous submission of concerns
regarding questionable fund accounting matters by
officers of the Fund and employees of the Fund's
investment adviser, administrator, principal
underwriter, or any other provider of accounting-related
services to the Fund.
COMPLIANCE AND 8 Oversees the development and implementation of the Butler*, Cohn*, Gunning*, Gutow*,
GOVERNANCE Fund's regulatory and fiduciary compliance policies, and Sherratt*
COMMITTEE procedures, and practices under the 1940 Act, and other
applicable laws, as well as oversight of compliance
policies of the Fund's investment adviser and certain
other service providers as they relate to Fund
activities. The Fund's Independent Chief Compliance
Officer reports directly to the Committee and assists
the Committee in carrying out its responsibilities. In
addition, the
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Part I-A-2
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
------------------------------------------------------------------------------------------------------------------------------------
Committee advises and makes recommendations to the Board
on matters concerning Trustee practices and
recommendations concerning the functions and duties of
the committees of the Board.
CONTRACTS 5 Requests, reviews, and considers the information deemed All non-interested Trustees of the
REVIEW reasonably necessary to evaluate the terms of the Board (Butler, Cohn, Gunning, Gutow,
COMMITTEE investment advisory and principal underwriting Hegarty, Ives, Perera, Sherratt,
agreements and the Plan of Distribution under Rule 12b-1 Thomsen, and Uek)
that the Fund proposes to renew or continue, and to make
its recommendations to the full Board of Trustees on
these matters.
NOMINATION AND 1 Recommends qualified candidates to the Board in the All non-interested Trustees of the
COMPENSATION event that a position is vacated or created. The Board (Butler, Cohn, Gunning, Gutow,
COMMITTEE Committee will consider recommendations by shareholders Hegarty, Ives, Perera, Sherratt,
when a vacancy exists. Shareholders wishing to recommend Thomsen, and Uek)
candidates for Trustee for consideration by the
Committee may do so by writing to the Fund's Secretary
at the principal executive office of the Fund. Such
recommendations must be accompanied by biographical and
occupational data on the candidate (including whether
the candidate would be an "interested person" of the
Fund), a written consent by the candidate to be named as
a nominee and to serve as Trustee if elected, record and
ownership information for the recommending shareholder
with respect to the Fund, and a description of any
arrangements or understandings regarding recommendation
of the candidate for consideration. The Committee is
also responsible for making recommendations to the Board
regarding any necessary standards
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Part I-A-3
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
------------------------------------------------------------------------------------------------------------------------------------
or qualifications for service on the Board. The
Committee also reviews and makes recommendations to the
Board regarding compensation for the non-interested
Trustees.
PORTFOLIO 8 Oversees the policies, procedures, and practices of the Cohn*, Gunning*, Hegarty*, and
TRADING AND Fund with respect to brokerage transactions involving Perera*
MARKET REVIEW portfolio securities as those policies, procedures, and
COMMITTEE practices are carried out by MFS and its affiliates. The
Committee also oversees the administration of the Fund's
proxy voting policies and procedures by MFS. In
addition, the Committee receives reports from MFS
regarding the policies, procedures, and practices of MFS
and its affiliates in connection with their marketing
and distribution of shares of the Fund.
PRICING 8 Oversees the determination of the value of the portfolio Hegarty*, Perera*, Thomsen*, and
COMMITTEE securities and other assets held by the Fund and Uek*
determines or causes to be determined the fair value of
securities and assets for which market quotations are
not "readily available" in accordance with the 1940 Act.
The Committee delegates primary responsibility for
carrying out these functions to MFS and MFS' internal
valuation committee pursuant to pricing policies and
procedures approved by the Committee and adopted by the
full Board. These policies include methodologies to be
followed by MFS in determining the fair values of
portfolio securities and other assets held by the Fund
for which market quotations are not readily available.
The Committee meets periodically with the members of
MFS' internal valuation committee to review and assess
the quality of fair valuation and other pricing
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Part I-A-4
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
------------------------------------------------------------------------------------------------------------------------------------
determinations made pursuant to the Fund's pricing
policies and procedures, and to review and assess the
policies and procedures themselves. The Committee also
exercises the responsibilities of the Board under the
Amortized Cost Valuation Procedures approved by the
Board on behalf of each Fund which holds itself out as a
"money market fund" in accordance with Rule 2a-7 under
the 1940 Act.
SERVICES 8 Reviews and evaluates the contractual arrangements of Gunning*, Sherratt*, Thomsen*,
CONTRACTS the Fund relating to transfer agency, administrative and Uek*
COMMITTEE services, custody, pricing and bookkeeping services, and
lending of portfolio securities, and makes
recommendations to the full Board of Trustees on these
matters.
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(1) The Trustees' identification and background are set forth in Appendix A to
Part II.
* Non-interested or independent Trustees. Although Mr. Ives is not a member of all Committees of the Board, he is invited to and attends many of the Committees' meetings in his capacity as Chair or the Trustees.
Part I-A-5
PART I - APPENDIX B
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of August 31, 2007, the current Trustees and officers of the Trust as a group owned less than 1% of any class of the Fund's shares. The following table shows the dollar range of equity securities beneficially owned by each current Trustee in the Fund and, on an aggregate basis, in all MFS Funds overseen by each current Trustee, as of December 31, 2006.
The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. Over $100,000
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE OF EQUITY EQUITY SECURITIES IN ALL MFS
NAME OF TRUSTEE SECURITIES IN THE FUND FUNDS OVERSEEN BY TRUSTEES
-------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N D
Robert C. Pozen N D
NON-INTERESTED TRUSTEES
Robert E. Butler N D
Lawrence H. Cohn, M.D D D
David H. Gunning N D
William R. Gutow N D
Michael Hegarty N D
J. Atwood Ives N D
Lawrence T. Perera N D
J. Dale Sherratt N D
Laurie J. Thomsen N D
Robert W. Uek N D
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25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the Fund's shares (all share classes taken together) as of August 31, 2007, and are therefore presumed to control the Fund. All holdings are of record unless otherwise indicated.
Part I-B-1
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any class of the Fund's shares as of August 31, 2007. All holdings are of record unless otherwise indicated.
NAME AND ADDRESS OF INVESTOR PERCENTAGE OWNERSHIP -------------------------------------------------------------------------------- Merrill Lynch Pierce Fenner & Smith, Inc. 11.46% of Class A Shares For the Sole Benefit of its Customers 16.91% of Class B Shares 4800 Deerlake Drive East, 3rd Floor 36.72% of Class C Shares Jacksonville, FL 32246-6484 20.13% of Class R Shares Citigroup Global Markets, Inc. 8.95% of Class B Shares Surpas House Account 17.02% of Class C Shares ATTN: Cindy Tempesta 333 West 34th Street, 7th Floor New York, NY 10001-2402 Charles Schwab & Company, Inc. 27.93% of Class A Shares For the Benefit of Clearing Customers 101 Montgomery Street San Francisco, CA 94104-4151 Raymond James & Associates, Inc. 22.91% of Class I Shares 880 Carillon Parkway St. Petersburg, FL 33716-1100 MFS Defined Contribution Plan 10.92% of Class I Shares C/O Massachusetts Financial Services Company ATTN: Mark A. Leary, SVP-HR 500 Boylston Street, 6th Floor Boston, MA 02116-3740 MFS 401(k) Plan 6.03% of Class I Shares C/O Massachusetts Financial Services Company ATTN: Mark A. Leary, SVP-HR 500 Boylston Street, 6th Floor Boston, MA 02116-3740 Penfirn & Company 401(k) Plans 32.73% of Class R Shares P.O. Box 3357 17.57% of Class R4 Shares Omaha, NE 68103-0357 Joey A. Prince, Trustee 6.47% of Class R Shares Prince Service & Mfg. PSP & Trust C/O Massachusetts Financial Services Company ATTN: Christian A. Giorgi, VP-RSI 500 Boylston Street, 6th Floor Boston, MA 02116-3740 MFS Heritage Trust Company, Trustee 5.67% of Class R1 Shares Arseneault Fassett Mariano LLP PSP P.O. Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company, Trustee 5.27% of Class R1 Shares Jackson Chevrolet Company, Inc. 401(k) Plan P.O. Box 79377 Atlanta, GA 30357-7377 |
Part I-B-2
NAME AND ADDRESS OF INVESTOR PERCENTAGE OWNERSHIP -------------------------------------------------------------------------------- MFS Heritage Trust Company, Trustee 15.81% of Class R2 Shares Wright Employees PSP P.O. Box 79377 Atlanta, GA 30357-7377 MG Trust Company, Custodian for the Benefit 8.87% of Class R2 Shares of Cancer Care Retirement Plan 700 17th Street, Suite 300 Denver, CO 80202-3531 MFS Heritage Trust Company, Trustee 8.01% of Class R2 Shares Burgerbusters, Inc. 401(k) Savings Plan P.O. Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company, Trustee 7.18% of Class R2 Shares Gigliotti Arnaudin Barton Plan P.O. Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company, Trustee 5.75% of Class R2 Shares Jan Companies 401(k) Plan P.O. Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company, Trustee 5.70% of Class R2 Shares Michael J. Waldvogel Trucking 401(k) Plan P.O. Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company, Trustee 5.69% of Class R2 Shares Delta Health Technologies 401(k) Plan P.O. Box 79377 Atlanta, GA 30357-7377 SEI Trust Company C/O HSBC TPA Portal 17.92% of Class R3 Shares ATTN: Mutual Fund Administrator 1 Freedom Valley Drive Oaks, PA 19456-0001 MFS Heritage Trust Company, Trustee 7.45% of Class R4 Shares Dayton Heidelberg/OH Valley Wine 401(k) Plan P.O. Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company, Trustee 5.47% of Class R4 Shares Pottstown Medical Specialists, Inc. P.O. Box 79377 Atlanta, GA 30357-7377 MFS Heritage Trust Company, Trustee 5.16% of Class R4 Shares TIVO, Inc. 401(k) Plan P.O. Box 79377 Atlanta, GA 30357-7377 MG Trust Company, Custodian for the Benefit 67.19% of Class R5 Shares of Continental Envelope Corp. PSP 700 17th Street, Suite 300 Denver, CO 80202-3531 |
Part I-B-3
NAME AND ADDRESS OF INVESTOR PERCENTAGE OWNERSHIP -------------------------------------------------------------------------------- MG Trust Company, Custodian for the Benefit 11.11% of Class R5 Shares of Acton Ford 401(k) Plan 700 17th Street, Suite 300 Denver, CO 80202-3531 BISYS Retirement Services for the Benefit of 8.98% of Class R5 Shares Engineering Design Services, Inc. 401(k) Plan 700 17th Street, Suite 300 Denver, CO 80202-3531 MFS 529 Savings Plan 100.00% of Class 529A shares C/O Massachusetts Financial Services Company 100.00% of Class 529B shares ATTN: Christian A. Giorgi, VP-RSI 100.00% of Class 529C shares 500 Boylston Street, 6th Floor Boston, MA 02116-3740 |
Part I-B-4
PART I - APPENDIX C
PORTFOLIO MANAGER(S)
COMPENSATION
Portfolio manager total cash compensation is a combination of base salary and performance bonus:
BASE SALARY - Base salary represents a smaller percentage of portfolio manager total cash compensation (generally below 33%) than incentive compensation.
PERFORMANCE BONUS - Generally, incentive compensation represents a majority of portfolio manager total cash compensation.
The performance bonus is based on a combination of quantitative and qualitative factors.
The quantitative portion is based on pre-tax performance of all of the accounts managed by the portfolio manager (which includes the Fund and any other accounts managed by the portfolio manager) over a one-, three-, and five-year period relative to the appropriate Lipper peer group universe and/or one or more benchmark indices with respect to each account. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one- and five-year periods (adjusted as appropriate if the portfolio manager has served for shorter periods).
The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts, and traders) and management's assessment of overall portfolio manager contributions to investor relations, the investment process and overall performance (distinct from fund and other account performance).
Part I-C-1
Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors.
Finally, portfolio managers are provided with a benefits package including a defined contribution plan, health coverage and other insurance, which are available to other employees of MFS on substantially similar terms. The percentage such benefits represent of any portfolio manager's compensation depends upon the length of the individual's tenure at MFS and salary level, as well as other factors.
OWNERSHIP OF FUND SHARES
The following table shows the dollar range of equity securities of the Fund beneficially owned by the Fund's portfolio manager(s) as of fiscal year ended May 31, 2007. The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
Thomas Melendez D
OTHER ACCOUNTS
In addition to the Fund, the Fund's portfolio manager is responsible (either individually or jointly) for the day-to-day management of certain other accounts, the number and total assets of which, as of fiscal year ended May 31, 2007, were as follows:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES* INVESTMENT VEHICLES OTHER ACCOUNTS
------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
------------------------------------------------------------------------------------------------
Thomas Melendez 8 $9.6 billion 2 $1.1 billion 5 $3.6 billion
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* Includes the Fund.
With respect to the accounts identified in the table above, Thomas Melendez manages one non-pooled investment vehicle with assets totaling $1.7 billion, for which the advisory fees are based in part on the performance of the accounts.
Part I-C-2
Performance fees for any particular account are paid to MFS, not the portfolio manager, and the portfolio manager's compensation is not determined by reference to the level of performance fees received by MFS.
POTENTIAL CONFLICTS OF INTEREST
The Adviser seeks to identify potential conflicts of interest resulting from a portfolio manager's management of both the Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts.
The management of multiple funds and accounts (including proprietary accounts) may give rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there may be securities which are suitable for the Fund's portfolio as well as for accounts of the Adviser or its subsidiaries with similar investment objectives. A Fund's trade allocation policies may give rise to conflicts of interest if the Fund's orders do not get fully executed or are delayed in getting executed due to being aggregated with those of other accounts of the Adviser or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely impact the value of the Fund's investments. Investments selected for funds or accounts other than the Fund may outperform investments selected for the Fund.
When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and 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 most cases, however, the Adviser believes that the Fund's ability to participate in volume transactions will produce better executions for the Fund.
The Adviser does not receive a performance fee for its management of the Fund. As a result, the Adviser and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund - for instance, those that pay a higher advisory fee and/or have a performance fee.
Part I-C-3
PART I - APPENDIX D
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund for advisory services, administrative services, retirement plan administration and services, program management services, and transfer agency services, over the specified periods are set forth below. For information regarding sales charges and distribution payments paid to MFD, see APPENDIX E to this Part I.
AMOUNT PAID TO MFS AMOUNT WAIVED AMOUNT PAID TO
FOR ADVISORY BY MFS FOR MFSC FOR
SERVICES AFTER ADVISORY TRANSFER
FISCAL YEAR ENDED WAIVERS SERVICES AGENCY SERVICES(1)
---------------------------------------------------------------------------
May 31, 2007 $0 $0 $944,818
May 31, 2006 $0 $0 N/A
May 31, 2005 $0 $0 N/A
AMOUNT PAID TO AMOUNT PAID TO AMOUNT PAID TO
MFS FOR GENERAL MFS TO RETIREMENT MFD FOR PROGRAM
ADMINISTRATIVE PLAN ADMINISTRATION MANAGEMENT
FISCAL YEAR ENDED SERVICES AND SERVICES(2) SERVICES(3)
---------------------------------------------------------------------------
May 31, 2007 $17,457 $58,229 $5,457
May 31, 2006 $58,213 $ 7,177 $1,957
May 31, 2005 $14,366 $ 0 $1,053
|
(1) Amount paid to MFSC for transfer agency services includes: a) reimbursements for certain out-of-pocket expenses and payments made under agreements with affiliated and unaffiliated entities that provide sub-accounting services; and b) payments made pursuant to the Special Servicing Agreement for transfer agent related expenses of Fund-of-Funds investing in the fund. In addition to the fees disclosed, the fund also paid directly $91,308 for transfer agent related services for the fiscal year ended May 31, 2007.
(2) Payment solely from assets attributable to Class R1, R2, R3, R4 and R5 shares.
(3) Payment solely from assets attributable to Class 529A, 529B and 529C shares.
Part I-D-1
APPENDIX E
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
----------------------------------------------------------------------
REALLOWED TO
RETAINED FINANCIAL CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES SHARES SHARES SHARES
----------------------------------------------------------------------------------------
May 31, 2007 $5,548,342 $814,948 $4,733,394 $2,918 $246,690 $106,406
May 31, 2006 $5,269,526 $787,955 $4,481,571 $ 0 $ 91,908 $ 60,647
May 31, 2005 $2,791,938 $404,338 $2,387,600 $ 0 $ 11,008 $ 8,028
|
CLASS 529A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
--------------------------------------------------------------------------
REALLOWED TO
RETAINED FINANCIAL CLASS 529A CLASS 529B CLASS 529C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES SHARES SHARES SHARES
--------------------------------------------------------------------------------------------
May 31, 2007 $18,988 $2,815 $16,173 N/A $0 $0
May 31, 2006 $ 7,813 $1,187 $ 6,626 N/A $0 $0
May 31, 2005 $ 863 $ 109 $ 754 N/A $0 $0
|
Part I-E-1
DISTRIBUTION PLAN PAYMENTS
During the fiscal year ended May 31, 2007, the Fund made the following Distribution Plan payments:
PAID BY RETAINED PAID TO FINANCIAL
CLASS OF SHARES FUND BY MFD INTERMEDIARIES(1)
---------------------------------------------------------------
Class A Shares $3,266,897 $1,272,352 $1,994,545
Class B Shares $1,880,653 $1,558,510 $ 322,143
Class C Shares $5,008,971 $2,870,168 $2,138,803
Class I Shares N/A N/A N/A
Class 529A Shares $ 3,316 $ 1,701 $ 1,615
Class 529B Shares $ 3,442 $ 3,032 $ 410
Class 529C Shares $ 9,037 $ 4,223 $ 4,814
Class R Shares $ 38,446 $ 13,035 $ 25,411
Class R1 Shares $ 15,897 $ 3,518 $ 12,379
Class R2 Shares $ 7,434 $ 1,502 $ 5,932
Class R3 Shares $ 47,140 $ 15,120 $ 32,020
Class R4 Shares $ 58,099 $ 11,533 $ 46,566
Class R5 Shares N/A N/A N/A
|
(1) May include amounts paid to financial intermediaries affiliated with MFD.
Amounts retained by MFD may represent fees paid to MFD but not yet paid to intermediaries as of the close of the period, compensation to MFD for commissions advanced by MFD to financial intermediaries upon sale of Fund shares, and/or compensation for MFD's distribution and servicing costs.
Part I-E-2
PART I - APPENDIX F
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
The following brokerage commissions were paid by the Fund during the specified time periods:
FISCAL YEAR END BROKERAGE COMMISSIONS PAID BY FUND ---------------------------------------------------- May 31, 2007 N/A May 31, 2006 N/A May 31, 2005 N/A |
SECURITIES ISSUED BY REGULAR BROKER/DEALERS
During the fiscal year ended May 31, 2007, the Fund purchased securities issued by the following regular broker/dealers of the Fund, which had the following values as of May 31, 2007:
TRANSACTIONS WITH RESEARCH FIRMS
During the fiscal year ended May 31, 2007, the Fund allocated the following amount of transactions, and related commissions, to broker/dealer firms that have been deemed by MFS to provide valuable Research ("Research Firms"). The provision of Research was not necessarily a factor in the placement of this business with such Research Firms. (1)
DOLLAR AMOUNT OF TRANSACTIONS COMMISSIONS PAID ON TRANSACTIONS WITH RESEARCH FIRMS WITH RESEARCH FIRMS ---------------------------------------------------------------- N/A N/A |
(1) The amounts shown do not include transactions directed to electronic communication networks (ECNs) owned by the Research Firms.
Part I-F-1
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI, updated through July 1, 2007, as amended or supplemented from time to time, describes policies and practices that apply to the Funds in the MFS Family of Funds. References in this Part II to a "Fund" mean each Fund in the MFS Family of Funds, unless noted otherwise. References in this Part II to a "Trust" mean the Massachusetts business trust of which the Fund is a series, or, if the Fund is itself a Massachusetts business trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
DEFINITIONS ............................................................. 3 MANAGEMENT OF THE FUND .................................................. 3 SALES CHARGE WAIVERS .................................................... 10 DISTRIBUTION PLAN ....................................................... 10 FINANCIAL INTERMEDIARY COMPENSATION ..................................... 13 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS .......................... 13 NET INCOME AND DISTRIBUTIONS ............................................ 13 TAX CONSIDERATIONS ...................................................... 14 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS ........................ 27 DISCLOSURE OF PORTFOLIO HOLDINGS ........................................ 31 DETERMINATION OF NET ASSET VALUE ........................................ 35 SHAREHOLDER SERVICES .................................................... 37 DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES .................... 40 APPENDIX A - TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND ...... 42 APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES ....................... 51 APPENDIX C - WAIVERS OF SALES CHARGES ................................... 75 APPENDIX D - FINANCIAL INTERMEDIARY COMPENSATION ........................ 91 APPENDIX E - INVESTMENT STRATEGIES AND RISKS ............................ 102 APPENDIX F - INVESTMENT RESTRICTIONS .................................... 137 APPENDIX G - RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS ........................................................ 141 APPENDIX H - DESCRIPTION OF BOND RATINGS ................................ 143 |
I. DEFINITIONS
"Alliance Plans" - include retirement plans with respect to which MFS (or one of its affiliates) has entered into an administrative arrangement with a third party to provide certain recordkeeping and/or administrative services.
"Financial intermediary" - includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administration, and any other institutions having a selling, administration or other similar agreement with MFD, MFS or one of its affiliates.
"Majority Shareholder Vote" - as defined currently in the 1940 Act to be the lesser of (i) 67% or more of the voting securities present at a meeting at which holders of voting securities representing more than 50% of the outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities.
"Serviced Plans" - include retirement plans for which MFS or one of its affiliates is responsible for providing participant recordkeeping services.
"1940 Act"- the Investment Company Act of 1940 and the rules and regulations thereunder, as amended from time to time, and as such Act, rules or regulations are interpreted by the Securities and Exchange Commission.
II. MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
Board Oversight -- The Board of Trustees which oversees the Fund provides broad supervision over the business and operations of the Fund.
Trustees and Officers -- Identification and Background -- The identification and background of the Trustees and Officers of the Trust are set forth in Appendix A of this Part II.
INVESTMENT ADVISER
MFS provides the Fund with investment advisory services. MFS and its predecessor organizations have a history of money management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc., which in turn is an indirect majority-owned subsidiary of Sun Life Financial Inc. (a diversified financial services company).
Unless otherwise noted, MFS votes proxies on behalf of the Funds pursuant to the proxy voting policies described in Appendix B to this SAI Part II (except for the MFS Union Standard Equity Fund, for which Institutional Shareholders Services, Inc., votes proxies as described in Appendix B to this SAI Part II). Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, 2006 is available without charge by visiting MFS.COM and clicking on "Proxy Voting" and by visiting the SEC's Web site at http://www.sec.gov. Prior to January 1, 2007, JMR/Financial, Inc., voted proxies on behalf of MFS Union Standard Equity Fund.
INVESTMENT SUB-ADVISERS - MFS has engaged Sun Capital Advisers LLC (referred to as Sun Capital) to act as sub-adviser with respect to the real estate related portion of the MFS Diversified Income Fund's portfolio. Sun Capital is located at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Sun Capital is an indirect wholly-owned subsidiary of Sun Life Financial Inc. ("Sun Life Financial"), a corporation organized in Canada as well as an affiliate of MFS. Sun Life Financial and its affiliates currently transact business in Canada, the United States and Asia Pacific region. Sun Life Financial is a reporting company under the Securities Exchange Act of 1934 with common shares listed on the Toronto, New York, and Philippine stock exchanges. Sun Life Financial Inc. is located at 150 King Street West, Toronto, Canada, M5H 1J9.
Sun Capital is a Delaware limited liability company and a registered investment adviser. Sun Capital provides investment management and supervisory services to mutual funds and institutional accounts.
MFS has engaged Valley Forge Capital Advisors, Inc. (referred to as Valley Forge), to act as sub-adviser with respect to the MFS Sector Rotational Fund's portfolio. Valley Forge is located at 83 General Warren Boulevard, Suite 200, Malvern, Pennsylvania 19355. Valley Forge is 56% owned by George M. Mara and 20% owned by Maryanne P. Mara.
Valley Forge is a Delaware corporation and a registered investment adviser. Valley Forge provides investment management and supervisory services to mutual funds, high net worth individuals and institutional accounts.
Unless otherwise noted, all references to "sub-adviser" shall include Sun Capital with respect to that portion of the Diversified Income Fund for which Sun Capital provides day-to-day investment advisory services and Valley Forge for MFS Sector Rotational Fund.
INVESTMENT ADVISORY AGREEMENT -- MFS manages the Fund pursuant to an Investment Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, MFS provides the Fund with investment advisory services. Subject to such policies as the Trustees may determine, MFS makes investment decisions for the Fund. For these services, MFS receives an annual investment advisory fee, computed and paid monthly, as disclosed in the Prospectus under the heading "Management of the Fund(s)."
MFS pays the compensation of the Trust's officers and of any Trustee who is an employee of MFS. MFS also furnishes at its own expense investment advisory and administrative services, office space, equipment, clerical personnel, investment advisory facilities, and executive and supervisory personnel necessary for managing the Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are "not affiliated" with MFS and all expenses of the Fund incurred in its operation and offering of shares (other than those assumed by MFS in writing) including but not limited to: management fees; Rule 12b-1 fees; administrative services fees; retirement plan administration services fees; program management services fees; governmental fees; interest charges; taxes; membership dues in the Investment Company Institute allocable to the Fund; fees and expenses of independent auditors, of legal counsel, and of any transfer agent, registrar, or dividend disbursing agent of the Fund; expenses of repurchasing and redeeming shares and servicing shareholder accounts; expenses of preparing, printing and mailing stock certificates, shareholder reports, notices, proxy statements, confirmations, periodic investment 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; organizational and start up costs; and such non-recurring or extraordinary expenses as may arise, including those relating to actions, suits, or proceedings to which the Fund is a party or otherwise may have an exposure, and the legal obligation which the Fund may have to indemnify the Trust's Trustees and officers with respect thereto. 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 to the extent that the Distribution Agreement with MFS Fund Distributors, Inc. ("MFD"), provides that MFD is to pay all of such expenses. Expenses of the Trust which are not attributable to a specific series are allocated between the series in a manner believed by management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two-year term and continues in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by Majority Shareholder Vote and, in either case, by a majority of the Trustees who are not "interested persons" of the Fund or MFS as defined by the 1940 Act. The Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a Majority Shareholder Vote, or by either party on not more than 60 days' nor less than 30 days' written notice. The Advisory Agreement may be approved, renewed, amended, or terminated as to one Fund in the Trust, even though the Agreement is not approved, renewed, amended, or terminated as to any other Fund in the Trust.
The Advisory Agreement also provides that neither MFS 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, gross negligence, or reckless disregard of its or their duties and obligations under the Advisory Agreement.
SUB-ADVISORY AGREEMENTS - Sun Capital serves as the MFS Diversified Income Fund's Sub-Adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Sun Capital (the "Sun Capital Sub-Advisory Agreement"). The Sun Capital Sub-Advisory Agreement provides that the Adviser delegate to Sun Capital the authority to make investment decisions for a portion of the MFS Diversified Income Fund (for the purposes of this paragraph, the "Fund"). Sun Capital will provide portfolio management services for the Fund for the portion of the portfolio invested in REITs ("real estate investment trust") and other real estate related investments. For these services, the Adviser pays Sun Capital an investment advisory fee, computed daily and paid monthly in arrears, at the annual rate of 0.30% of the Fund's average daily net assets managed by Sun Capital. The Sun Capital Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by a majority of the Independent Trustees. The Sun Capital Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a majority of the Independent Trustees, by a Majority Shareholder Vote, or by the Adviser or Sub-Adviser on not less than 60 days' written notice. The Sun Capital Sub-Advisory Agreement specifically provides that neither the Sub-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 misconduct, bad faith, reckless disregard, or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under the Sun Capital Sub-Advisory Agreement.
Valley Forge serves as the MFS Sector Rotational Fund's sub-adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Valley Forge (for purposes of this paragraph, the "Valley Forge Sub-Advisory Agreement"). The Valley Forge Sub-Advisory Agreement provides that the Adviser delegate to Valley Forge the authority to make investment decisions for the MFS Sector Rotational Fund (for the purposes of this paragraph, the "Fund"). For these services, the Adviser pays Valley Forge an investment advisory fee, computed and paid quarterly in arrears, in an amount equal to 0.35% annually of the first $1 billion of the fund's average daily net assets; 0.30% annually of the fund's average daily net assets in excess of $1 billion and up to $2.5 billion; 0.25% annually of the fund's average daily nets assets in excess of $2.5 billion and up to $5 billion; and 0.20% annually of the fund's average daily net assets in excess of $5 billion. The Valley Forge Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by the Board of Trustees or by the vote of a majority of the Fund's outstanding voting securities, and, in either case, by a majority of the Trustees who are not parties to the Valley Forge Sub-Advisory Agreement or interested persons of any such party. The Valley Forge Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by the Trustees, by vote of a majority of the Fund's outstanding voting securities, or by the Adviser or Valley Forge on not less than 60 days' written notice. The Valley Forge Sub-Advisory Agreement specifically provides that neither Valley Forge 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 duties or by reason of reckless disregard of its obligations and duties under the Valley Forge Sub-Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal and other administrative services under a Master Administrative Services Agreement between the Fund and MFS. Under the Agreement, the fund pays an annual fee to MFS for providing these services.
Effective August 1, 2006, the maximum annual fee payable by each Fund is $17,500 plus an amount equal to the following percentage of the Fund's average daily net assets (except for Funds investing primarily in shares of MFS Funds):
------------------------------------------------------------------- On the first $50,000,000 in assets 0.0000% ------------------------------------------------------------------- $50,000,000 - $750,000,000 in assets 0.0175% ------------------------------------------------------------------- $750,000,000 - $1,500,000,000 in assets 0.0170% ------------------------------------------------------------------- $1,500,000,000 - $2,500,000,000 in assets 0.0165% ------------------------------------------------------------------- $2,500,000,000 - $4,000,000,000 in assets 0.0120% ------------------------------------------------------------------- Over $4,000,000,000 0.0000% ------------------------------------------------------------------- |
The fees are subject to minimum and maximum fees, based on the asset level of the MFS Funds.
In addition, MFS provides, either directly or through affiliated and/or unaffiliated entities, certain administrative, recordkeeping, and communication/educational services to the retirement plans and retirement plan participants which invest in Class R1, Class R2, Class R3, Class R4 and Class R5 shares under a Master Class R Administration and Services Agreement. Under the Agreement, the Fund pays an annual fee to MFS for these services at the following percentages of the average daily net assets attributable to that class of shares: 0.35% for Class R1; 0.25% for Class R2; 0.15% for Class R3; 0.15% for Class R4; and 0.10% for Class R5 shares.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the Fund under a Shareholder Servicing Agent Agreement. Under the Agreement, MFSC may receive a fee based on the costs it incurs in providing these services, plus a target profit margin. MFSC may also contract with other affiliated and unaffiliated service providers to provide some or all of the services described above. State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, performs dividend disbursing agent functions for the Fund.
MFSC may receive a fee from the Fund designed to achieve a target pre-tax annual profit margin. Taking into account this goal, effective April 1, 2007, the Fund (except Funds investing primarily in other MFS Funds) pays MFSC a fee based on its average daily net assets equal to 0.048%. Such fee rate shall continue until modified by agreement between the Fund and MFSC, taking into account MFSC's pre-tax profit margin target.
In addition, MFSC is reimbursed by the Fund for certain expenses incurred by MFSC on behalf of the Fund. These reimbursements include payments for certain out-of-pocket expenses, such as costs related to mailing shareholder statements and the use of third party recordkeeping systems, incurred by MFSC in performing the services described above. MFSC is also reimbursed for payments made under agreements with affiliated and unaffiliated service providers that provide sub-accounting and other shareholder services, including without limitation recordkeeping, reporting and transaction processing services. Payments made under these agreements are based on the Fund's average daily net assets and/or the Fund accounts serviced by the service provider.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund which invests in other MFS Funds ("MFS fund-of-funds") and each underlying fund in which an MFS fund-of-funds invests ("underlying funds"), the underlying fund may pay a portion of each MFS fund-of-fund's transfer agent-related expenses, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the MFS fund-of-funds.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD" or the "Distributor"), a wholly owned subsidiary of MFS, serves as distributor for the continuous offering of shares of the Fund pursuant to a Distribution Agreement. The Agreement obligates MFD to use best efforts to find purchasers for shares of the Fund.
See Appendix D to this Part II for information regarding sales charges and Rule 12b-1 distribution and service payments paid to MFD.
PROGRAM MANAGER(S)
MFD serves as program manager for a qualified tuition program under Section 529 of the Internal Revenue Code through which 529 share classes are available as investment options to program participants. The Fund's 529 share classes may also be offered through qualified tuition programs for which MFD does not serve as program manager. MFD provides, either directly or through third parties, recordkeeping, tax reporting, and account services, as well as services designed to maintain the programs' compliance with the Internal Revenue Code and other regulatory requirements under a Master 529 Administrative Services Agreement.
Under the Agreement, the Fund pays MFD a fee for these services of up to 0.35% annually of the assets attributable to the 529 share classes. The current annual fee has been established at 0.25% of the average daily net assets attributable to each 529 share class up to $10 billion in assets, 0.225% from $10 billion in assets up to $20 billion in assets, and 0.20% from $20 billion in assets and above. The fee may only be increased with the approval of the Fund's Board of Trustees. MFD pays a portion of this fee to third parties who provide these services.
Please consult the program description for your particular qualified tuition program for a discussion of the fees paid to and services received from the program manager.
CODE OF ETHICS
The Fund, its Adviser, its sub-adviser (if applicable) and Distributor have adopted separate codes of ethics as required under the Investment Company Act of 1940 ("the 1940 Act"). Subject to certain conditions and restrictions, each code permits personnel subject to the code to invest in securities for their own accounts, including securities that may be purchased, held or sold by the Fund. Securities transactions by some of these persons may be subject to prior approval of the Adviser's or sub-adviser's Compliance Departments, and securities transactions of certain personnel are subject to quarterly reporting and review requirements.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge paid to MFD and imposed upon
purchases of Class A, Class A1, and Class 529A shares, and the CDSC paid to MFD
and imposed upon redemptions of Class A, Class A1, Class B, Class B1, Class C,
Class 529B, and Class 529C shares, are waived. These circumstances are described
in Appendix C of this Part II. The Fund, MFS, and their affiliates reserve the
right to eliminate, modify, and add waivers at any time in their discretion.
DISTRIBUTION PLAN
The Trustees have approved a plan for all funds (except the MFS Money Market
Fund and the MFS Government Money Market Fund) in accordance with Rule 12b-1
under the 1940 Act for Class A, Class B, Class B1, Class C, Class 529A, Class
529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, Class W and
Class J shares (the "Distribution Plan"). The Fund has not adopted a
Distribution Plan with respect to its Class A1, Class I or Class R5 shares. In
approving the Distribution Plan, the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust as defined in the 1940
Act and have no direct or indirect financial interest in the operation of the
Distribution Plan or any agreements relating to the Distribution Plan
("Distribution Plan Qualified Trustees"), concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders.
The Distribution Plan is designed to promote sales of shares and minimize redemptions, as well as to assist in the servicing and maintenance of shareholder accounts. Increasing a Fund's net assets through sales of shares, or minimizing reductions in net assets by minimizing redemptions, may help reduce a Fund's expense ratio by spreading the Fund's fixed costs over a larger base and may reduce the potential adverse effect of selling a Fund's portfolio securities to meet redemptions. There is, however, no assurance that the net assets of the Fund will increase or not be reduced, or that other benefits will be realized as a result of the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its continuance is specifically approved at least annually by vote of both the Trustees and a majority of the Distribution Plan Qualified Trustees. The Distribution Plan also requires that the Fund and MFD each provide the Trustees, and that the Trustees review, at least quarterly, a written report of the amounts expended (and purposes therefor) under the Distribution Plan. The Distribution Plan may be terminated at any time by vote of a majority of the Distribution Plan Qualified Trustees or by a Majority Shareholder Vote of the shares of the class to which the Distribution Plan relates ("Designated Class"). The Distribution Plan may not be amended to increase materially the amount of permitted distribution expenses without the approval of a majority of the shares of the Designated Class of the Fund, or may not be materially amended in any case without a vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The distribution and service fees paid to MFD equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
-------------------------------------------------------------------------------
MAXIMUM TOTAL
MAXIMUM MAXIMUM SERVICE DISTRIBUTION AND
CLASS DISTRIBUTION FEE FEE SERVICE FEE
-------------------------------------------------------------------------------
Class A 0.10% 0.25% 0.35%
-------------------------------------------------------------------------------
Class B 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class B1 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class C 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class 529A 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class 529B 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class 529C 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class R 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R1 0.50% 0.25% 0.75%
-------------------------------------------------------------------------------
Class R2 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R3 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R4 0.00% 0.25% 0.25%
-------------------------------------------------------------------------------
Class W 0.10% 0.00% 0.10%
-------------------------------------------------------------------------------
Class J 0.25% 0.70%/0.75% 0.95%/1.00%
-------------------------------------------------------------------------------
Service Class 0.25% 0.00% 0.25%
-------------------------------------------------------------------------------
|
In certain circumstances, the fees described above may not be implemented, are being waived, or do not apply to certain MFS Funds. Current distribution and service fees for each Fund are reflected under the captions "Expense Summary" and "Description of Share Classes -- Distribution and Service Fees" in the Prospectus.
SERVICE FEES
The Distribution Plan provides that the Fund may pay MFD a service fee based on the average daily net assets attributable to the Designated Class, (i.e., Class A, Class B, Class B1, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, or Class J shares, as appropriate) annually. Class W shares do not pay a service fee. MFD may, at its discretion, retain all or a portion of such payments or pay all or a portion of such payments to financial intermediaries. Service fees compensate MFD and/or financial intermediaries for shareholder servicing and account maintenance activities, including, but not limited to, shareholder recordkeeping (including assisting in establishing and maintaining customer accounts and records), transaction processing (including assisting with purchase, redemption and exchange requests), shareholder reporting, arranging for bank wires, monitoring dividend payments from the Funds on behalf of customers, forwarding certain shareholder communications from the Funds to customers, corresponding with shareholders and customers regarding the Funds (including receiving and responding to inquiries and answering questions regarding the Funds), and aiding in maintaining the investment of their respective customers in the Funds. Financial intermediaries may from time to time be required to meet certain criteria in order to receive service fees.
DISTRIBUTION FEES
The Distribution Plan provides that the Fund may pay MFD a distribution fee based on the average daily net assets attributable to the Designated Class as partial consideration for distribution services performed and expenses incurred in the performance of MFD's obligations under its distribution agreement with the Fund. Distribution fees compensate MFD and/or financial intermediaries for their expenses in connection with the distribution of Fund shares, including, but not limited to, commissions to financial intermediaries, printing prospectuses and reports used for sales purposes, the preparation and printing of sales literature, personnel, travel, office expense and equipment, payments made to wholesalers employed by MFD (employees may receive additional compensation if they meet certain targets for sales of one or more MFS Funds), and other distribution-related expenses. The amount of the distribution fee paid by the Fund with respect to each class differs under the Distribution Plan, as does the use by MFD of such distribution fees. While the amount of compensation received by MFD in the form of distribution fees during any year may be more or less than the expenses incurred by MFD under its distribution agreement with the Fund, the Fund is not liable to MFD for any losses MFD may incur in performing services under its Distribution Agreement with the Fund.
In addition, with respect to Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Emerging Growth Fund, MFS High Income Fund, MFS Total Return Fund, MFS Research Fund, MFS Strategic Income Fund, and MFS Bond Fund, to the extent that the annualized aggregate service and distribution fees paid under the Distribution Plan do not exceed 0.35% of Class A shares' average daily net assets, the Fund is permitted to pay such distribution-related expenses or other distribution-related expenses.
FINANCIAL INTERMEDIARY COMPENSATION
MFD and/or its affiliates may pay commissions, Rule 12b-1 distribution and service fees, 529 administrative services fees, retirement plan administrative and service fees, shareholder servicing fees, and other payments to financial intermediaries that sell Fund shares as described in Appendix D of this Part II.
INVESTMENT STRATEGIES, RISKS AND RESTRICTIONS
Set forth in Appendix E of this Part II is a description of investment strategies which the MFS Funds may generally use in pursuing their investment objectives and investment policies to the extent such strategies are consistent with their investment objectives and investment policies, and a description of the risks associated with these investment strategies. Set forth in Appendix F of this Part II is a description of investment restrictions to which the Fund is subject.
NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is determined each day during which the New York Stock Exchange is open for trading (see "Determination of Net Asset Value" below for a list of days that the Exchange is closed).
For this purpose, the net income attributable to shares of a money market fund (from the time of the immediately preceding determination thereof) shall consist of (i) all interest income accrued on the portfolio assets of the money market fund less (ii) all actual and accrued expenses of the money market fund determined in accordance with generally accepted accounting principles. Interest income shall include discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income is determined, the net asset value per share (i.e., the value of the net assets of the money market fund divided by the number of shares outstanding) is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment, representing the reinvestment of dividend income, is reflected by an increase in the number of shares in the shareholder's account.
It is expected that the shares of the money market fund will have a positive net income at the time of each determination thereof. If for any reason the net income determined at any time is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the money market fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to each such account. If and to the extent that such negative amount exceeds such declared dividends at the end of the month (or during the month in the case of an account liquidated in its entirety), the money market fund could reduce the number of its outstanding shares by treating each shareholder of the money market fund as having contributed to its capital that number of full and fractional shares of the money market fund in the account of such shareholder which represents its proportion of such excess. Each shareholder of the money market fund will be deemed to have agreed to such contribution in these circumstances by his or her investment in the money market fund. This procedure would permit the net asset value per share of the money market fund to be maintained at a constant $1.00 per share.
In addition, the money market funds intend to distribute net realized short- and long-term capital gains, if any, at least annually.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute to its shareholders all or substantially all of its net investment income. The net investment income of these Funds consists of non-capital gain income less expenses. In addition, these Funds intend to distribute net realized short- and long-term capital gains, if any, at least annually. Shareholders will be informed of the tax consequences of such distributions, including whether any portion represents a return of capital, after the end of each calendar year.
TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important federal
(and, where noted, state) income tax consequences affecting the Fund and its
shareholders. The discussion is very general, and therefore prospective
investors are urged to consult their tax advisers about the impact an investment
in the Fund may have on their own tax situations.
TAX TREATMENT OF THE FUND
Federal Taxes -- The Fund (even if it is a Fund in a Trust with multiple series) is treated as a separate entity for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has elected (or in the case of a new Fund, intends to elect) to be, and intends to qualify to be treated each year as, a "regulated investment company" under Subchapter M of the Code.
In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in "qualified publicly traded partnerships" (as defined below);
(b) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid-generally, taxable ordinary income and the excess, if any, of the net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year; and
(c) diversify its holdings so that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested (x) in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or businesses or (y) in the securities of one or more qualified publicly traded partnerships (as defined below).
In the case of the Fund's investment in loan participations, the Fund shall treat both the financial intermediary and the issuer of the loan participation as an issuer for the purposes of meeting the diversification requirement described in paragraph (c).
In general, for purposes of the 90% income requirement described in paragraph
(a) above, income derived from a partnership will be treated as qualifying
income only to the extent such income is attributable to items of income of the
partnership which would be qualifying income if realized by the regulated
investment company. However, 100% of the net income derived from an interest in
a "qualified publicly traded partnership" (which is defined as any partnership
(i) whose interests are traded on an established securities market or whose
interests are readily traded on a secondary market or the substantial equivalent
thereof and (ii) that derives less than 90% of its income from the qualifying
income described in paragraph (a)(i) above) will be treated as qualifying
income. In addition, although in general the passive loss rules of the Code do
not apply to regulated investment companies, such rules do apply to a regulated
investment company with respect to items attributable to an interest in a
qualified publicly traded partnership. Finally, for purposes of paragraph (c)
above, the term "outstanding voting securities of such issuer" will include
the equity securities of a qualified publicly traded partnership.
As a regulated investment company, the Fund will not be subject to any federal income or excise taxes on its net investment income and net realized capital gains that it distributes to shareholders in accordance with the timing requirements imposed by the Code. The Fund's foreign-source income, if any, may be subject to foreign withholding taxes. If the Fund failed to qualify as a "regulated investment company" in any year, it would incur a regular federal corporate income tax on all of its taxable income, whether or not distributed, and Fund distributions would generally be taxable as dividend income to the shareholders.
If the Fund fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or later if the Fund is permitted so to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders by the Fund in January of a year generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November, or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
Massachusetts Taxes -- As long as it qualifies as a regulated investment company under the Code, the Fund will not be required to pay Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
Tax Treatment of Distributions -- Subject to the special rules discussed below for Municipal Funds, shareholders of the Fund normally will have to pay federal income tax and any state or local income taxes on the dividends and "Capital Gain Dividends" (as defined below) they receive from the Fund. Except as described below, any distributions from ordinary income or from net short-term capital gains are taxable to shareholders as ordinary income for federal income tax purposes whether paid in cash or reinvested in additional shares.
For taxable years beginning before January 1, 2011, "qualified dividend income" received by an individual will be taxed at the rates applicable to long-term capital gains. In order for some portion of the dividends received by a Fund shareholder to be qualified dividend income, the Fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to the Fund's shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (1) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such date), (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) if the recipient elects to have the dividend income treated as investment interest, or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (b) treated as a passive foreign investment company. Payments in lieu of dividends, such as payments pursuant to securities lending arrangements, also do not qualify to be treated as qualified dividend income.
In general, a distribution of investment income designated by the Fund as derived from qualified dividend income will be treated as qualified dividend income by a shareholder taxed as an individual provided the shareholder meets the holding period and other requirements described above with respect to the Fund's shares. In any event, if the qualified dividend income received by the Fund during any taxable year is 95% or more of its gross income for that taxable year, then 100% of the Fund's dividends (other than Capital Gain Dividends), will be eligible to be treated as qualified dividend income. For this purpose, in the case of a sale or other disposition of the Fund of stock or securities, the only gain included in the term "gross income" is the excess of net short-term capital gain from such sales or dispositions over the net long-term capital loss from such sales or dispositions.
Properly designated distributions of net capital gain (i.e., the excess of net long-term capital gain over the net short-term capital loss) ("Capital Gains Dividends"), whether paid in cash or reinvested in additional shares, are taxable to shareholders as long-term capital gains for federal income tax purposes without regard to the length of time the shareholders have held their shares.
Long-term capital gain rates applicable to individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
Any Fund dividend that is declared in October, November, or December of any calendar year, payable to shareholders of record in such a month and paid during the following January, will be treated as if received by the shareholders on December 31 of the year in which the dividend is declared. The Fund will notify shareholders regarding the federal tax status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the Fund on a daily basis, will have the effect of reducing the per share net asset value of Fund shares by the amount of the distribution. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Capital Loss Carryovers-- Distributions from capital gains are generally made after applying any available capital loss carryovers. The amounts and expiration dates of any capital loss carryovers available to the Fund are shown in the notes to the financial statements for the Fund.
Dividends-Received Deduction-- If the Fund receives dividend income from U.S. corporations, a portion of the Fund's ordinary income dividends is normally eligible for the dividends-received deduction for corporations if the recipient otherwise qualifies for that deduction with respect to its holding of Fund shares. Availability of the deduction for particular corporate shareholders is subject to certain limitations, and deducted amounts may be subject to the alternative minimum tax or result in certain basis adjustments.
Disposition of Shares-- In general, any gain or loss realized upon a disposition of Fund shares by a shareholder that holds such shares as a capital asset will be treated as a long-term capital gain or loss if the shares have been held for more than 12 months and otherwise as a short-term capital gain or loss. However, any loss realized upon a disposition of Fund shares held for six months or less will be treated as a long-term capital loss to the extent of any Capital Gain Dividends made with respect to those shares.
Shares Purchased Through Tax-Qualified Plans -- Distributions by the Fund to
retirement plans that qualify for tax-exempt treatment under federal income tax
laws will not be taxable. Special tax rules apply to investments through such
plans. You should consult your tax adviser to determine the suitability of the
Fund as an investment through such a plan and the tax treatment of distributions
(including distributions of amounts attributable to an investment in the Fund)
from such a plan.
U.S. Taxation of Non-U.S. Persons -- Capital Gain Dividends and exempt-interest
dividends, if any, will not be subject to withholding of federal income tax.
However, distributions properly designated as exempt-interest dividends may be
subject to backup withholding, as discussed below. In general, dividends other
than Capital Gain Dividends and exempt-interest dividends, if any, paid by the
Fund to a shareholder that is not a "U.S. person" within the meaning of the
Code (such shareholder, a "Non-U.S. Person") are subject to withholding of U.S
federal income tax at a rate of 30% (or lower applicable treaty rate) even if
they are derived from income or gains (such as portfolio interest, short-term
capital gains, or foreign-source dividend and interest income) that, if paid to
a Non-U.S. Person directly, would not be subject to withholding. However,
effective for taxable years of the Fund beginning after December 31, 2004, and
before January 1, 2008, the Fund will not be required to withhold any amounts
with respect to (i) distributions (other than distributions to a Non-U.S. Person
(w) that has not provided a satisfactory statement that the beneficial owner is
not a U.S. person, (x) to the extent that the dividend is attributable to
certain interest on an obligation if the Non-U.S. Person is the issuer or is a
10% shareholder of the issuer, (y) that is within certain foreign countries that
have inadequate information exchange with the United States, or (z) to the
extent the dividend is attributable to interest paid by a person that is a
related person of the Non-U.S. Person and the Non-U.S. Person is a controlled
foreign corporation) from U.S.-source interest income that would not be subject
to U.S. federal income tax if earned directly by an individual Non-U.S. Person
(an "interest-related dividend"), and (ii) distributions (other than
distributions to an individual Non-U.S. Person who is present in the United
States for a period or periods aggregating 183 days or more during the year of
the distribution) of net short-term capital gains in excess of net long-term
capital losses (a "short-term capital gain dividend"), in each such case to
the extent such distributions are properly designated by the Fund. This
provision will first apply to the Fund (1) with respect to its direct portfolio
investments (if any) in its taxable year beginning after December 31, 2004, and,
(2) with respect to its investments in underlying Funds (if any), with respect
to designated distributions from such underlying Funds in their taxable years
beginning after December 31, 2004, that are received by the Fund in its taxable
year beginning after December 31, 2004. Depending on the circumstances, the Fund
may make such designations with respect to all, some or none of its potentially
eligible dividends and/or treat such dividends, in whole or in part, as
ineligible for this exemption for withholding. The Fund does not currently
intend to, but may in certain circumstances, designate distributions as
interest-related dividends or as short-term capital gain dividends except with
respect to Research Bond Fund J shares. In order to qualify for this exemption
from withholding, a foreign person will need to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN or substitute Form). In the case of
shares held through an intermediary, the intermediary may withhold even if the
Fund makes a designation with respect to a payment. Foreign persons should
contact their intermediaries with respect to the application of these rules to
their accounts.
If a beneficial holder who is a Non-U.S. Person has a trade or business in the United States, and the dividends are effectively connected with the conduct by the beneficial holder of a trade or business in the United States, the dividend will be subject to U.S. federal net income taxation at regular income tax rates.
In general, special tax rules apply to distributions that a "qualified investment entity" (a "QIE") pays to foreign shareholders that are attributable to gain from the Fund's sale or exchange of "U.S. real property interests" (a "USRPI Distribution"). A Fund will be a QIE if it is both (i) a regulated investment company and (ii) a "U.S. real property holding corporation" (determined without regard to certain exceptions, described below, for 5% holders of publicly traded classes of stock and for interests in domestically-controlled regulated investment companies and real estate investment trusts ("REITs")). Under the Code, a "U.S. real property holding corporation" is any corporation that holds (or held during the previous five-year period) "U.S. real property interests" ("USRPIs") (defined as U.S. real property and interests (other than solely as a creditor) in "U.S. real property holding corporations") with an aggregate fair market value equal to 50% or more of the fair market value of the corporation's real property assets and other trade-or-business assets. A USRPI does not include (i) any class of stock of a corporation that is traded on an established securities market with respect to a person who holds 5% or less of such class of stock at all times during the previous five-year period and (ii) a regulated investment company's interests in domestically controlled REITs and other regulated investment companies.
For taxable years beginning on or after January 1, 2006, where a foreign shareholder has owned more than 5% of a class of shares of a Fund that is a QIE during the one-year period preceding the date of the USRPI Distribution, the Fund will be required to withhold 35% of any USRPI Distribution and the foreign shareholder will have an obligation to file a U.S. tax return and pay tax. For all other foreign shareholders of a Fund that is a QIE, a USRPI Distribution will be treated as ordinary income (notwithstanding any designation by the Fund that such distribution is a Capital Gain Dividend) and the Fund will be required to withhold 30% (or lower applicable treaty rate) of such distribution. If a Fund that is a QIE makes a distribution to its foreign shareholders that is attributable to a USRPI Distribution received by the Fund from a "lower-tier" REIT or regulated investment company that is a QIE, that distribution will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the "lower-tier" REIT or regulated investment company.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend and certain other conditions are met, or (iii) the shares are USRPIs or the Capital Gain Dividends are USRPI Distributions.
Foreign shareholders in the Fund should consult their tax advisers with respect to the potential application of the above rules.
Backup Withholding -- The Fund is also required in certain circumstances to apply backup withholding at the rate of 28% on taxable dividends, including Capital Gain Dividends, redemption proceeds (except for redemptions by money market funds), and certain other payments that are paid to any non-corporate shareholder (including a Non-U.S. Person) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor residents of the United States. The back-up withholding rules also apply to distributions that are properly designated as exempt-interest dividends.
Foreign Income Taxation of a Non-U.S. Person -- Distributions received from the Fund by a Non-U.S. Person may also be subject to tax under the laws of their own jurisdictions.
State and Local Income Taxes: U.S. Government Securities -- Dividends paid by the Fund that are derived from interest on obligations of the U.S. Government and certain of its agencies and instrumentalities (but generally not distributions of capital gains realized upon the disposition of such obligations) may be exempt from state and local income taxes. The Fund generally intends to advise shareholders of the extent, if any, to which its dividends 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.
Certain Investments -- Any investment in zero coupon bonds, deferred interest bonds, payment-in-kind bonds, certain inflation-adjusted debt instruments, certain stripped securities, and certain securities purchased at a market discount (including certain high yield debt obligations) will cause the Fund to recognize income prior to the receipt of cash payments with respect to those securities. To distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund's investments in REIT equity securities may also require the Fund to accrue and distribute income not yet received and may at other times result in the Fund's receipt of cash in excess of the REIT's earnings. If the Fund distributes such amounts, such distribution could constitute a return of capital to Fund shareholders for federal income tax purposes. Income from REIT securities generally will not be eligible for treatment as qualified dividend income. Any investment in residual interests of a Collateralized Mortgage Obligation (a "CMO") that has elected to be treated as a real estate mortgage investment conduit (a "REMIC") can create complex tax problems, especially if the Fund has state or local governments or other tax-exempt organizations as shareholders. Under current law, the Fund serves to block unrelated business taxable income ("UBTI") from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if either: (1) the Fund invests in REITs that hold residual interests in REMICs; or (2) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). If a charitable remainder trust (as defined in Code Section 664) realizes any UBTI for a taxable year, it will lose its tax-exempt status for the year.
Options, Futures Contracts, and Forward Contracts -- The Fund's transactions in options, futures contracts, forward contracts, short sales, and swaps and related transactions will be subject to special tax rules that may affect the amount, timing, and character of Fund income and distributions to shareholders. For example, certain positions held by the Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out on that day), and any gain or loss associated with the positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by the Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," and may be subject to special tax rules that would cause deferral of Fund losses, adjustments in the holding periods of Fund securities, and conversion of short-term into long-term capital losses. Certain tax elections exist for straddles that may alter the effects with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund will limit its activities in options, futures contracts, forward contracts, short sales, and swaps and related transactions to the extent necessary to meet the diversification requirements of Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to foreign investments by the Fund. Foreign exchange gains and losses realized by the Fund may be treated as ordinary income and loss. Use of foreign currencies for non-hedging purposes and investment by the Fund in certain "passive foreign investment companies" may be limited in order to avoid a tax on the Fund. The Fund may elect to mark to market certain investments in "passive foreign investment companies" on the last day of each year. This election may cause the Fund to recognize income prior to the receipt of cash payments with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund.
Foreign Income Taxes -- Investment income received by the Fund and gains with respect to foreign securities may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of tax or an exemption from tax on such income; the Fund intends to qualify for treaty reduced rates where available. It is not possible, however, to determine the Fund's effective rate of foreign tax in advance, since the amount of the Fund's assets to be invested within various countries is not known.
If more than 50% of the total assets of a Fund are represented by direct investments in foreign stock and securities at the close of its taxable year, the Fund may elect to "pass through" to its shareholders foreign income taxes paid by it. If the Fund so elects, shareholders will be required to treat their pro rata portions of the foreign income taxes paid by the Fund as part of the amounts distributed to them by it and thus includable in their gross income for federal income tax purposes. Shareholders who do not itemize deductions would (subject to such limitations) be able to claim a credit but not a deduction. No deduction will be permitted to individuals in computing their alternative minimum tax liability. If the Fund is not eligible, or does not elect, to "pass through" to its shareholders foreign income taxes it has paid, shareholders will not be able to claim any deduction or credit for any part of the foreign taxes paid by the Fund. In addition, the Fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the Fund's recognition of ordinary income and may affect the timing, amount, or character of the Fund's distributions.
Tax Shelter Reporting -- Under Treasury regulations, if a shareholder recognizes a loss with respect to the Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Underlying Funds -- If the Fund invests all of its assets in shares of underlying Funds, its distributable income and gains will normally consist entirely of distributions from the underlying Funds' income and gains and gains and losses on the dispositions of shares of underlying Funds. To the extent that an underlying Fund realizes net losses on its investments for a given taxable year, the Fund will not be able to recognize its share of those losses (so as to offset distributions of net income or capital gains from other underlying Funds) until it disposes of shares of the underlying Fund. Moreover, even when the Fund does make such a disposition, a portion of its loss may be recognized as a long-term capital loss, which will not be treated as favorably for federal income tax purposes as a short-term capital loss or an ordinary deduction. In particular, the Fund will not be able to offset any capital losses from its dispositions of underlying Fund shares against its ordinary income, which includes distributions of any net short-term capital gains realized by an underlying Fund. In addition, in certain circumstances, the "wash sale" rules under Section 1091 of the Code may apply to a Fund's sales of underlying Fund shares that have generated losses. A wash sale occurs if shares of an underlying Fund are sold by the Fund at a loss and the Fund acquires additional shares of that same underlying Fund thirty days before or after the date of the sale. The wash sale rules could defer losses of the Fund on sales of underlying Fund shares (to the extent such sales are wash sales) for extended (and, in certain cases, potentially indefinite) periods of time. As a result of the foregoing rules, and certain other special rules, it is possible that the amounts of net investment income and net capital gains that the Fund will be required to distribute to shareholders will be greater than such amounts would have been had the Fund invested directly in the securities held by the underlying Funds, rather than investing in shares of the underlying Funds. For similar reasons, the character of distributions from a Fund (e.g., capital gains as compared to ordinary income, eligibility for the dividends-received deduction, etc.) will not necessarily be the same as it would have been had the Fund invested directly in the securities held by the underlying Funds.
If the Fund received dividends from an underlying Fund that qualifies as a regulated investment company, and the underlying Fund designates such dividends as "qualified dividend income," then the Fund is permitted in turn to designate a portion of its distributions as "qualified dividend income" as well, provided the Fund meets holding period and other requirements with respect to shares of the underlying Fund.
Depending on the Fund's percentage ownership in an underlying Fund before and after a redemption of shares of such underlying Fund, such a redemption may cause the Fund to be treated as receiving a dividend on the full amount of the distribution instead of receiving capital gain income on the shares of the underlying Fund. This would be the case where the Fund holds a significant interest in an underlying Fund and redeems only a small portion of such interest. It is possible that such a dividend will qualify as "qualified dividend income;" otherwise, it will be taxable as ordinary income.
The fact that a Fund achieves its investment objectives by investing in underlying Funds will generally not adversely affect the Fund's ability to pass on to foreign shareholders the full benefit of the interest-related dividends and short-term capital gain dividends that it receives from its underlying investments in the Funds, except possibly to the extent that (1) interest-related dividends received by the Fund are offset by deductions allocable to the Fund's qualified interest income or (2) short-term capital gain dividends received by the Fund are offset by the Fund's net short- or long-term capital losses, in which case the amount of a distribution from the Fund to a foreign shareholder that is properly designated as either an interest-related dividend or a short-term capital gain dividend, respectively, may be less than the amount that such shareholder would have received had they invested directly in the underlying Funds. Furthermore, if the Fund is a QIE and invests in an underlying Fund that is a QIE, a distribution to a foreign shareholder that is attributable to a USRPI Distribution received by the Fund will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the underlying Fund.
Under the current law, a Fund of Funds cannot pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying Fund. A Fund is permitted to elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and securities at the close of its taxable year. Foreign securities held indirectly through an underlying Fund do not contribute to this 50% threshold.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of Funds whose objective is to invest primarily in obligations that pay interest that is exempt from federal income tax ("Municipal Funds").
Tax-Exempt Distributions -- The portion of a Municipal Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends will increase a corporate shareholder's alternative minimum tax. Except when the Fund provides actual monthly percentage breakdowns, the percentage of income designated as tax-exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Taxable Distributions -- A Municipal Fund may also earn some income that is taxable as ordinary income (including interest from any obligations that lose their federal tax exemption and, subject to a de minimis exception, when a bond purchased at a price less than its stated redemption price at maturity (a so-called "market discount bond") matures or is disposed of by the Municipal Fund) and may recognize capital gains and losses as a result of the disposition of securities and from certain options and futures transactions. Shareholders normally will have to pay federal income tax on the non-exempt interest dividends and capital gain distributions they receive from the Fund, whether paid in cash or reinvested in additional shares. However, such Funds do not expect that the non-tax-exempt portion of their net investment income, if any, will be substantial. Because Municipal Funds expect to earn primarily tax-exempt interest income, it is expected that dividends from such Funds will not qualify for the dividends-received deduction for corporations and will not be treated as "qualified dividend income" taxable to non-corporate shareholders at reduced rates.
Consequences of Distributions by a Municipal Fund: Effect of Accrued Tax-Exempt Income -- Shareholders redeeming shares after tax-exempt income has been accrued but not yet declared as a dividend should be aware that a portion of the proceeds realized upon redemption of the shares will reflect the existence of such accrued tax-exempt income and that this portion 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 redemption. For this reason, if a shareholder wishes to redeem shares of a Municipal Fund that does not declare dividends on a daily basis, the shareholder may wish to consider whether he or she could obtain a better tax result by redeeming immediately after the Fund declares dividends representing substantially all the ordinary income (including tax-exempt income) accrued for that period.
Certain Additional Information for Municipal Fund Shareholders -- Interest on indebtedness incurred by shareholders to purchase or carry Municipal Fund shares will not be deductible for federal income tax purposes. Exempt-interest dividends are taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal income tax. You should consult your tax adviser to determine what effect, if any, an investment in a Fund may have on the federal taxation of your benefits. Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by private activity bonds should consult their tax advisers before purchasing Fund shares.
Consequences of Redeeming Shares -- Any loss realized on a redemption of Municipal Fund shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received with respect to those shares. If not disallowed, any such loss will be treated as a long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares.
State and Local Income Taxes: Municipal Obligations -- The exemption of exempt-interest dividends for federal income tax purposes does not necessarily result in exemption under the income tax laws of any state or local taxing authority. Some states do exempt from tax that portion of an exempt interest dividend that represents interest received by a regulated investment company on its holdings of securities issued by that state and its political subdivisions and instrumentalities. Therefore, the Fund will report annually to its shareholders the percentage of interest income earned by it during the preceding year on Municipal Bonds and will indicate, on a state-by-state basis only, the source of such income.
SPECIAL CONSIDERATIONS FOR 529 SHARE CLASSES
The following special consideration applies specifically to the ownership of a Fund' 529 share classes through a tuition program that qualifies under Section 529 of the Code.
The 529 share classes are an investment option under one or more tuition programs designed to qualify under Section 529 of the Code so that earnings on investments are not subject to federal income tax (to either a contributor to the tuition program or a designated beneficiary) until the earnings are withdrawn. Withdrawals of earnings that are used to pay "qualified higher education expenses" are tax-free for federal income tax purposes. State and local taxes may still apply. These tax benefits are not available to 529 shares that are not owned through a qualifying Section 529 tuition program.
Withdrawals of earnings that are not used for the designated beneficiary's qualified higher education expenses generally are subject not only to federal income tax but also to a 10% penalty tax unless such amounts are transferred within sixty (60) days to another tuition program for the same designated beneficiary (only one such transfer may be made in any twelve (12) month period) or another designated beneficiary who is a member of the family of the designated beneficiary with respect to which the distribution was made and certain other conditions are satisfied. The 10% penalty tax will not apply to withdrawals made under certain circumstances, including certain withdrawals made after the designated beneficiary dies, becomes disabled, or receives a scholarship or other tax-free payment for educational expenses that does not exceed the amount of the distribution. Withdrawals attributable to contributions to the tuition program (including the portion of any rollover from another tuition program that is attributable to contributions to that program) are not subject to tax.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
For the purposes of this section, all references to the "Adviser" shall include
the Sub-Adviser with respect to MFS Diversified Income Fund and MFS Sector
Rotational Fund.
Specific decisions to purchase or sell securities for the Funds are made by persons affiliated with the Adviser. Any such person may serve other clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
In connection with the selection of broker/dealers and the placing of Fund
portfolio transactions, the Adviser seeks to achieve for the Funds the best
overall price and execution available from responsible brokerage firms, taking
account of all factors it deems relevant, including by way of illustration:
price; the size of the transaction; the nature of the market of the security;
the amount of the commission; the timing and impact of the transaction taking
into account market prices and trends; the reputation, experience and financial
stability of the broker/dealer involved; the willingness of the broker/dealer to
commit capital; the need for anonymity in the market; and the quality of
services rendered by the broker/dealer in that and other transactions.
In the case of securities traded in the over-the-counter market, portfolio transactions may be effected either on an agency basis, which involves the payment of negotiated brokerage commissions to the broker/dealer, including electronic communication networks, or on a principal basis at net prices without commissions, but which include compensation to the broker/dealer in the form of a mark-up or mark-down, depending on where the Adviser believes best execution is available. In the case of securities purchased from underwriters, the cost of such securities generally includes a fixed underwriting commission or concession. From time to time, soliciting dealer fees are available to the Adviser on tender or exchange offers. Such soliciting or dealer fees are, in effect, recaptured by the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended ("Section 28(e)"), the Adviser may cause the Funds to pay a broker/dealer which provides "brokerage and research services" (as defined by the Securities Exchange Act of 1934, as amended) to the Adviser an amount of commission for effecting a securities transaction for the Funds in excess of the amount other broker/dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the effecting broker/dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Funds and its other clients. "Commissions," as interpreted by the SEC, include fees paid to brokers for trades conducted on an agency basis, and certain mark-ups, markdowns, commission equivalents and other fees received by dealers in riskless principal transactions placed in the over-the-counter market.
The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement) or required in connection therewith by applicable rules. In determining whether a service or product qualifies as "brokerage and research services," the Adviser evaluates whether the service or product provides lawful and appropriate assistance to the Adviser in carrying out its investment decision-making responsibilities. It is often not possible to place a dollar value on the brokerage and research services the Adviser received from brokers. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions is based primarily on the professional opinions of the persons responsible for the placement and review of such transactions.
Broker/dealers may be willing to furnish statistical, research and other factual information or services ("Research"), for example, investment research reports; access to analysts; execution systems and trading analytics; reports or databases containing corporate, fundamental, and technical analyses; portfolio modeling strategies; and economic research services, such as publications, chart services, and advice from economists concerning macroeconomics information, and analytical investment information about particular corporations to the Adviser for no consideration other than brokerage or underwriting commissions. Such broker/dealers may be involved from time to time in executing, clearing or settling securities transactions on behalf of the Funds ("Executing Brokers"), or may have entered into agreements with one or more Executing Brokers pursuant to which they are responsible for performing one or more functions, the performance of which has been identified by the SEC as being sufficient to constitute effecting securities transactions within the meaning of Section 28(e) as interpreted by the SEC ("Effecting Brokers"). In reliance on this interpretation the Adviser expects to enter into Commission Sharing Agreements with Executing Brokers which will provide for the Executing Brokers to pay a portion of the Commissions paid by the Funds for securities transactions to Effecting Brokers. In addition to effecting securities transactions on behalf of the Funds pursuant to a Commission Sharing Agreement, the Effecting Brokers will also provide Research for the benefit of the Adviser. If a government agency with regulatory authority over the affairs of the Adviser or its subsidiaries, or a court of competent jurisdiction, were to determine that an Effecting Broker is not effecting a securities transaction within the meaning of Section 28(e), the Adviser believes that such Research should be considered as Research provided by the relevant Executing Broker and permitted by Section 28(e), provided that the relationship with such Executing Broker is otherwise consistent with the requirement for Research under Section 28(e). In such circumstances the Adviser will in effect be paying a greater commission in order to obtain third party research. The Adviser may use brokerage commissions from the Funds' portfolio transactions to acquire Research, subject to the procedures and limitations described in this discussion.
The advisory fee paid by each of the Funds to the Adviser is not reduced as a consequence of the Adviser's receipt of Research. To the extent the Funds' portfolio transactions are used to obtain Research, the brokerage commissions paid by the Funds might exceed those that might otherwise be paid for execution only. The Research received may be useful and of value to the Adviser in serving both the Funds and other clients of the Adviser; accordingly, not all of the Research provided by brokers through which the Funds effect securities transactions may be used by the Adviser in connection with the Funds. The Adviser would, through the use of the Research, avoid the additional expenses that would be incurred if it attempted to develop comparable information through its own staff.
From time to time, the Adviser prepares a list of broker/dealer firms that have been deemed by the Adviser to provide valuable Research as determined periodically by the investment staff ("Research Firms"), together with a suggested non-binding amount of brokerage commissions ("non-binding target") to be allocated to each Research Firm, subject to certain requirements. These Research Firms may include Executing Brokers and Effecting Brokers. In instances when the Adviser allocates commissions to Research Firms that are effecting trades within the meaning of Section 28(e) on behalf of client accounts, such trades will be executed in accordance with the Adviser's obligation to seek best execution for its client accounts. Neither the Adviser nor the Funds have an obligation to any Research Firm if the amount of brokerage commissions paid to the Research Firm is less than the applicable non-binding target. The Adviser reserves the right to pay cash to the Research Firm from its own resources in an amount the Adviser determines in its discretion.
If the Adviser determines that any service or product has a mixed use (i.e., it also serves functions that do not assist the investment decision-making or trading process), the Adviser will allocate the costs of such service or product accordingly in its reasonable discretion. The Adviser will allocate brokerage commissions to Research Firms only for the portion of the service or product that the Adviser determines assists it in the investment decision-making or trading process and will pay for the remaining value of the product or service in cash.
In effecting portfolio transactions on behalf of the Funds and the Adviser's other clients, the Adviser from time to time may instruct the broker/dealer that executes a transaction to allocate, or "step out," a portion of such transaction to another broker/dealer. The broker/dealer to which the Adviser has "stepped out" would then settle and complete the designated portion of the transaction, and the executing broker/dealer would settle and complete the remaining portion of the transaction that has not been "stepped out." Each broker/dealer may receive a commission or brokerage fee with respect to that portion of the transaction that it settles and completes.
In certain instances there may be securities that are suitable for the Funds' portfolios as well as for one or more of the other clients of the Adviser or of any subsidiary of the Adviser (or that the Adviser believes should no longer be held by the Funds' portfolios or by other clients of the Adviser or any subsidiary of the Adviser). 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. Transactions for each client are generally effected independently unless the Adviser determines to purchase or sell the same securities for several clients at approximately the same time. The Adviser may, but is not required to, aggregate together purchases and sales for several clients and will allocate the trades in a fair and equitable manner, across participating clients. The Adviser has adopted policies that are reasonably designed to ensure that when two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. Among other things, these policies prohibit allocations of equity initial public offerings, equity limited offerings or fixed income new issues to, among others: (1) Private Portfolio Management accounts; (2) funds or other accounts the beneficial owners of which are principally the Adviser's officers and employees of the Trust or Trustees which are not being offered to the public; and (3) any accounts owned beneficially solely by the Adviser or any direct or indirect subsidiary of the Adviser. However, these policies do not prohibit allocations to funds or other accounts owned beneficially by Sun Life of Canada (U.S.) Financial Services Holdings, Inc., or Sun Life Financial Inc., or their affiliates other than the Adviser and its direct and indirect subsidiaries. In addition, accounts in which the Adviser or any of its direct or indirect subsidiaries is the sole beneficial owner generally will be allocated investment opportunities (other than with respect to equity initial public offerings, equity limited offerings or fixed income new issues) on the same basis as Funds or other clients of the Adviser when the account has been established and seeded by the Adviser or the subsidiary with a limited amount of assets for the purpose of establishing a performance record to enable the Adviser or the subsidiary to offer the account's investment style to unaffiliated third parties.
It is recognized that in some cases this system could have a detrimental effect on the price or availability of a security as far as the Funds are concerned. In other cases, however, the Adviser believes that such practices may produce increased investment opportunities for the Funds.
DISCLOSURE OF PORTFOLIO HOLDINGS
Each Fund has established a policy governing the disclosure of its portfolio
holdings that is reasonably designed to protect the confidentiality of the
Fund's non-public portfolio holdings and prevent inappropriate selective
disclosure of such holdings. The Fund's Board of Trustees has approved this
policy and will be asked to approve any material amendments to this policy.
Exceptions to this policy may be authorized by MFS' general counsel or a senior
member of the MFS legal department acting under the supervision of MFS' general
counsel (an "Authorized Person").
Neither MFS nor the Fund nor, if applicable, a sub-adviser, will receive any compensation or other consideration in connection with its disclosure of Fund portfolio holdings.
PUBLIC DISCLOSURE OF PORTFOLIO HOLDINGS
In addition to the public disclosure of Fund portfolio holdings through required SEC quarterly filings, a Fund may make its portfolio holdings publicly available on the MFS Web site in such scope and form and with such frequency as MFS may reasonably determine.
The following information is generally available to you on the MFS Web site (MFS.COM):
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APPROXIMATE DATE OF POSTING
INFORMATION TO WEB SITE
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Fund's full securities holdings 24 days after month end
as of each month's end
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Fund's top 10 securities holdings
as of each month's end 14 days after month end
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If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for fund's that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the Fund or MFS may suspend the posting of this information or modify the elements of this Web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the Fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
Not all registered investment companies that are advised by MFS publicly disclose portfolio holdings in the form or on the schedule described above, and registered investment companies that are sub-advised by MFS or its affiliates may be subject to different portfolio holdings disclosure policies that may permit public disclosure of portfolio holdings information in different forms and at different times. In addition, separate account and unregistered product clients of MFS or its affiliates have access to their portfolio holdings, and prospective clients have access to representative portfolio holdings. These clients and prospective clients are not subject to the Fund's portfolio holdings disclosure policies. Some of these registered investment companies, sub-advised Funds, separate accounts, and unregistered products, all advised or sub-advised by MFS or its affiliates, have substantially similar or identical investment objectives and strategies to certain Funds. They therefore have potentially substantially similar, and in certain cases nearly identical, portfolio holdings as those Funds.
A Fund's portfolio holdings are considered to be publicly disclosed: (a) upon the disclosure of the portfolio holdings in a publicly available, routine filing with the SEC that is required to include the information; (b) the day after the Fund makes such information available on its Web site (assuming that it discloses in its prospectus that such information is available on its Web site); or (c) at such additional times and on such additional basis as determined by the SEC or its staff.
DISCLOSURE OF NON-PUBLIC PORTFOLIO HOLDINGS
A Fund may, in certain cases, disclose to third parties its portfolio holdings which have not been made publicly available. Disclosure of non-public portfolio holdings to third parties may only be made if an Authorized Person determines that such disclosure is not impermissible under applicable law or regulation. In the case of sub-advisers, as applicable, this determination may be made by a senior member of the sub-adviser's legal or compliance departments (a "Sub-Adviser Authorized Person"). In addition, the third party receiving the non-public portfolio holdings may, at the discretion of an Authorized Person, be required to agree in writing to keep the information confidential and/or agree not to trade directly or indirectly based on the information. Such agreements may not be required in circumstances such as where portfolio securities are disclosed to brokers to obtain bids/prices or in interviews with the media. MFS will seek to monitor a recipient's use of non-public portfolio holdings provided under these agreements and, when appropriate, use its best efforts to enforce the terms of these agreements. The restrictions and obligations described in this paragraph do not apply to non-public portfolio holdings provided to MFS or its affiliates.
In addition, to the extent that an Authorized Person determines that there is a potential conflict with respect to the disclosure of information that is not publicly available between the interests of a Fund's shareholders, on the one hand, and MFS, MFD or an affiliated person of MFS, MFD, or the Fund, on the other hand, the Authorized Person must inform MFS' conflicts officer of such potential conflict, and MFS' conflicts officer shall determine whether, in light of the potential conflict, disclosure is reasonable under the circumstances, and shall report such potential conflict of interest determinations to the Fund's Independent Chief Compliance Officer and the Board of Trustees of the Fund. MFS also reports to the Board of Trustees of the Fund regarding the disclosure of information regarding the Fund that is not publicly available.
Subject to compliance with the standards set forth in the previous two paragraphs, non-public portfolio holdings may be disclosed in the following circumstances:
Employees of MFS or MFD or, if applicable, a sub-adviser, (collectively "Fund representatives") disclose non-public portfolio holdings in connection with the day-to-day operations and management of the Fund. Full portfolio holdings are disclosed to a Fund's custodians, independent registered accounting firm, financial printers, regulatory authorities, and stock exchanges and other listing organizations. Portfolio holdings are disclosed to a Fund's pricing service vendors and broker/dealers when requesting bids for, or price quotations on, securities, and to other persons (including independent contractors) who provide systems or software support in connection with Fund operations, including accounting, compliance support, and pricing. Portfolio holdings may also be disclosed to persons assisting a Fund in the voting of proxies or in connection with litigation relating to Fund portfolio holdings. In connection with managing the Funds, MFS or, if applicable, a sub-adviser, may use analytical systems provided by third parties who may have access to Fund portfolio holdings.
Non-public portfolio holdings may be disclosed in connection with other activities, such as to participants in in-kind purchases and redemptions of Fund shares, to service providers facilitating the distribution or analysis of portfolio holdings, once the information is public, and in other circumstances not described above. All such disclosures are subject to compliance with the applicable disclosure standards.
In addition, subject to such disclosure not being impermissible under applicable law or regulation, Fund representatives may disclose Fund portfolio holdings and related information, which may be based on non-public portfolio holdings, under the following circumstances (among others):
Fund representatives may provide oral or written information ("portfolio commentary") about a Fund, including, but not limited to, how the Fund's investments are divided among various sectors, industries, countries, value and growth stocks, small, mid, and large-cap stocks, among stocks, bonds, currencies and cash, types of bonds, bond maturities, bond coupons, and bond credit quality ratings. This portfolio commentary may also include information on how these various weightings and factors contributed to Fund performance. Fund representatives may also express their views orally or in writing on one or more of a Fund's portfolio holdings or may state that a Fund has recently purchased or sold one or more holdings.
Fund representatives may also provide oral or written information ("statistical information") about various financial characteristics of a Fund or its underlying portfolio securities including, but not limited to, alpha, beta, coefficient of determination, duration, maturity, information ratio, Sharpe ratio, earnings growth, payout ratio, price/book value, projected earnings growth, return on equity, standard deviation, tracking error, weighted average quality, market capitalization, percent debt to equity, price to cash flow, dividend yield or growth, default rate, portfolio turnover, and risk and style characteristics.
The portfolio commentary and statistical information may be provided to members of the press, shareholders in the Fund, persons considering investing in the Fund, or representatives of such shareholders or potential shareholders, such as fiduciaries of a 401(k) plan or a trust and their advisers, and the content and nature of the information provided to each of these persons may differ.
ONGOING ARRANGEMENTS TO MAKE NON-PUBLIC PORTFOLIO HOLDINGS AVAILABLE
With authorization from an Authorized Person or, as applicable, a Sub-Adviser Authorized Person, consistent with "Disclosure of Non-Public Portfolio Holdings" above, Fund representatives may disclose non-public Fund portfolio holdings to the recipients identified on Appendix G to this SAI Part II, or permit the recipients identified in Appendix G to this SAI Part II to have access to non-public Fund portfolio holdings, on an on-going basis.
This list of recipients in Appendix G to this SAI Part II is current as of May 31, 2007, and any additions, modifications, or deletions to this list that have occurred since May 31, 2007, are not reflected. The portfolio holdings of the Fund which are provided to these recipients, or to which these recipients have access, may be the Fund's current portfolio holdings. As a condition to receiving or being provided access to non-public Fund portfolio holdings, the recipients listed in Appendix G to this SAI Part II must agree, or otherwise have an independent duty, to maintain this information in confidence.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the New York Stock Exchange (the "Exchange") is open for trading.
(As of the date of this SAI, the Exchange is open for trading every weekday
except in an emergency and for the following holidays (or the days on which they
are observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day, and
Christmas Day.) This determination is made once each day as of the close of
regular trading on the Exchange (generally, 4 p.m., Eastern time) (the
"valuation time") 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 Fund shares outstanding for that class. In
accordance with regulations for regulated investment companies and except for
money market funds, changes in portfolio holdings and number of shares
outstanding are generally reflected in a Fund's net asset value the next
business day after such change.
MONEY MARKET FUNDS
Money market instruments are valued at amortized cost, which approximates market value. Amortized cost involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its current market value. Each money market fund's use of amortized cost is subject to the Fund's compliance with Rule 2a-7 under the Investment Company Act of 1940. The amortized cost value of an instrument can be different from the market value of an instrument.
The Board of Trustees for each money market fund has established procedures designed to stabilize its net asset value per share at $1.00 and has delegated to the Adviser the responsibility for the implementation and administration of such procedures. Under the procedures, the adviser is responsible for monitoring and notifying the Board of Trustees of circumstances where the net asset value calculated by using market valuations may deviate from the $1.00 per share calculated using amortized cost and might result in a material dilution or other unfair result to investors or existing shareholders. Under such circumstances, the Board may take such corrective action, if any, as it deems appropriate to eliminate or reduce, to the extent reasonably practicable, any such dilution or unfair results. Such corrective action could include selling portfolio instruments prior to maturity to realize capital gains or losses; shortening average portfolio maturity; withholding dividends; calculating net asset value by using available market quotations; and such other measures as the Trustees may deem appropriate.
NON-MONEY MARKET FUNDS
Open-end investment companies are generally valued at their net asset value per share. The underlying investments of open-end investment companies managed by the Adviser are valued as described below.
Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded. For securities held short for which there were no sales reported that day, the position is generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded.
Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by an independent pricing service.
Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value.
Exchange-traded options are generally valued at the last sale or official closing price as provided by an independent pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by an independent pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from an independent source.
Futures contracts are generally valued at last posted settlement price as provided by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by an independent pricing service on the market on which such futures contracts are primarily traded.
Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by an independent pricing service for proximate time periods.
Swaps are generally valued at valuations provided by an independent pricing service.
Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker/dealer bid quotation.
Values obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by an independent pricing service.
SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available certain programs designed to enable shareholders to add to or withdraw from their investment with applicable sales charges reduced or waived. These programs are generally described in the prospectus and additional details regarding certain of these programs are set forth below. These programs or waivers may be changed or discontinued by the Fund at any time without notice. Some of these programs and waivers may not be available to you if your shares are held through certain types of accounts, such as certain retirement accounts and 529 plans, or certain accounts that you maintain with your financial intermediary. You or your financial intermediary must inform MFSC of your intention to invest in the Fund under one of the programs below upon purchasing Fund shares. You can provide this information in your account application or through a separate document provided by your financial intermediary.
LETTER OF INTENT. Out of the shareholder's initial purchase (or subsequent purchases if necessary), 5% of the dollar amount specified in the Letter of Intent application shall be held in escrow by MFSC in the form of shares registered in the shareholder's name. All distributions on escrowed shares will be paid to the shareholder or to the shareholder's 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 minimum investment amount is not completed, MFSC will redeem an appropriate number of the escrowed shares in order to pay the higher sales charge level for the amount actually purchased. Shares remaining after any such redemption will be released by MFSC. By completing and signing the Account Application or separate Letter of Intent application, the shareholder irrevocably appoints MFSC his or her attorney to surrender for redemption any or all escrowed shares with full power of substitution in the premises.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). To initiate this service, shares having an aggregate value of at least $5,000 must be held on deposit by, or certificates for such shares must be deposited with, MFSC. MFSC may charge the account for services rendered and expenses incurred beyond those normally assumed by the Fund with respect to the redemption of shares. No charge is currently assessed against the account, but one could be instituted by MFSC on 60 days' notice in writing to the shareholder in the event that the Fund ceases to assume the cost of these services. The Fund may terminate any SWP for an account if the value of the account falls below $5,000 as a result of share redemptions (other than as a result of a SWP). Any SWP may be terminated at any time by either the shareholder or the Fund.
GROUP PURCHASES. A bona fide group and all its members may be treated at MFD's discretion as a single purchaser and, under the Right of Accumulation (but not the Letter of Intent), obtain quantity sales charge discounts on the purchase of Class A, Class A1, or 529A shares if the group (1) gives its endorsement or authorization to the investment program so that it may be used by the financial intermediary to facilitate solicitation of the membership, thus effecting economies of sales effort; (2) 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 financial intermediary, 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.
EXCHANGE PRIVILEGE
MONEY MARKET FUNDS
If you exchange your shares out of MFS Cash Reserve Fund, MFS Government Money Market Fund, or MFS Money Market Fund into Class A or Class 529A shares of any other MFS Fund, you will pay the initial sales charge, if applicable, if you have not already paid this charge on these shares. You will not pay the charge if:
o the shares exchanged from either Fund were acquired by an exchange from any other MFS Fund;
o the shares exchanged from either Fund were acquired by automatic investment of dividends from any other MFS Fund; or
o the shares being exchanged would have, at the time of purchase, been eligible for purchase at net asset value had you invested directly in the MFS Fund into which the exchange is being made.
MFS FIXED FUND. Class A, Class A1, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund held by certain qualified retirement plans may be exchanged for units of participation of the MFS Fixed Fund (the "Units"), and Units may be exchanged for Class A, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund (if the share purchase eligibility for these share classes is met). With respect to exchanges between Class C shares subject to a CDSC and Units, a shareholder will only be eligible to make the exchange if the CDSC would have been waived had the Class C shares been redeemed. With respect to exchanges between Class A and Class A1 shares and Units, shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares or Units will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged Fund and the original purchase date of the shares subject to the CDSC. In the event that a shareholder initially purchases Units and then exchanges into Class A shares subject to an initial sales charge of a MFS Fund, the initial sales charge shall be due upon such exchange, but will not be imposed with respect to any subsequent exchanges between such Class A and Class A1 shares and Units with respect to shares on which the initial sales charge has already been paid.
TELEPHONE EXCHANGES. No more than ten exchanges may be made in any one exchange request by telephone.
DESCRIPTION OF SHARES, VOTING RIGHTS, AND LIABILITIES
The Trust's Declaration of Trust, as amended or amended and restated from time
to time, permits the Trust's Board of Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) of each
series, 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, and to divide such shares into classes. The Board of Trustees
has reserved the right to create and issue additional series and classes of
shares and to classify or reclassify outstanding shares.
Each shareholder of the Fund is entitled to one vote for each dollar of net asset value (number of shares of the Fund owned times net asset value per share) of the Fund, on each matter on which the shareholder is entitled to vote. Each fractional dollar amount is entitled to a proportionate fractional vote. Except when a larger vote is required by applicable law, a majority of the voting power of the shares voted in person or by proxy on a matter will decide that matter and a plurality of the voting power of the shares voted in person or by proxy will elect a Trustee. Shareholders of all series of the Trust generally will vote together on all matters except when a particular matter affects only shareholders of a particular class or series or when applicable law requires shareholders to vote separately by series or class.
Except in limited circumstances, the Trustees may, without any shareholder vote, amend or otherwise supplement the Trust's Declaration of Trust. Each Trust except MFS Series Trust XII, or any series or class thereof, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets if authorized (either at a meeting or by written consent) by a Majority Shareholder Vote of the class, series, or trust, as applicable. MFS Series Trust XII, or any series or class of MFS Series Trust XII, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets without any shareholder vote to the extent permitted by law. Each Trust, or any series or class, may reincorporate or reorganize (but not with another operating entity) without any shareholder vote. The Trust, any series of the Trust, or any class of any series, may be terminated at any time by a vote of 1) a Majority Shareholder Vote, or 2) by the Trustees by written notice to the shareholders of that series or class.
The Trustees may cause a shareholder's shares to be redeemed for any reason under terms set by the Trustees, including, but not limited to, 1) to protect the tax status of a Fund, 2) the failure of a shareholder to provide a tax identification number if required to do so, 3) the failure of a shareholder to pay when due for the purchase of shares issued to the shareholder, 4) in order to eliminate accounts whose values are less than a minimum amount established by the Trustees, 5) the failure of a shareholder to meet or maintain the qualifications for ownership of a particular class of shares, and 6) to eliminate ownership of shares by a particular shareholder when the Trustees determine that the particular shareholder's ownership is not in the best interests of the other shareholders of the applicable Fund (for example, in the case of an alleged market timer). The exercise of the above powers is subject to any applicable provisions under the 1940 Act or the rules adopted thereunder.
Under the Declaration of Trust, the Fund may convert to a master/feeder structure or a fund of funds structure without shareholder approval. In a master/feeder structure, a Fund invests all of its assets in another investment company with similar investment objectives and policies. In a Fund of Funds structure, a Fund invests all or a portion of its assets in multiple investment companies.
The Trust is an entity 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 Trust also maintains insurance for the protection of the Trust and its shareholders and the Trustees, officers, employees, and agents of the Trust covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust, and that the Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust or other agreement with a Trustee protects a Trustee against any liability to which he or she would otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
The Trust's Declaration of Trust provides that shareholders may not bring suit on behalf of the fund without first requesting that the Trustees bring such suit unless there would be irreparable injury to the Fund or if a majority of the Trustees (or a majority of Trustees on any committee established to consider the merits of such action) have a personal financial interest in the action. Trustees are not considered to have a personal financial interest by virtue of being compensated for their services as Trustees or as trustees of Funds with the same or an affiliated investment adviser or distributor.
The Trust's Declaration of Trust provides that by becoming a shareholder of the Fund, each shareholder shall be expressly held to have assented to and agreed to be bound by the provisions of the Declaration of Trust.
PART II - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND
BACKGROUND
The Trustees and officers of the Trust, as of July 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(S) TRUSTEE/OFFICER DURING THE PAST FIVE YEARS
Robert J. Trustee April 2005; Massachusetts Financial
Manning(3) December 2004 - Services Company, Chief
(born 10/20/63) March 2005 Executive Officer,
(Advisory President, Chief
Trustee); Investment Officer and
February - Director
December 2004
(Trustee)
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Robert C. Pozen(3) Trustee April 2005; Massachusetts Financial
(born 8/8/46) December 2004 Services Company, Chairman
-March 2005 (since February 2004); MIT
(Advisory Sloan School (education),
Trustee); Senior Lecturer (since
February - 2006); Secretary of
December 2004 Economic Affairs, The
(Trustee) Commonwealth of
Massachusetts (January
2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to
December 2001); Fidelity
Management & Research
Company (investment
adviser), President (March
1997 to July 2001); Bell
Canada Enterprises
(telecommunications),
Director; Medtronic, Inc.
(medical technology),
Director; Telesat
(satellite
communications), Director
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INDEPENDENT TRUSTEES
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J. Atwood Ives Trustee and February 1992 Private investor; Eastern
Chair of Enterprises (diversified
(born 5/1/36) Trustees services company),
Chairman, Trustee and
Chief Executive Officer
(until November 2000)
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Robert E. Butler(4) Trustee January 2006 Consultant - regulatory
and compliance matters
(born 11/29/41) (since July 2002);
PricewaterhouseCoopers LLP
(professional services
firm), Partner (November
2000 until June 2002)
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Lawrence H. Cohn, Trustee August 1993 Brigham and Women's
M.D. Hospital, Chief of Cardiac
(born 3/11/37) Surgery (until 2005);
Harvard Medical School,
Professor of Cardiac
Surgery; Physician
Director of Medical Device
Technology for Partners
HealthCare
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David H. Gunning Trustee January 2004 Retired; Cleveland-Cliffs
Inc. (mining products and
(born 5/30/42) service provider), Vice
Chairman/Director (until
May 2007); Portman Limited
(mining), Director (since
2005); Encinitos Ventures
(private investment
company), Principal (1997
to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director
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William R. Gutow Trustee December 1993 Private investor and real
(born 9/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman; Atlantic
Coast Tan (tanning
salons), Vice Chairman
(since 2002)
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Michael Hegarty Trustee December 2004 Retired; AXA Financial
(financial services and
(born 12/21/44) insurance), Vice Chairman
and Chief Operating
Officer (until May 2001);
The Equitable Life
Assurance Society
(insurance), President and
Chief Operating Officer
(until May 2001)
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Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 6/23/35) (attorneys), Partner
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J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 9/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing
General Partner (since
1993); Cambridge
Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
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Laurie J. Thomsen Trustee March 2005 New Profit, Inc. (venture
(born 8/5/57) philanthropy), Partner
(since 2006); Private
investor; Prism Venture
Partners (venture
capital), Co-founder and
General Partner (until
June 2004); The Travelers
Companies (commercial
property liability
insurance), Director
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Robert W. Uek Trustee January 2006 Retired (since 1999);
(born 5/18/41) PricewaterhouseCoopers LLP
(professional services
firm), Partner (until
1999); Consultant to
investment company
industry (since 2000); TT
International Funds
(mutual fund complex),
Trustee (2000 until 2005);
Hillview Investment Trust
II Funds (mutual fund
complex), Trustee (2000
until 2005)
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Maria F. Dwyer(3) President November 2005 Massachusetts Financial
(born 12/1/58) Services Company,
Executive Vice President
and Chief Regulatory
Officer (since March 2004)
and Chief Compliance
Officer (since December
2006); Fidelity Management
& Research Company, Vice
President (prior to March
2004); Fidelity Group of
Funds, President and
Treasurer (prior to March
2004)
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Tracy Atkinson(3) Treasurer September 2005 Massachusetts Financial
Services Company, Senior
(born 12/30/64) Vice President (since
September 2004);
PricewaterhouseCoopers
LLP, Partner (prior to
September 2004)
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Christopher R. Assistant July 2005 Massachusetts Financial
Bohane(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 1/18/74) Clerk Counsel (since April
2003); Kirkpatrick &
Lockhart LLP (law firm),
Associate (prior to April
2003)
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Ethan D. Corey(3) Assistant July 2005 Massachusetts Financial
Secretary and Services Company, Special
(born 11/21/63) Assistant Counsel (since December
Clerk 2004); Dechert LLP (law
firm), Counsel (prior to
December 2004)
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David L. Assistant July 2005 Massachusetts Financial
DiLorenzo(3) Treasurer Services Company, Vice
President (since June
(born 8/10/68) 2005); JP Morgan Investor
Services, Vice President
(prior to June 2005)
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Mark D. Fischer(3) Assistant July 2005 Massachusetts Financial
Treasurer Services Company, Vice
(born 10/27/70) President (since May
2005); JP Morgan
Investment Management
Company, Vice President
(prior to May 2005)
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Brian E. Assistant May 2006 Massachusetts Financial
Langenfeld(3) Secretary and Services Company,
Assistant Assistant Vice President
(born 3/7/73) Clerk and Counsel (since May
2006); John Hancock
Advisers, LLC, Assistant
Vice President and Counsel
(May 2005 to April 2006);
John Hancock Advisers,
LLC, Attorney and
Assistant Secretary (prior
to May 2005)
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Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial
(born 11/13/57) Treasurer Services Company, Senior
Vice President
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Susan S. Newton(3) Assistant May 2005 Massachusetts Financial
Secretary and Services Company, Senior
(born 3/7/50) Assistant Vice President and
Clerk Associate General Counsel
(since April 2005); John
Hancock Advisers, LLC,
Senior Vice President,
Secretary and Chief Legal
Officer (prior to April
2005); John Hancock Group
of Funds, Senior Vice
President, Secretary and
Chief Legal Officer (prior
to April 2005)
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Susan A. Assistant July 2005 Massachusetts Financial
Pereira(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 11/5/70) Clerk Counsel (since June 2004);
Bingham McCutchen LLP (law
firm), Associate (prior to
June 2004)
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Mark N. Secretary and January 2006 Massachusetts Financial
Polebaum(3) Clerk Services Company,
Executive Vice President,
(born 5/1/52) General Counsel and
Secretary (since January
2006); Wilmer Cutler
Pickering Hale and Dorr
LLP (law firm), Partner
(prior to January 2006)
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Frank L. Tarantino Independent June 2004 Tarantino LLC (provider of
Chief compliance services),
(born 3/7/44) Compliance Principal (since June
Officer 2004); CRA Business
Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (prior to March
2003)
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James O. Yost(3) Assistant September 1990 Massachusetts Financial
(born 06/12/60) Treasurer Services Company, Senior
Vice President
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(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each
Trustee has served continuously since appointment unless indicated
otherwise.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of the trust within the meaning of the Investment
Company Act of 1940 (referred to as the 1940 Act), which is the principal
federal law governing investment companies like the fund, as a result of
position with MFS. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
(4) In 2004 and 2005, Mr. Butler provided consulting services to the
independent compliance consultant retained by MFS pursuant to its
settlement with the SEC concerning market timing and related matters. The
terms of that settlement required that compensation and expenses related to
the independent compliance consultant be borne exclusively by MFS and,
therefore, MFS paid Mr. Butler for the services he rendered to the
independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a
total of $351,119.29.
The Trust held a shareholders' meeting in 2005 to elect Trustees, and will hold a shareholders' meeting at least once every five years thereafter, to elect Trustees. Each Trustee (except Messrs. Butler and Uek) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of July 1, 2007, the Trustees served as board members of 97 funds within the MFS Family of Funds.
PART II - APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
MARCH 1, 2007
Massachusetts Financial Services Company, MFS Institutional Advisors, Inc. and MFS' other investment adviser subsidiaries (collectively, "MFS") have adopted proxy voting policies and procedures, as set forth below ("MFS Proxy Voting Policies and Procedures"), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the registered investment companies sponsored by MFS, other than the MFS Union Standard Equity Fund (the "MFS Funds"). References to "clients" in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.
The MFS Proxy Voting Policies and Procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
A. VOTING GUIDELINES
1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST
MFS' policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS' clients, and not in the interests of any other party or in MFS' corporate interests, including interests such as the distribution of MFS Fund shares, administration of 401(k) plans, and institutional relationships.
MFS periodically reviews matters that are presented for shareholder vote by either management or shareholders of public companies. Based on the overall principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote. In all cases, MFS will exercise its discretion in voting on these matters in accordance with this overall principle. In other words, the underlying guidelines are simply that - guidelines. Proxy items of significance are often considered on a case-by-case basis, in light of all relevant facts and circumstances, and in certain cases MFS may vote proxies in a manner different from these guidelines.
As a general matter, MFS maintains a consistent voting position on similar proxy proposals with respect to various issuers. In addition, MFS generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts. However, MFS recognizes that there are gradations in certain types of proposals that might result in different voting positions being taken with respect to different proxy statements. There also may be situations involving matters presented for shareholder vote that are not governed by the guidelines. Some items that otherwise would be acceptable will be voted against the proponent when it is seeking extremely broad flexibility without offering a valid explanation. MFS reserves the right to override the guidelines with respect to a particular shareholder vote when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients.
From time to time, MFS receives comments on these guidelines as well as regarding particular voting issues from its clients. These comments are carefully considered by MFS when it reviews these guidelines each year and revises them as appropriate.
These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its affiliates that are likely to arise in connection with the voting of proxies on behalf of MFS' clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and E below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Voting Committee is responsible for monitoring and reporting with respect to such potential material conflicts of interest.
2. MFS' POLICY ON SPECIFIC ISSUES
ELECTION OF DIRECTORS
MFS believes that good governance should be based on a board with at least a simple majority of directors who are "independent" of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of "independent" directors. While MFS generally supports the board's nominees in uncontested elections, we will withhold our vote for, or vote against, as applicable, a nominee to a board of a U.S. issuer if, as a result of such nominee being elected to the board, the board would be comprised of a majority of members who are not "independent" or, alternatively, the compensation, nominating or audit committees would include members who are not "independent."
MFS will also withhold its vote for, or vote against, as applicable, a nominee to a board if we can determine that he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason stated in the proxy materials. In addition, MFS will withhold its vote for, or vote against, as applicable, all nominees standing for re-election to a board if we can determine: (1) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (2) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. Responsive action would include the rescission of the "poison pill"(without a broad reservation to reinstate the "poison pill" in the event of a hostile tender offer), or assurance in the proxy materials that the terms of the "poison pill" would be put to a binding shareholder vote within the next five to seven years.
MFS will also withhold its vote for, or vote against, as applicable, a nominee (other than a nominee who serves as the issuer's Chief Executive Officer) standing for re-election if such nominee participated (as a director or committee member) in the approval of a senior executive compensation package MFS deems to be "excessive." In the event that MFS determines that an issuer has adopted an "excessive" executive compensation package, MFS will withhold its vote for, or vote against, as applicable, the re-election of the issuer's Chief Executive Officer as director regardless of whether the Chief Executive Officer participated in the approval of the package. MFS will determine whether a senior executive compensation package is excessive on a case by case basis. Examples of "excessive" executive compensation packages include packages that contain egregious employment contract terms or pension payouts, backdated stock options, overly generous hiring bonuses for chief executive officers or packages which include excessive perks.
MFS evaluates a contested election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management's track record, the qualifications of the nominees for both slates and an evaluation of what each side is offering shareholders.
MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company's bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) ("Majority Vote Proposals").
MFS considers voting against Majority Vote Proposals if the company has adopted, or has proposed to adopt in the proxy statement, formal corporate governance principles that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast.
MFS believes that a company's election policy should address the specific circumstances at that company. MFS considers whether a company's election policy articulates the following elements to address each director nominee who fails to receive an affirmative majority of votes cast in an election:
o Establish guidelines for the process by which the company determines the status of nominees who fail to receive an affirmative majority of votes cast and disclose the guidelines in the annual proxy statement;
o Guidelines should include a reasonable timetable for resolution of the nominee's status and a requirement that the resolution be disclosed together with the reasons for the resolution;
o Vest management of the process in the company's independent directors, other than the nominee in question; and
o Outline the range of remedies that the independent directors may consider concerning the nominee.
CLASSIFIED BOARDS
MFS opposes proposals to classify a board (e.g., a board in which only one-third of board members are elected each year). MFS supports proposals to declassify a board.
NON-SALARY COMPENSATION PROGRAMS
MFS votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give "free rides" on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted.
MFS also opposes stock option programs that allow the board or the compensation committee, without shareholder approval, to reprice underwater options or to automatically replenish shares (i.e., evergreen plans). MFS will consider on a case-by-case basis proposals to exchange existing options for newly issued options (taking into account such factors as whether there is a reasonable value-for-value exchange).
MFS opposes stock option programs and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or could result in excessive dilution to other shareholders. As a general guideline, MFS votes against restricted stock plans, stock option, non-employee director, omnibus stock plans and any other stock plan if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS may accept a higher percentage (up to 20%) in the case of startup or small companies which cannot afford to pay large salaries to executives, or in the case where MFS, based upon the issuer's public disclosures, believes that the issuer has been responsible with respect to its recent compensation practices, including the mix of the issuance of restricted stock and options.
EXPENSING OF STOCK OPTIONS
MFS supports shareholder proposals to expense stock options because we believe that the expensing of options presents a more accurate picture of the company's financial results to investors. We also believe that companies are likely to be more disciplined when granting options if the value of stock options were treated as an expense item on the company's income statements.
EXECUTIVE COMPENSATION
MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. Therefore, except as provided in paragraph 2 above with respect to "excessive compensation" and the election of directors, MFS opposes shareholder proposals that seek to set restrictions on executive compensation. MFS also opposes shareholder requests for disclosure on executive compensation beyond regulatory requirements because we believe that current regulatory requirements for disclosure of executive compensation are appropriate and that additional disclosure is often unwarranted and costly. Although we support linking executive stock option grants to a company's performance, MFS opposes shareholder proposals that mandate a link of performance-based options to a specific industry or peer group stock index. MFS believes that compensation committees should retain the flexibility to propose the appropriate index or other criteria by which performance-based options should be measured.
MFS supports reasonably crafted shareholder proposals that (i) require the issuer to adopt a policy to recover the portion of performance-based bonuses and awards paid to senior executives that were not earned based upon a significant negative restatement of earnings unless the company already has adopted a clearly satisfactory policy on the matter, or (ii) expressly prohibit any future backdating of stock options.
EMPLOYEE STOCK PURCHASE PLANS
MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution.
"GOLDEN PARACHUTES"
From time to time, shareholders of companies have submitted proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer's annual compensation that is not determined in MFS' judgment to be excessive.
ANTI-TAKEOVER MEASURES
In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from "poison pills" and "shark repellents" to super-majority requirements.
MFS will vote for proposals to rescind existing "poison pills" and
proposals that would require shareholder approval to adopt prospective "poison
pills." Nevertheless, MFS will consider supporting the adoption of a
prospective "poison pill" or the continuation of an existing "poison pill" if we
can determine that the following two conditions are met: (1) the "poison pill"
allows MFS clients to hold an aggregate position of up to 15% of a company's
total voting securities (and of any class of voting securities); and (2) either
(a) the "poison pill" has a term of not longer than five years, provided that
MFS will consider voting in favor of the "poison pill" if the term does not
exceed seven years and the "poison pill" is linked to a business strategy or
purpose that MFS believes is likely to result in greater value for shareholders;
or (b) the terms of the "poison pill" allow MFS clients the opportunity to
accept a fairly structured and attractively priced tender offer (e.g., a
"chewable poison pill" that automatically dissolves in the event of an all cash,
all shares tender offer at a premium price).
MFS will consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer.
REINCORPORATION AND REORGANIZATION PROPOSALS
When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. While MFS generally votes in favor of management proposals that it believes are in the best long-term economic interests of its clients, MFS may oppose such a measure if, for example, the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers.
ISSUANCE OF STOCK
There are many legitimate reasons for the issuance of stock. Nevertheless, as noted above under "Non-Salary Compensation Programs," when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g. by approximately 15% or more), MFS generally votes against the plan. In addition, MFS votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a "blank check") because the unexplained authorization could work as a potential anti-takeover device. MFS may also vote against the authorization or issuance of common or preferred stock if MFS determines that the requested authorization is not warranted.
REPURCHASE PROGRAMS
MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders.
CONFIDENTIAL VOTING
MFS votes in favor of proposals to ensure that shareholder voting results are kept confidential. For example, MFS supports proposals that would prevent management from having access to shareholder voting information that is compiled by an independent proxy tabulation firm.
CUMULATIVE VOTING
MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS' clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company's nominating committee, which (for U.S. listed companies) must be comprised solely of "independent" directors.
WRITTEN CONSENT AND SPECIAL MEETINGS
Because the shareholder right to act by written consent (without calling a formal meeting of shareholders) can be a powerful tool for shareholders, MFS generally opposes proposals that would prevent shareholders from taking action without a formal meeting or would take away a shareholder's right to call a special meeting of company shareholders.
INDEPENDENT AUDITORS
MFS believes that the appointment of auditors for U.S. issuers is best left to the board of directors of the company and therefore supports the ratification of the board's selection of an auditor for the company. Some shareholder groups have submitted proposals to limit the non-audit activities of a company's audit firm or prohibit any non-audit services by a company's auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company's auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company's auditor for specific pieces of non-audit work in the limited situations permitted under current law.
OTHER CORPORATE GOVERNANCE, CORPORATE RESPONSIBILITY AND SOCIAL ISSUES
There are many groups advocating social change or changes to corporate governance or corporate responsibility standards, and many have chosen the publicly-held corporation as a vehicle for advancing their agenda. Generally, MFS votes with management on such proposals unless MFS can determine that the benefit to shareholders will outweigh any costs or disruptions to the business if the proposal were adopted. Common among the shareholder proposals that MFS generally votes against are proposals requiring the company to use corporate resources to further a particular social objective outside the business of the company, to refrain from investing or conducting business in certain countries, to adhere to some list of goals or principles (e.g., environmental standards), to disclose political contributions made by the issuer, to separate the Chairman and Chief Executive Officer positions, or to promulgate special reports on various activities or proposals for which no discernible shareholder economic advantage is evident.
The laws of various states may regulate how the interests of certain clients subject to those laws (e.g., state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients.
FOREIGN ISSUERS
Many of the items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted in favor) for foreign issuers include the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; and (v) approval of share repurchase programs.
MFS generally supports the election of a director nominee standing for re-election in uncontested elections unless it can be determined that (1) he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason given in the proxy materials; (2) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (3) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. MFS will also withhold its vote for, or vote against, as applicable, a director nominee standing for re-election of an issuer that has adopted an excessive compensation package for its senior executives as described above in the section entitled "Voting Guidelines-MFS' Policy on Specific Issues-Election of Directors."
MFS generally supports the election of auditors, but may determine to vote against the election of a statutory auditor in certain markets if MFS reasonably believes that the statutory auditor is not truly independent. MFS will evaluate all other items on proxies for foreign companies in the context of the guidelines described above, but will generally vote against an item if there is not sufficient information disclosed in order to make an informed voting decision.
In accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting ("share blocking"). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior to the meeting (e.g., one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the "block" restriction lifted early (e.g., in some countries shares generally can be "unblocked" up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer's transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY VOTING COMMITTEE
The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The MFS Proxy Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable;
b. Determines whether any potential material conflicts of interest exist with respect to instances in which (i) MFS seeks to override these MFS Proxy Voting Policies and Procedures and (ii) votes on ballot items not clearly governed by these MFS Proxy Voting Policies and Procedures; and
c. Considers special proxy issues as they may arise from time to time.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its affiliates that could arise in connection with the voting of proxies on behalf of MFS' clients. Any significant attempt to influence MFS' voting on a particular proxy matter should be reported to the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, or (ii) matters presented for vote are not governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy Voting Committee, or delegees, will follow these procedures:
a. Compare the name of the issuer of such proxy against a list of significant current and potential (i) distributors of MFS Fund shares, (ii) retirement plans administered by MFS or its affiliate MFS Retirement Services, Inc. ("RSI"), and (iii) MFS institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee;
c. If the name of the issuer appears on the MFS Significant Client List, then the MFS Proxy Voting Committee will be apprised of that fact and each member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS' clients, and not in MFS' corporate interests; and
d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer's relationship to MFS, the analysis of the matters submitted for proxy vote, the votes as to be cast and the reasons why the MFS Proxy Voting Committee determined that the votes were cast in the best long-term economic interests of MFS' clients, and not in MFS' corporate interests. A copy of the foregoing documentation will be provided to MFS' Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS' distribution, institutional business units and RSI. The MFS Significant Client List will be reviewed and updated periodically, as appropriate.
3. GATHERING PROXIES
Most proxies received by MFS and its clients originate at Automatic Data Processing Corp. ("ADP") although a few proxies are transmitted to investors by corporate issuers through their custodians or depositories. ADP and issuers send proxies and related material directly to the record holders of the shares beneficially owned by MFS' clients, usually to the client's custodian or, less commonly, to the client itself. This material will include proxy cards, reflecting the shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy statements with the issuer's explanation of the items to be voted upon.
MFS, on behalf of itself and the Funds, has entered into an agreement with an independent proxy administration firm, Institutional Shareholder Services, Inc. (the "Proxy Administrator"), pursuant to which the Proxy Administrator performs various proxy vote related administrative services, such as vote processing and recordkeeping functions for MFS' Funds and institutional client accounts. The Proxy Administrator receives proxy statements and proxy cards directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator's system by an MFS holdings datafeed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for all upcoming shareholders' meetings are available on-line to certain MFS employees and the MFS Proxy Voting Committee.
4. ANALYZING PROXIES
Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator at the prior direction of MFS automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by the MFS Proxy Voting Committee. With respect to proxy matters that require the particular exercise of discretion or judgment, MFS considers and votes on those proxy matters. MFS receives research from ISS which it may take into account in deciding how to vote. In addition, MFS expects to rely on ISS to identify circumstances in which a board may have approved excessive executive compensation. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have little or no involvement in specific votes taken by MFS. This is designed to promote consistency in the application of MFS' voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g., corporate actions, such as mergers and acquisitions), a representative of the MFS Proxy Voting Committee may consult with or seek recommendations from portfolio managers or analysts.(1) However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted.
(1) From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst is not available to provide a recommendation on a merger or acquisition proposal. If such a recommendation cannot be obtained prior to the cut-off date of the shareholder meeting, certain members of the MFS Proxy Voting Committee may determine to abstain from voting.
As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients. Any such override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies.
5. VOTING PROXIES
In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy Voting Committee to monitor the proxy voting process. When proxy materials for clients are received, they are forwarded to the Proxy Administrator and are input into the Proxy Administrator's system. Through an interface with the portfolio holdings database of MFS, the Proxy Administrator matches a list of all MFS Funds and clients who hold shares of a company's stock and the number of shares held on the record date with the Proxy Administrator's listing of any upcoming shareholder's meeting of that company.
When the Proxy Administrator's system "tickler" shows that the voting cut-off date of a shareholders' meeting is approaching, a Proxy Administrator representative checks that the vote for MFS Funds and clients holding that security has been recorded in the computer system. If a proxy card has not been received from the client's custodian, the Proxy Administrator calls the custodian requesting that the materials be forwarded immediately. If it is not possible to receive the proxy card from the custodian in time to be voted at the meeting, MFS may instruct the custodian to cast the vote in the manner specified and to mail the proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy cards completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator's system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company's proxy issues, are retained as required by applicable law.
E. REPORTS
MFS FUNDS
MFS will report the results of its voting to the Board of Trustees,
Board of Directors and Board of Managers of the MFS Funds. These reports will
include: (i) a summary of how votes were cast; (ii) a review of situations where
MFS did not vote in accordance with the guidelines and the rationale therefore;
(iii) a review of the procedures used by MFS to identify material conflicts of
interest; and (iv) a review of these policies and the guidelines and, as
necessary or appropriate, any proposed modifications thereto to reflect new
developments in corporate governance and other issues. Based on these reviews,
the Trustees, Directors and Managers of the MFS Funds will consider possible
modifications to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party other than the client or its representatives (unless required by applicable law) because we consider that information to be confidential and proprietary to the client.
MFS UNION STANDARD EQUITY FUND
INSTITUTIONAL SHAREHOLDERS SERVICES TAFT-HARTLEY ADVISORY SERVICES
PROXY VOTING GUIDELINES AND PROCEDURES
The Taft-Hartley Advisory Services Voting Policy is based upon the AFL-CIO Proxy Voting Guidelines, which comply with all the fiduciary standards delineated by the U.S. Department of Labor.
INTRODUCTION
Taft-Hartley client accounts are governed by the Employee Retirement Income Security Act (ERISA). ERISA sets forth the tenets under which pension fund assets must be managed and invested. Proxy voting rights have been declared by the Department of Labor to be valuable plan assets and therefore must be exercised in accordance with the fiduciary duties of loyalty and prudence. The duty of loyalty requires that the voting fiduciary exercise proxy voting authority solely in the economic interest of participants and plan beneficiaries. The duty of prudence requires that decisions be made based on financial criteria and that a clear process exists for evaluating proxy issues.
The Taft-Hartley Advisory Services voting policy was carefully crafted to meet those requirements by promoting long-term shareholder value, emphasizing the "economic best interests" of plan participants and beneficiaries. Taft-Hartley Advisory Services will assess the short-term and long-term impact of a vote and will promote a position that is consistent with the long-term economic best interests of plan members embodied in the principle of a "worker-owner view of value."
Our guidelines address a broad range of issues, including election of directors, executive compensation, proxy contests, auditor ratification, and tender offer defenses - all significant voting items that affect long-term shareholder value. In addition, these guidelines delve deeper into workplace issues that may have an impact on corporate performance, including:
o Corporate policies that affect job security and wage levels;
o Corporate policies that affect local economic development and stability;
o Corporate responsibility to employees and communities; and
o Workplace safety and health issues.
All votes will be reviewed on a case-by-case basis, and no issues will be considered strictly routine. Each issue will be considered in the context of the company under review. In other words, proxy voting guidelines are just that - guidelines. When company-specific factors are taken into account, every proxy voting decision becomes a case-by-case decision. Keeping in mind the concept that no issue is considered "routine", outlined in the following pages are general voting parameters for various types of proxy voting issues (when there are no company-specific reasons for voting to the contrary).
I) BOARD OF DIRECTORS PROPOSALS
Electing directors is the single most important stock ownership right that shareholders can exercise. The board of directors is responsible for holding management accountable to performance standards on behalf of the shareholders. Taft-Hartley Advisory Services holds directors to a high standard when voting on their election, qualifications, and compensation.
Votes on entire board of directors take into account factors that include:
o Company performance relative to its peers;
o Lack of independence of the full board and key board committees (fully
independent audit, compensation, and nominating committees);
o Board diversity;
o Executive compensation-related (excessive salaries/bonuses/pensions, stock
option repricing, misallocation of corporate funds, etc.);
o Failure of board to respond to majority shareholder votes;
o Poor long-term corporate performance record relative to peer, S&P 500 or
Russell 3000 Indices.
Votes on individual director nominees are made on a case-by-case basis, taking into account factors that include:
o Poor attendance;
o Lack of a board that is at least two-thirds (67 percent) independent;
Independence of the key board committees (audit, compensation, and
nominating);
o Performance of the key board committees;
o Failure to establish key board committees; and
o Interlocking and excessive directorships.
NON-INDEPENDENT CHAIRMAN: A principal function of the board is to monitor management, and a fundamental responsibility of the chairman is to monitor the company's CEO. This duty is obviously compromised when the chairman is the CEO. Approximately 60 percent of companies in both the S&P 500 and Russell 3000 have joint chairman and CEO positions. A McKinsey survey of board members at 500 U.S. companies found that nearly 70 percent of directors polled said a CEO should not run the board. As executive compensation is heavily correlated to the managerial power relationship in the boardroom, the separation of the CEO and chairman positions is a critical step in curtailing excessive pay. Indeed, a number of academic studies have demonstrated that executive compensation is twenty to forty percent higher if the CEO is also the chairman of the board. We WITHHOLD votes from non-independent directors who serve as board chairs, and vote FOR proposals calling for non-executive directors who are not former CEOs or senior-level executives to serve as chairman.
INDEPENDENT DIRECTORS: Taft-Hartley Advisory Services believes that a board independent of management is of critical value to safeguard a company and its shareholders. Board independence helps ensure that directors carry out their duties in an objective manner and without manager interference to select, monitor, and compensate management. We will cast votes in a manner consistent with supporting and reinforcing this philosophy. Independence is evaluated upon factors including: past or current employment with the company or its subsidiaries; the provision of consulting services; familial relationships; board interlocks; and service with a non-profit that receives contributions from the company. We vote FOR proposals that request that the board comprise of a two-thirds majority of independent directors, and/or its audit, compensation, and nominating committees be comprised wholly of independent directors. We WITHHOLD votes from non-independent director nominees on boards that are not at least two-thirds (67 percent) independent.
BOARD STRUCTURE: Taft-Hartley Advisory Services supports the principle that all directors should be accountable to shareholder vote on an annual basis. A classified board is a board divided into separate classes (typically three), with only one class of nominees coming up to vote at the annual meeting each year. As a result, shareholders are only able to vote a single director approximately once every three years. A classified board makes it difficult to change control of the board through a proxy contest because typically only one-third of the seats will be at stake. The ultimate result is that classified boards can entrench management and preclude most takeover bids or proxy contests. Good corporate governance practice supports annually elected boards. We vote AGAINST classified boards when the issue comes up for vote.
BOARD AND COMMITTEE SIZE: While there is no hard and fast rule among institutional investors as to what may be an optimal size board, Taft-Hartley Advisory Services believes there is an acceptable range which companies should strive to meet and not exceed. A board that is too large may function inefficiently. Conversely, a board that is too small may allow the CEO to exert disproportionate influence or may stretch the time requirements of individual directors too thin. Given that the preponderance of boards in the U.S. range between five and fifteen directors, we believe this is a useful benchmark for evaluating such proposals. We vote AGAINST any proposal seeking to amend the company's board size to fewer than five seats or more than fifteen seats. On a CASE-BY-CASE basis, we consider WITHHOLDS or other action at companies that have fewer than five directors and more than 15 directors on their board.
FINANCIAL PERFORMANCE TEST FOR BOARDS: Taft-Hartley Advisory Services believes that long-term financial performance should be considered when determining vote recommendations with regard to directors in uncontested elections. When evaluating whether to withhold votes against director nominees, we will look at the company's response to the ongoing performance issues, and consider several factors, including performance improvement in the current year, changes in management or board composition, recent transactions at the company, overall governance practices, particularly any recent changes, and the financial health of the company.
PROPOSALS ON BOARD INCLUSIVENESS: Taft-Hartley Advisory Services votes FOR shareholder proposals asking a company to make efforts to seek more women and minority group members for service on the board. A more diverse group of directors benefits shareholders and the company.
MAJORITY THRESHOLD VOTING REQUIREMENT FOR DIRECTOR ELECTIONS: Taft-Hartley fiduciaries believe shareholders should have a greater voice in regard to the election of directors and view majority threshold voting as a viable alternative to the current deficiencies of the plurality system in the U.S. Shareholders have expressed strong support for resolutions on majority threshold voting. Taft-Hartley Advisory Services supports proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors, provided the proposal includes a carve-out for a plurality voting standard in contested director elections.
CUMULATIVE VOTING: Under a cumulative voting scheme, shareholders are permitted to have one vote per share for each director to be elected and may apportion these votes among the director candidates in any manner they wish. This voting method allows minority shareholders to influence the outcome of director contests by "cumulating" their votes for one nominee, thereby creating a measure of independence from management control. Taft-Hartley Advisory Services votes FOR proposals to allow cumulative voting and votes AGAINST proposals to eliminate it.
POISON PILLS: Shareholder rights plans, more commonly known as poison pills, are warrants issued to shareholders allowing them to purchase shares from the company at a price far below market value when a certain ownership threshold has been reached, thereby effectively preventing a takeover. Poison pills can entrench management and give the board veto power over takeover bids, thereby altering the balance of power between shareholders and management. While we evaluate poison pills on a case-by-case basis depending on a company's particular set of circumstances, Taft-Hartley Advisory Services generally votes FOR proposals to submit a company's poison pill to shareholder vote and/or eliminate or redeem poison pills. We WITHHOLD votes from boards where a dead-hand poison pill provision is in place. From a shareholder perspective, there is no justification for a dead-hand provision.
II) CAPITAL STRUCTURE
INCREASE AUTHORIZED COMMON STOCK: Corporations seek shareholder approval to increase their supply of common stock for a variety of business reasons. We vote FOR proposals to increase authorized common stock when management has provided a specific justification for the increase, evaluating proposals on a case-by-case basis. We believe that an increase of up to 50 percent is enough to allow a company to meet its capital needs. We vote AGAINST proposals to increase an authorization by more than 50 percent unless management provides compelling reasons for the increase.
DUAL CLASS STRUCTURES: Taft-Hartley Advisory Services does not support dual share class structures. Incumbent management can use a dual class structure to gain unequal voting rights. A separate class of shares with superior voting rights can allow management to concentrate its power and insulate itself from the majority of its shareholders. An additional drawback is the added cost and complication of maintaining the two class system. We will vote FOR a one share, one vote capital structure, and we will vote AGAINST the creation or continuation of dual class structures.
III) RATIFYING AUDITORS
Ratifying auditors is no longer a routine procedure. Accounting scandals at companies such as Enron and WorldCom underscore the need to ensure auditor independence in the face of selling consulting services to audit clients. A study by Richard Frankel, Marilyn Johnson, and Karen Nelson found that the ratio of non-audit fees to total fees paid is negatively associated with stock market returns on the filing date, indicating that investors associate non-audit fees "with lower quality audits and, by implication, lower quality earnings." This study also found that companies that pay high non-audit fees are more likely to engage in earnings management.
Auditors are the backbone upon which a company's financial health is measured, and auditor independence is essential for rendering objective opinions upon which investors then rely. When an auditor is paid more in consulting fees than for auditing, its relationship with the company is left open to conflicts of interest. Because accounting scandals evaporate shareholder value, any proposal to ratify auditors is examined for potential conflicts of interest, with particular attention to the fees paid to the auditor, as well as whether the ratification of auditors has been put up for shareholder vote. Failure by a company to present its selection of auditors for shareholder ratification should be discouraged as it undermines good governance and disenfranchises shareholders.
We vote AGAINST ratification of a company's auditor if it receives more than one-quarter of its total fees for consulting and WITHHOLD votes from Audit Committee members when auditor ratification is not included on the proxy ballot and/or when consulting fees exceed audit fees. We support shareholder proposals to ensure auditor independence and effect mandatory auditor ratification.
IV) MERGERS, ACQUISITIONS, AND TRANSACTIONS
Taft-Hartley Advisory Services votes for corporate transactions that take the high road to competitiveness and company growth. Taft-Hartley Advisory Services believes that structuring merging companies to build long-term relationships with a stable and quality work force and preserving good jobs creates long-term company value. We oppose corporate transactions which indiscriminately layoff workers and shed valuable competitive resources.
Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis, taking into account the following factors:
o Impact on shareholder value;
o Changes in corporate governance and their impact on shareholder rights;
o Fairness opinion (or lack thereof);
o Offer price (cost vs. premium);
o Form and mix of payment (i.e. stock, cash, debt, etc.);
o Change-in-control payments to executive officers;
o Perspective of ownership (target vs. acquirer) in the deal;
o Fundamental value drivers behind the deal;
o Anticipated financial and operating benefits realizable through
combined synergies;
o Financial viability of the combined companies as a single entity;
o What are the potential legal or environmental liability risks associated
with the target firm?;
o Impact on community stakeholders and employees in both workforces;
o How will the merger adversely affect employee benefits like pensions and
health care?
REINCORPORATION: Taft-Hartley Advisory Services reviews proposals to change a company's state of incorporation on a case-by-case basis. We vote FOR proposals to reincorporate in another state when the company has provided satisfactory business reasons and there is no significant reduction in shareholder rights. We vote AGAINST proposals to reincorporate that reduce shareholder rights. In cases of offshore reincorporations to tax havens, among other factors, we evaluate the effect upon any and all legal recourse of shareholders in a new jurisdiction, potential harm to company brands and image, and any actual, qualified economic benefit.
V) EXECUTIVE COMPENSATION
STOCK OPTION PLANS: Taft-Hartley Advisory Services supports compensating executives at a reasonable rate and believes that executive compensation should be strongly correlated to performance. Stock option and other forms of compensation should be performance-based with an eye toward improving shareholder value. Well-designed stock option plans align the interests of executives and shareholders by providing that executives benefit when stock prices rise as the company-- and shareholders-- prosper together.
Many plans sponsored by management provide goals so easily attained that executives can realize massive rewards even though shareholder value is not necessarily created. Stock options that are awarded selectively and excessively can dilute shareholders' share value and voting power. In general, Taft-Hartley Advisory Services supports plans that are offered at fair terms to executives who satisfy well-defined performance goals. We evaluate option plans on a case-by-case basis, taking into consideration factors including: offer price, dilution to outstanding share value, dilution to share voting power, stock option expensing, annual burn rate, executive concentration ratios, pay-for-performance and the presence of any repricing provisions. We support plans that retain tax deductibility through the use of performance goals and oppose plans whose award size exceeds the tax deduction limit.
Taft-Hartley Advisory Services votes FOR option plans that provide legitimately challenging performance targets that truly motivate executives in the pursuit of excellent performance. Likewise, we vote AGAINST plans that offer unreasonable benefits to executives that are not available to any other shareholders.
POOR COMPENSATION PRACTICES: Poor disclosure, the absence or non-transparency of disclosure and poor plan design of compensation payouts lead to excessive executive compensation practices that are detrimental to shareholders. Poorly designed plans or those lacking in transparency can be reflective of a poorly performing compensation committee or board. Taft-Hartley Advisory Services will consider WITHHOLDING votes from compensation committee members and/or the CEO on a CASE-BY-CASE basis if the company has poor compensation practices. In addition, we may consider recommending a WITHHOLD from the entire board if the whole board was involved in and contributed to egregious compensation.
PROPOSALS TO LIMIT EXECUTIVE AND DIRECTOR PAY: Taft-Hartley Advisory Services votes FOR shareholder proposals that seek additional disclosure of executive and director pay information. We vote FOR shareholder proposals that seek to eliminate outside directors' retirement benefits. We review on a case-by-case basis all other shareholder proposals that seek to limit executive and director pay. This includes shareholder proposals that seek to link executive compensation to customer, employee, or stakeholder satisfaction.
GOLDEN PARACHUTES: golden parachutes are designed to protect the senior level employees of a corporation in the event of a change-in-control. Under most golden parachute agreements, senior level management employees receive a lump sum pay-out triggered by a change-in-control at usually two to three times base salary. These severance agreements grant extremely generous benefits to well-paid executives and most often offer no value to shareholders. Taft-Hartley Advisory Services votes FOR shareholder proposals to have all golden parachute agreements submitted for shareholder ratification, and we generally vote AGAINST all proposals to ratify golden parachutes.
OPTIONS BACKDATING: Options backdating has serious implications and has resulted in financial restatements, delisting of companies, and/or the termination of executives or directors. When options backdating has taken place, Taft-Hartley Advisory Services may consider WITHHOLDING votes from the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. We adopt a CASE-BY-CASE approach to the options backdating issue to differentiate companies that had sloppy administration vs. those that had committed fraud, as well as those companies that have since taken corrective action. Instances in which companies have committed fraud are more disconcerting, and Taft-Hartley Advisory Services will look to them to adopt formal policies to ensure that such practices will not re-occur in the future.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS): Taft-Hartley Advisory Services generally votes FOR ESOPs which allow a company's employees to acquire stock in the company at a slight discount. Such plans help link employees' self-interest to the interests of the shareholders, thereby benefiting the company, its customers, and shareholders and creating long-term company value.
VI) SOCIAL AND ENVIRONMENTAL ISSUES Increasingly, shareholders are presenting proposals related to company environmental practices, workplace practices, social issues and sustainability goals. Taft-Hartley Advisory Services provides specific narrative explanations for votes on these types of shareholder proposals. Taft-Hartley Advisory Services evaluates shareholder proposals on a case-by-case basis to determine if they are in the best economic interests of the plan participants and beneficiaries. Taft-Hartley Advisory Services' clients select investment strategies and criteria for their portfolios. Taft-Hartley Advisory Services views its responsibility to protect plan beneficiary economic interests through the use of the proxy. To meet this obligation, Taft-Hartley Advisory Services votes consistent with the economic best interests of the participants and beneficiaries to create "high road" shareholder and economic value.
In most cases, Taft-Hartley Advisory Services supports proposals that request management to report to shareholders information and practices that would help in evaluating the company's operations. In order to be able to intelligently monitor their investments, shareholders often need information best provided by the company itself. Taft-Hartley Advisory Services supports proposals that seek management compliance with shareholder interests to ensure that shareholders are fully informed about actions harmful to society with special attention to the company's legal and ethical obligations, impact on company profitability, and the potential negative publicity for disreputable practices.
CERES PRINCIPLES: The CERES Principles, formulated by the Coalition of Environmentally Responsible Economies, require signing companies to address environmental issues, including protection of the biosphere, sustainable use of natural resources, reduction and disposal of wastes, energy conservation, and employee and community risk reduction. Evidence suggests that environmentally conscious companies may realize long-term savings by implementing programs to pollute less and conserve resources while realizing good public relations and new marketing opportunities. Moreover, the reports that are required of signing companies provide shareholders with more information concerning topics they may deem relevant to their company's financial well-being.
Many companies have voluntarily adopted these principles and proven that environmental sensitivity makes good business sense. Taft-Hartley Advisory Services supports proposals that improve a company's public image, reduce exposure to liabilities, and establish standards so that environmentally responsible companies and markets are not at a competitive financial disadvantage. Taft-Hartley Advisory Services votes FOR the adoption of the CERES Principles and FOR reporting to shareholders on environmental issues.
CORPORATE CONDUCT, HUMAN RIGHTS, AND LABOR CODES: Taft-Hartley Advisory Services generally supports proposals that call for the adoption and/or enforcement of clear principles or codes of conduct relating to countries in which there are systematic violations of human rights. These conditions include the use of slave, child, or prison labor, undemocratically elected governments, widespread reports by human rights advocates, fervent pro-democracy protests, and/or economic sanctions and boycotts.
Many proposals refer to the seven core conventions, commonly referred to as the "Declaration on Fundamental Principles and Rights At Work," ratified by the International Labor Organization (ILO). The seven conventions fall under four broad categories: i) Right to organize and bargain collectively; ii) Non-discrimination in employment; iii) Abolition of forced labor; and iv) End of child labor. Each of the 180 member nations of the ILO body are bound to respect and promote these rights to the best of their abilities. Taft-Hartley Advisory Services supports the principles and codes of conduct relating to company investment in countries with patterns of human rights abuses (Northern Ireland, Columbia, Burma, former Soviet Union, and China). Taft-Hartley Advisory Services votes FOR proposals to implement and report on ILO codes of conduct.
PART II - APPENDIX C
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which the initial sales charge (ISC) and/or the CDSC is waived for the MFS funds' share classes. Some of the following information will not apply to certain funds, depending on which classes of shares are offered by the funds. In order to qualify for a sales charge waiver, you must advise MFS that you are eligible for the waiver at the time of purchase and/or redemption. The funds, MFS, and their affiliates reserve the right to eliminate, modify, and add waivers at any time at their discretion.
In addition, transfers, rollovers or other transactions from one account to the same class of the same fund of another account otherwise subject to a CDSC or an ISC will not be charged a CDSC or ISC so long as each account is held in your name or for your benefit (either individually or collectively) by MFSC or an affiliate. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the fund in the first account and the original purchase date of the shares subject to the CDSC.
As used in this Appendix C, the term "ESP" includes employer sponsored plans, the term "SRO" includes salary reduction only plans, and the term "ERISA" refers to the Employment Retirement Income Security Act of 1974, as amended.
In this appendix, all references to Class A Shares shall apply to Class A1 Shares and all references to Class B Shares shall apply to Class B1 Shares.
RETIREMENT PLANS:
-----------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
-----------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS A CLASS A CLASS B CLASS C
ISC CDSC CDSC CDSC
-----------------------------------------------------------------------------------------------------
1. WAIVERS FOR SERVICED PLANS
-----------------------------------------------------------------------------------------------------
o To the extent that redemption proceeds are used V V V
to pay expenses (or certain participant expenses)
of the 401(a) or ESP Plan (e.g., participant
account fees).
-----------------------------------------------------------------------------------------------------
o Shares purchased or redeemed representing V V V V
transfers from, or transfers to, plan investments
other than the MFS funds.
-----------------------------------------------------------------------------------------------------
o Shares acquired pursuant to repayments by V V V V
retirement plan participants of loans from 401(a)
or ESP Plans.
-----------------------------------------------------------------------------------------------------
o By a retirement plan which established an account V
with MFSC on or after July 1, 1996, but before
January 1, 2003 (provided that the plan
establishment paperwork is received by MFSC in good
order on or before December 31, 2002).
-----------------------------------------------------------------------------------------------------
o Transfers from a single account maintained for a V V V
401(a) Plan to multiple accounts maintained by MFSC
on behalf of individual participants of such Plan.
-----------------------------------------------------------------------------------------------------
o All Serviced Plans. V V
-----------------------------------------------------------------------------------------------------
o Transfers due to the eligibility of a Serviced V V V V
Plan to move its investment into a new share class
under certain eligibility criteria established from
time to time by MFD (sales charges waived may vary
depending upon the criteria established by MFD).
-----------------------------------------------------------------------------------------------------
o Transfer or rollover to MFS Prototype IRA from a V V V V
Serviced Plan.
-----------------------------------------------------------------------------------------------------
o Reinvestment of Redemption Proceeds from Class B V V
Shares:
o Shares acquired by a retirement plan whose
account application was received by MFD on or
prior to March 30, 2001 where the purchase
represents the immediate reinvestment of
proceeds from the plan's redemption of its
Class B shares of the MFS funds and is equal to
or exceeds $500,000, either alone or in
aggregate with the current market value of the
plan's existing Class A shares; or
o Shares acquired by a retirement plan whose
account application was received by MFD on or
after April 2, 2001 and before December 31,
2002 where the purchase represents the
immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the
MFS funds and is equal to or exceeds
$1,000,000, either alone or in aggregate with
current market value of the plan's existing
Class A shares.
-----------------------------------------------------------------------------------------------------
2. WAIVERS FOR NON- SERVICED PLANS ("TA PLANS")
-----------------------------------------------------------------------------------------------------
A. 401(A) PLANS AND ESP PLANS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan and/or sponsoring V V
organization demonstrates to the satisfaction of,
and certifies to, MFSC that the retirement plan (or
multiple plans maintained by the same plan sponsor)
has, at the time of certification or will have
pursuant to a purchase order placed with the
certification, a market value of $500,000 or more
(applies only when the certification was received
by MFSC on or prior to March 30, 2001) or
$1,000,000 or more (applies only when the
certification is received by MFSC on or after April
2, 2001), invested in shares of any class or
classes of the MFS funds and aggregate assets of at
least $10 million; provided, however, that the CDSC
will not be waived (i.e., it will be imposed) (a)
with respect to plans which establish an account
with MFSC on or after November 1, 1997, in the
event that the plan makes a complete redemption of
all of its shares in the MFS Family of funds, or
(b) with respect to plans which establish an
account with MFSC prior to November 1, 1997, in the
event that there is a change in law or regulations
which result in a material adverse change to the
tax advantaged nature of the plan, or in the event
that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated
under ERISA or is liquidated or dissolved; or (iii)
is acquired by, merged into, or consolidated with
any other entity.
-----------------------------------------------------------------------------------------------------
o Investment in Class A shares by certain V(1)
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1997 and December 31, 1999;
o The plan records are maintained on a pooled
basis by MFSC; and
o The sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of
purchase, the employer has at least 200
eligible employees and the plan has aggregate
assets of at least $2,000,000.
-----------------------------------------------------------------------------------------------------
3. WAIVERS FOR BOTH SERVICED PLANS AND TA PLANS
-----------------------------------------------------------------------------------------------------
A. BENEFIT RESPONSIVE WAIVERS
-----------------------------------------------------------------------------------------------------
o Distributions made from an IRA or a 403(b) SRO V V V
pursuant to Section 72(t) of the Internal Revenue
Code of 1986, as amended.
-----------------------------------------------------------------------------------------------------
o Death, disability or retirement of 401(a) or ESP V V V
Plan participant, or death or disability of IRA
owner, SRO Plan Participant or SAR-SEP Plan
Participant.
-----------------------------------------------------------------------------------------------------
o Eligible participant distributions, such as V V V
distributions due to death, disability, financial
hardship, retirement and termination of employment
from Serviced Plans and nonqualified deferred
compensation plans (excluding, however, a
termination of a plan).
-----------------------------------------------------------------------------------------------------
o Loan from 401(a) or ESP Plan. V V V
-----------------------------------------------------------------------------------------------------
o Financial hardship (as defined in Treasury V V V
Regulation Section 1.401(k)-l(d)(2), as amended
from time to time) for 401(a) Plans and ESP Plans.
-----------------------------------------------------------------------------------------------------
o Termination of employment of 401(a) or ESP Plan V V V
participant (excluding, however, a termination of
the Plan).
-----------------------------------------------------------------------------------------------------
o Tax-free return of excess 401(a) Plan, ESP Plan V V V
or IRA contributions.
-----------------------------------------------------------------------------------------------------
o Distributions from a 401(a) or ESP Plan that has V V V
invested its assets in one or more of the MFS funds
for more than 10 years from the later to occur of
(i) January 1, 1993 or (ii) the date such 401(a) or
ESP Plan first invests its assets in one or more of
the MFS funds. The sales charges will be waived in
the case of a redemption of all of the 401(a) or
ESP Plan's shares in all MFS funds (i.e., all the
assets of the 401(a) or ESP Plan invested in the
MFS funds are withdrawn), unless immediately prior
to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS funds
(excluding the reinvestment of distributions)
during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets
in the MFS funds, in which case the sales charges
will not be waived.
-----------------------------------------------------------------------------------------------------
o Distributions made on or after the IRA owner, ESP V
participant, SRO Plan participant or 401(a) Plan
participant has attained the age of 591/2 years old.
-----------------------------------------------------------------------------------------------------
o Certain involuntary redemptions and redemptions V V V
in connection with certain automatic withdrawals
from a 401(a) Plan.
-----------------------------------------------------------------------------------------------------
o Distributions made on or after the IRA owner or V V V
the 401(a), ESP, SRO or SAR-SEP Plan participant,
as applicable, has attained the age of 701/2 years
old, but only with respect to the minimum
distribution under Code rules.
-----------------------------------------------------------------------------------------------------
o Investments in Class A shares by certain V(1)
retirement plans subject to ERISA, if, prior to
July 1, 1996,
o The plan had established an account with MFSC;
and
o The sponsoring organization had demonstrated to
the satisfaction of MFD that either:
o The employer had at least 25 employees; or
o The total purchases by the retirement plan of
Class A shares of the MFS funds would be in the
amount of at least $250,000 within a reasonable
period of time, as determined by MFD in its
sole discretion.
-----------------------------------------------------------------------------------------------------
o Investments in Class A shares by certain V(1 )
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1996 and March 30, 2001;
o The plan has, at the time of purchase, either
alone or in aggregate with other plans
maintained by the same plan sponsor, a market
value of $500,000 or more invested in shares of
any class or classes of the MFS funds; and
o The retirement plans will qualify under this
category only if the plans or their sponsoring
organization informs MFSC prior to the
purchases that the plans have a market value of
$500,000 or more invested in shares of any
class or classes of the MFS funds; MFSC has no
obligation independently to determine whether
such plans qualify under this category.
-----------------------------------------------------------------------------------------------------
B. CERTAIN TRANSFERS OF REGISTRATION
-----------------------------------------------------------------------------------------------------
o Transfers to an IRA rollover account where any V V V
sales charges with respect to the shares being
reregistered would have been waived had they been
redeemed.
-----------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan is, at that time, a V V
party to a retirement plan recordkeeping or
administrative services agreement with MFD or one
of its affiliates pursuant to which certain of
those services are provided by Benefit Services
Corporation or any successor service provider
designated by MFD.
-----------------------------------------------------------------------------------------------------
o Where the retirement plan has established an V V
account with MFSC on or after January 1, 2000, and
is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement
with MFD or one of its affiliates pursuant to which
such services are provided with respect to at least
$10 million in plan assets.
-----------------------------------------------------------------------------------------------------
o Shares acquired by retirement plans or trust V V
accounts whose financial intermediaries have
entered into an administrative services agreement
with MFD or one of its affiliates to perform
certain administrative services, subject to certain
operational and minimum size requirements specified
from time to time by MFD or one or more of its
affiliates.
-----------------------------------------------------------------------------------------------------
1 Purchases of Class A shares are not subject to an initial sales charge; however, a
CDSC of 1% will be deducted from redemption proceeds if the redemption is made within
12 months of purchase.
|
WAIVERS FOR 529 TUITION PROGRAMS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS 529A CLASS 529B CLASS 529C
ISC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. CERTAIN SPONSORED PLANS
---------------------------------------------------------------------------------------------------------
o Shares acquired on behalf of a group, association or V V V
employer sponsored plan, pursuant to guidelines created by
MFD from time to time.
---------------------------------------------------------------------------------------------------------
B. INVESTMENT PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS
A, CLASS B AND CLASS C SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases of Class V V V
529A shares, and the CDSC imposed on certain redemptions
of Class A, Class B and Class C shares, are waived where
Class 529A, Class 529B and Class 529C shares are acquired
following the reinvestment of the proceeds of a redemption
of Class A, Class B and Class C shares, respectively, of
the same fund; provided however, that any applicable CDSC
liability on the Class B or Class C shares redeemed will
carry over to the Class 529B or Class 529C shares acquired
and for purposes of calculating the CDSC, the length of
time you have owned your Class 529B or Class 529C shares
will be measured from the date of original purchase of the
Class B or Class C shares redeemed.
---------------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by 529 tuition programs whose sponsors V
or administrators have entered into an administrative
services agreement with MFD or one of its affiliates to
perform certain administrative or investment advisory
services subject to certain operational and minimum size
requirements specified from time to time by MFD or one or
more of its affiliates.
---------------------------------------------------------------------------------------------------------
D. QUALIFIED HIGHER EDUCATION EXPENSES
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the redemption proceeds are used V V
to pay for qualified higher education expenses, which may
include tuition, fees, books, supplies, equipment and room
and board (see the program description for further
information on qualified higher education expenses);
however the CDSC will not be waived for redemptions where
the proceeds are transferred or rolled over to another
tuition program.
---------------------------------------------------------------------------------------------------------
E. SCHOLARSHIP
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the account beneficiary has V V
received a scholarship, up to the amount of the
scholarship.
---------------------------------------------------------------------------------------------------------
F. DEATH OF 529 PLAN BENEFICIARY
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the death of the 529 plan V V
account beneficiary if the shares were held solely for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
GENERAL WAIVERS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
CLASS A/529A CLASS A CLASS B/529B CLASS C/529C
WAIVER CATEGORY ISC CDSC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. DIVIDEND REINVESTMENT
---------------------------------------------------------------------------------------------------------
o Shares acquired through dividend or capital V V V V
gain reinvestment.
---------------------------------------------------------------------------------------------------------
o Shares acquired by automatic reinvestment of V V V V
distributions of dividends and capital gains of
any fund in the MFS funds pursuant to the
Distribution Investment Program.
---------------------------------------------------------------------------------------------------------
B. AFFILIATES OF A MFS FUND/CERTAIN FINANCIAL
ADVISERS
---------------------------------------------------------------------------------------------------------
o Shares acquired by officers, eligible V V V V
directors, employees (including former
employees) and agents of MFS, Sun Life, or any
of their subsidiary companies.
---------------------------------------------------------------------------------------------------------
o Shares acquired by trustees and retired V V V V
trustees of any investment company for which
MFD serves as distributor.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees, directors, V V V V
partners, officers and trustees of any
subadviser to any MFS fund.
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain family members of V V V V
any such individual identified above and their
spouses (or legal equivalent under applicable
state law), and certain trusts, pension,
profit-sharing or other retirement plans for
the sole benefit of such persons, provided the
shares are not resold except to the MFS fund
which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees or registered V V V V
representatives (including former employees) of
financial intermediaries or an employee's
spouse (or legal equivalent under applicable
state law) or employee's children under the age
of 21. For employees or registered
representatives of financial intermediaries who
established an account with MFS prior to May 1,
2006, shares acquired by certain family
members of employees or registered
representatives of financial intermediaries and
their spouses (or legal equivalent under
applicable state law), and certain trusts,
pension, profit-sharing or other retirement
plans for the sole benefit of such persons,
provided the shares are not resold except to
the MFS Fund which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by institutional clients of V V V V
MFS or MFS Institutional Advisors, Inc.
---------------------------------------------------------------------------------------------------------
C. INVOLUNTARY REDEMPTIONS
---------------------------------------------------------------------------------------------------------
o Shares redeemed at a MFS fund's direction due V V V
to the small size of a shareholder's account.
---------------------------------------------------------------------------------------------------------
D. BANK TRUST DEPARTMENTS AND LAW FIRMS
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain bank trust V V
departments or law firms acting as trustee or
manager for trust accounts which have entered
into an administrative services agreement with
MFD and are acquiring such shares for the
benefit of their trust account clients.
---------------------------------------------------------------------------------------------------------
E. INVESTMENT OF PROCEEDS FROM CERTAIN
REDEMPTIONS OF CLASS I SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases V V
of Class A or Class 529A shares and the
contingent deferred sales charge imposed on
certain redemptions of Class A shares, are
waived with respect to Class A or Class 529A
shares acquired of any of the MFS funds through
the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS
funds.
---------------------------------------------------------------------------------------------------------
F. SYSTEMATIC WITHDRAWALS
---------------------------------------------------------------------------------------------------------
o Systematic withdrawals with respect to up to V V
10% per year of the account value (with respect
to Class B and Class 529B shares, determined at
the time of your first withdrawal under the
plan(s) or January 1, 2007, whichever is later
and reset annually thereafter and with respect
to Class C and Class 529 C shares, determined
at the time the plan is established).
---------------------------------------------------------------------------------------------------------
G. DEATH OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on the account of the death V V V
of the account owner (e.g., shares redeemed by
the estate or any transferee of the shares from
the estate) if the shares were held solely in
the deceased individual's name, or for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
H. DISABILITY OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the disability V V
of the account owner if shares are held either
solely or jointly in the disabled individual's
name in a living trust for the benefit of the
disabled individual (in which case a disability
certification form is required to be submitted
to MFSC), or shares redeemed on account of the
disability of the 529 account beneficiary.
---------------------------------------------------------------------------------------------------------
I. WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by investments through V V
certain dealers (including registered
investment advisers and financial planners)
which have established certain operational
arrangements with MFD which include a
requirement that such shares be sold for the
sole benefit of clients participating in a
"wrap" account, mutual fund "supermarket"
account or a similar program under which such
clients pay a fee to such dealer.
---------------------------------------------------------------------------------------------------------
J. INSURANCE COMPANY SEPARATE ACCOUNTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by insurance company separate V V
accounts.
---------------------------------------------------------------------------------------------------------
K. NO COMMISSIONS PAID
---------------------------------------------------------------------------------------------------------
o Shares redeemed where MFD has not paid an up
front commission with respect to the sale of
the shares, provided that such arrangement V V V
meets certain conditions established by MFD
from time to time.
---------------------------------------------------------------------------------------------------------
L. MISCELLANEOUS
---------------------------------------------------------------------------------------------------------
o In connection with settlements reached V
between certain broker/dealers and the NASD,
SEC, and/or other regulatory bodies regarding
sales of Class B and Class C shares in excess
of certain dollar thresholds, the funds will,
at times, permit shareholders who are clients
of these firms to redeem Class B and Class C
shares of the fund and concurrently purchase
Class A shares without paying an initial sales
charge.
---------------------------------------------------------------------------------------------------------
|
PART II - APPENDIX D
FINANCIAL INTERMEDIARY COMPENSATION
Financial intermediaries receive various forms of compensation in connection
with the sale of shares of a Fund and/or the servicing of shareholder accounts.
Financial intermediaries may receive such compensation (i) in the form of
upfront commissions and ongoing asset-based compensation paid by MFD based on
sales charges received and expected to be received by MFD from shareholders, and
Rule 12b-1 ("Distribution Plan") distribution and service payments received by
MFD from the Funds, (ii) in the form of 529 administrative services payments,
retirement plan administrative and service payments, and shareholder servicing
payments paid by MFD and/or one or more of its affiliates (for purposes of this
section only, collectively, "MFD") based on the receipt of such payments by MFD
from the Funds, and (iii) in the form of payments paid from MFD's own additional
resources. In addition, financial intermediaries may benefit from payments made
to other entities for consulting, research, or analytical services.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. The amount of compensation that MFD pays to a financial intermediary can be significant. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular Fund or share class or to recommend MFS Funds instead of other funds that do not pay such compensation or that pay lower amounts of compensation. For calendar year 2006, gross sales of MFS Funds through financial intermediaries who received such compensation from MFD represented 74% of total gross sales of MFS Funds.
Financial intermediaries may charge you additional fees and/or commissions. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries may categorize and disclose these arrangements differently than MFD does. Financial intermediaries that sell Fund shares may also act as a broker or dealer in connection with a MFS Fund's purchase or sale of portfolio securities. However, the Funds and MFS do not consider financial intermediaries' sale of shares of a MFS Fund as a factor when choosing brokers or dealers to effect portfolio transactions for the MFS Funds.
COMMISSIONS AND DISTRIBUTION PLAN PAYMENTS
Class A, Class A1, Class 529A, and Class J Shares - General Provisions
For purchases of Class A, Class A1, Class 529A and Class J shares subject to an initial sales charge, MFD generally pays a portion of the initial sales charge to financial intermediaries as an upfront commission of up to the following amounts:
EQUITY/ASSET ALLOCATION/TOTAL RETURN FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 5.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 4.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
SHORT-TERM BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 2.25%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 2.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 1.75%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 1.50%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.25%
-------------------------------------------------------------------------------
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The difference between the total amount invested and the sum of (a) the net proceeds to the Funds and (b) the financial intermediary commission, is the amount of the initial sales charge retained by MFD. Because of rounding in the computation of offering price, the portion of the sales charge retained by MFD may vary and the total sales charge may be more or less than the sales charge calculated using the sales charge expressed as a percentage of the offering price or as a percentage of the net amount invested as listed in the Prospectus. From time to time, MFD may pay financial intermediaries up to 100% of the applicable initial sales charge of Class A, Class A1, Class 529A and Class J shares of certain specified Funds sold by financial intermediaries during a specified sales period. In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares. Also, at the discretion of MFD, MFD may pay certain financial intermediaries some or all of the Distribution Plan distribution fee payments of up to 0.10% annually of the average daily net assets of the class with respect to such shares.
Class 529A-Specific Provisions
Except as noted below, for purchases of Class 529A shares not subject to an initial sales charge on or after April 1, 2007, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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On the first $10,000,000 plus 0.50%
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Over $10,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class 529A shares not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class 529A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares not subject to an initial sales charge, MFD may pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
--------------------------------------------------------------------------------
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On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares by employer sponsored or payroll deduction 529 plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
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In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class A and Class A1-Specific Provisions Effective For Purchases on or After April 1, 2007
Except as noted below, for purchases of Class A and Class A1 shares not subject to an initial sales charge on or after April 1, 2007, by retirement plans (other than Serviced Plans and plans for which Heritage Trust serves as a trustee) that are held by MFSC at the plan or omnibus level ("Investment-Only Retirement Plans"), MFD will generally pay financial intermediaries no upfront commission, but financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases of Class A and Class A1 shares by Investment-Only Retirement Plans not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
Except as noted below, for purchases of Class A and Class A1 shares on or after April 1, 2007, by accounts other than Investment-Only Retirement Plans and Serviced Plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $10,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $10,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 (or with respect to purchases pursuant to a letter of intent signed prior to April 1, 2007) of Class A and Class A1 shares not subject to an initial sales charge other than by Serviced Plans, MFD may pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
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|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established prior to April 1, 2001 (including sales to plans for which account establishment paperwork was received in good order by MFD on or prior to March 31, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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On the first $2,000,000 plus 1.00%
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Over $2,000,000 to $3,000,000 plus 0.80%
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Over $3,000,000 to $50,000,000 plus 0.50%
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Over $50,000,000 0.25%
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Except for Serviced Plans described below, for purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's new investment in Class A and Class A1 shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over a 12-month period (commencing from the date of the first such purchase).
In the case of Serviced Plans whose account establishment paperwork was received in good order after December 31, 1999, purchases prior to April 1, 2007 will be aggregated as described above but the cumulative purchase amount will not be re-set after the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established on or after April 1, 2001 (including, sales to plans for which account establishment paperwork was received in good order by MFD on or after April 1, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class A shares and Class A1, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase except for purchases by Serviced Plans that trade through Princeton Retirement Group for which financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class B, Class B1 and Class 529B Shares
Except as noted below, for purchases of Class B, Class B1 and Class 529B shares, MFD will generally pay an upfront commission to financial intermediaries of up to 3.75% of the amount purchased through such financial intermediaries. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B, Class B1 and Class 529B shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan for which account establishment paperwork was received in good order by MFD between July 1, 1996 and December 31, 1998, MFD will generally pay an upfront commission to financial intermediaries equal to 2.75% of the amount of Class B and Class B1 shares purchased through such financial intermediary. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B and Class B1 shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan which established its account with MFSC between January 1, 1999, and December 31, 2002 (i.e., plan establishment paperwork is received by MFSC in good order by December 31, 2002) and certain other retirement plans as determined by MFD from time to time, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee). This commission structure is not available with respect to a plan with a pre-existing account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper Plus product.
Class C and Class 529C Shares
Except as noted below, for purchases of Class C and Class 529C shares, MFD will generally pay an upfront commission to financial intermediaries of up to 1% of the amount of Class C and Class 529C shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan distribution fee payment of up to 0.75% and some or all of the Distribution Plan service fee payment of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class C shares by Serviced Plans established between January 1, 2003 and March 31, 2005 (i.e., plan establishment paperwork is received by MFSC in good order on or after January 1, 2003), MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee).
For purchases of Class C shares by an Alliance Plan, MFD will pay upfront commissions or asset-based compensation to financial intermediaries under either option discussed above, at the financial intermediary's discretion.
Class R, Class R1, Class R2, Class R3 and Class R4 Shares
Except as noted below, for purchases of the following R share classes, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to the following rates annually of the average daily net assets of the Funds attributable to plan assets (of which up to 0.25% consists of the Distribution Plan service fee), as follows:
------------------------------------------------------------------------------- Class Annual Rate ------------------------------------------------------------------------------- Class R1 0.75% ------------------------------------------------------------------------------- Class R, Class R2, Class R3 0.50% ------------------------------------------------------------------------------- Class R4 0.25% ------------------------------------------------------------------------------- |
In addition, MFD may pay financial intermediaries who sell Class R4 shares an upfront commission of up to 0.25% of up to $25 million of a Serviced Plan's initial investment. MFD generally will not pay financial intermediaries receiving this upfront commission an upfront commission with respect to any subsequent sale of Class R4 shares (subject to MFD waiving this limitation from time to time).
For purchases of Class R shares prior to April 1, 2007 by a Serviced Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class R shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class R shares prior to April 1, 2007 by an Alliance Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to 0.60% of the amount of Class R shares purchased through such financial intermediary.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
529 ADMINISTRATIVE SERVICES FEES, RETIREMENT PLAN ADMINISTRATIVE AND SERVICES FEES, AND SHAREHOLDER SERVICING PAYMENTS
Financial intermediaries may receive all or a portion of the following payments: 529 administrative services fees as described in "Management of the Fund - Program Manager"; retirement plan administrative and service fees as described in "Management of the Fund - Administrator"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
OTHER MFD PAYMENTS
Financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS Funds, to cooperate with MFD's promotional efforts, and/or in recognition of their marketing, administrative services, and/or processing support. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary, and the quality of the overall relationship with the financial intermediary.
MFD may make marketing support and/or administrative services payments to financial intermediaries that sell Fund shares or provide services to MFD, the Funds or shareholders of the Funds through the financial intermediary's retail distribution channel and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition to the opportunity to participate in a financial intermediary's retail distribution channel or program, payments may include one or more of the following: business planning assistance; educating financial intermediary personnel about the various MFS Funds; assistance with Fund shareholder financial planning; placement on the financial intermediary's preferred or recommended fund list; access to sales representatives and management representatives of the financial intermediary; administrative and account maintenance services.; participant or shareholder record-keeping; reporting or transaction processing; program administration; fund/investment selection and monitoring; enrollment; and education. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
MFD may make payments to certain financial intermediaries that sell Fund shares to help offset the financial intermediaries' costs associated with client account maintenance support, statement preparation, and transaction processing. The types of payments that MFD may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a financial intermediary, payment of networking fees of up to $6 per shareholder account maintained on certain mutual fund trading systems, or one-time payments for ancillary services such as setting up funds on a financial intermediary's mutual fund trading system.
NASD Member Broker/Dealers Receiving Such Payments from MFD's Own Additional Resources
Set forth below is a list of the member firms of the NASD to which MFD expects as of June 4, 2007 to make such payments from its own additional resources with respect to the Funds. Payments may also be made to affiliates of these firms. Any additions, modifications, or deletions to the broker/dealers identified in this list that have occurred since June 4, 2007 are not reflected. In addition to member firms of the NASD, MFD also makes such payments to other financial intermediaries that sell or provide services to the Funds and shareholders, such as banks, insurance companies, and plan administrators. These firms are not included in this list and may include affiliates of MFD. You should ask your financial intermediary if it receives such payments from MFD.
INTERMEDIARY FIRM NAME: INTERMEDIARY FIRM NAME: 401(K) Investment Services, Inc. Linsco/Private Ledger Corp. AG Edwards & Sons, Inc. Merrill Lynch, Pierce, Fenner & Smith Inc. ADP Broker-Dealer, Inc. Metlife Securities Inc. AIG Financial Advisors, Inc. Mid-Atlantic Securities, Inc. Ameriprise Financial Services, Inc. Morgan Stanley DW Inc. American General Securities Incorporated MSCS Financial Services, LLC Bear, Stearns Securities Corp Multi Financial Services, Inc. Becker & Suffern, LTD. Northwestern Mutual Investment Services Charles Schwab & Co., Inc. Paychex Securities Corporation Chase Investment Services Corp. Piper Jaffray & Co. Citigroup Global Markets Inc. Primevest Financial Services, Inc. Clark Securities, Inc. Princor Financial Services Corporation Commonwealth Financial Network Prudential Investment Management Services LLC CUNA Brokerage Services, Inc. Raymond James & Associates, Inc. Fidelity Brokerage Services LLC Raymond James Financial Services, Inc. Financial Network Investment Corp. RBC Dain Rauscher Inc. H.D. Vest Investment Services State Street Global Markets, LLC Hewitt Financial Services LLC SunTrust Investment Services, Inc. ICMA - RC Services, LLC UBS Financial Services Inc. IFMG Securities, Inc. Wachovia Securities, LLC ING Financial Partners, Inc. Wells Fargo Investments LLC Legg Mason Investor Services, LLC |
From time to time, MFD, from MFD's own additional resources, may make additional payments to financial intermediaries that sell or provide services in connection with the sale of MFS Fund shares or the servicing of shareholder accounts. Such payments by MFD may include payment or reimbursement to, or on behalf of, financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and events, and other sponsored events, and travel expenses, including lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting, retention, and due diligence trips. Other compensation may be offered, including goodwill payments relating to servicing, to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. MFD makes payments for entertainment events it deems appropriate, subject to MFD's policies and applicable law. These payments may vary depending upon the nature of the event.
PART II - APPENDIX E
INVESTMENT STRATEGIES AND RISKS
In addition to the principal investment strategies and the principal risks described in the prospectus, your Fund may employ other investment practices and may be subject to other risks, which are described below. Because the following is a combined description of the investment strategies and risks for all MFS Funds, certain matters described herein may not apply to your Fund.
ASSET-BACKED SECURITIES. Asset-backed securities are securities that represent a participation in, or are secured by and payable from, pools of underlying assets such as debt securities, bank loans, motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (i.e., credit card) agreements and other receivables. These underlying assets are securitized through the use of trusts and special purpose entities. Payment of interest and repayment of principal on asset-backed securities may be largely dependent upon the cash flows generated by the underlying assets backing the securities and, in certain cases, may be supported by letters of credit, surety bonds, or other credit enhancements.
Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate, as a result of the pass-through of prepayments of principal on the underlying assets. The rate of principal payments on asset-backed securities is related to the rate of principal payments on the underlying asset pool and related to the priority of payment of the security with respect to the asset pool. The occurrence of prepayments is a function of several factors, such as the level of interest rates, general economic conditions, the location, and age of the underlying obligations, asset default and recovery rates, and other social and demographic conditions. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, asset-backed securities may have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
The credit quality of asset-backed securities depends primarily on the quality of the underlying assets, the level of credit enhancement, if any, provided for the securities, and the credit quality of the credit-support provider, if any. The value of asset-backed securities may be affected by the various factors described above and other factors, such as changes in interest rates, the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets, or the entities providing the credit enhancement. Because asset-backed securities may not have the benefit of a security interest in the underlying assets that is comparable to a mortgage, asset-backed securities present certain additional risks that are not present with mortgage-backed securities.
BORROWING. If the Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage and may cause a Fund to liquidate investments when it would not otherwise do so. Money borrowed will be subject to interest charges and may be subject to other fees or requirements which would increase the cost of borrowing above the stated interest rate.
COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, or other securities that may be converted into or exchanged for (by the holder or by the issuer) shares of stock (or cash or other securities of equivalent value) of the same or a different issuer at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at prices above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
COUNTRY LOCATION. The issuer of a security or other investment is generally
deemed to be economically tied to a particular country if: (a) the security or
other investment is issued or guaranteed by the government of that country or
any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; (e) the issuer has 50% or more of its assets in that
country; (f) the issuer is included in an index which is representative of that
country; or (g) the issuer is exposed to the economic fortunes and risks of that
country.
DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs, EDRs, or GDRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and may be offered privately in the United States and are generally designed for use in securities markets outside the U.S. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders.
With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and financial information to the depositary receipt holders at the underlying issuer's request.
Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
EMERGING MARKETS. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign markets. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; the risk that a judgment against a foreign government may be unenforceable; and greater price volatility, less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, depository receipts for those securities, securities of investment companies, and other similar interests in an issuer.
FOREIGN CURRENCIES. Foreign securities may be denominated in foreign currencies and international currency units and foreign currencies may be purchased directly. Accordingly, the weakening of these currencies and units against the U.S. dollar would result in a decline in the value of securities denominated in that currency or the value of the currency itself.
While holding currencies permits an investor to take advantage of favorable movements in the applicable exchange rate, this strategy also exposes the investor to risk of loss if exchange rates move in a direction adverse to the investor's position. Such losses could reduce any profits or increase any losses sustained by the investor from the sale or redemption of securities and could reduce the dollar value of interest or dividend payments received.
Some foreign countries have managed currencies, which are not free floating against the U.S. dollar. Managed currencies can experience a steep devaluation relative to the U.S. dollar.
In addition, there is risk that certain foreign countries may restrict the free conversion of their currencies into other currencies. Further, certain currencies may not be internationally traded.
Foreign currency transactions can be made on a spot (i.e., cash) or forward basis (i.e., by entering into forward contracts to purchase or sell foreign currencies). Although foreign exchange dealers generally do not charge a fee for such conversions, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency at one rate, while offering a lesser rate of exchange should the counterparty desire to resell that currency to the dealer. Forward contracts are customized transactions that require a specific amount of a currency to be delivered at a specific exchange rate on a specific date or range of dates in the future. Forward contracts are generally traded in an interbank market directly between currency traders (usually large commercial banks) and their customers. The parties to a forward contract may agree to offset or terminate the contract before its maturity, or may hold the contract to maturity and complete the contemplated currency exchange.
A "settlement hedge" or "transaction hedge" attempts to protect against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. Forward contracts to purchase or sell a foreign currency may also be used in anticipation of future purchases or sales of securities denominated in foreign currency, even if the specific investments have not yet been selected.
Forward contracts can be used to hedge against a decline in the value of existing investments denominated in foreign currency. For example, if an investor owned securities denominated in pounds sterling, the investor could enter into a forward contract to sell pounds sterling in return for U.S. dollars to hedge against possible declines in the pound's value. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. An investor could also hedge the position by selling another currency expected to perform similarly to the pound sterling. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Forward contracts can also be used to shift investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if a Fund had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases.
Swap agreements, indexed securities, hybrid securities and options and futures contracts relating to foreign currencies can be used for the same purposes.
Successful use of currency management strategies will depend on MFS' skill in analyzing currency values. Currency management strategies may increase the volatility of a Fund's returns and could result in significant losses to a Fund if currencies do not perform as MFS anticipates. For example, if a currency's value rose at a time when MFS had hedged a Fund by selling that currency in exchange for dollars, a Fund would not participate in the currency's appreciation. If MFS hedges currency exposure through proxy hedges, a Fund could realize currency losses from both the hedge and the security position if the two currencies do not move in tandem. Similarly, if MFS increases a Fund's exposure to a foreign currency and that currency's value declines, a Fund will realize a loss. There is no assurance that MFS' use of currency management strategies will be advantageous to a Fund or that it will hedge at appropriate times.
FOREIGN MARKETS. Foreign securities and foreign currencies, as well as any securities issued by U.S. entities with substantial foreign operations, may involve significant risks in addition to the risks inherent in U.S. investments. Foreign investments involve risks relating to local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars, or other government intervention. The debt instruments of foreign governments and their agencies and instrumentalities may or may not be supported by the full faith and credit of the foreign government. Additionally, governmental issuers of foreign debt securities may be unwilling to pay interest and repay principal when due and may require that the conditions for payment be renegotiated. In addition, the value of securities denominated in foreign currencies and of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar.
Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading, settlement and custodial practices (including those involving securities settlement where Fund assets may be released prior to receipt of payment) are often less developed than those in U.S. markets, and may result in increased risk or substantial delays in the event of a failed trade or the insolvency of, or breach of duty by, a foreign broker-dealer, securities depository, or foreign subcustodian. In addition, the costs associated with foreign investments, including withholding taxes, brokerage commissions, and custodial costs, are generally higher than with U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers. Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated. Regulatory enforcement may be influenced by economic or political concerns, and investors may have difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions.
FUTURES CONTRACTS. A futures contract is a standardized agreement between two parties to buy or sell in the future a specific quantity of an asset, currency, interest rate, index, instrument or other indicator at a specific price and time. The value of a futures contract typically fluctuates in correlation with the increase or decrease in the value of the underlying indicator. The buyer of a futures contract enters into an agreement to purchase the underlying indicator on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying indicator on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying indicator or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. In the case of physically settled futures, it may not be possible to liquidate or close out the futures contract at any particular time or at an acceptable price. Other financial futures contracts (such as those relating to interest rates, foreign currencies and securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying indicator unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market."
The risk of loss in trading futures contracts can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. Thus, a purchase or sale of a futures contract may result in unlimited losses. In the event of adverse price movements, an investor would continue to be required to make daily cash payments to maintain its required margin. In addition, on the settlement date, an investor may be required to make delivery of the indicators underlying the futures positions it holds.
An investor could suffer losses if it is unable to close out a futures contract because of an illiquid secondary market. Futures contracts may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures position, and an investor would remain obligated to meet margin requirements until the position is closed. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment.
An investor could lose margin payments it has deposited with its futures commission merchant (FCM), if, for example, the FCM breaches its agreement with the investor or becomes insolvent or goes into bankruptcy. In that event, the investor may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the investor.
If MFS attempts to use a futures contract as a hedge against, or as a substitute for, a portfolio investment, the futures position may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Pursuant to a claim of exemption filed with the Commodity Futures Trading Commission (CFTC) on behalf of the MFS Funds that are permitted by their investment objectives and policies to use futures and options on futures contracts, each such MFS Fund is not deemed to be a "commodity pool" or "commodity pool operator" under the Commodity Exchange Act and is not subject to registration or regulation as such under the Commodity Exchange Act.
HYBRID INSTRUMENTS. Hybrid instruments are generally considered derivatives and combine the elements of swaps, futures contracts, or options with those of debt, preferred equity or a depository instrument. A hybrid instrument may be a debt instrument, preferred stock, warrant, convertible security, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, commodities, indexes, economic factors or other measures, including interest rates, currency exchange rates, or commodities or securities indices, or other indicators (collectively, "indicators").
The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, swaps, options, futures and currencies. An investment in a hybrid instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published benchmark. The risks of a particular hybrid instrument will depend upon the terms of the instrument, but may include the possibility of significant changes in the benchmark(s) or the prices of the underlying indicators to which the instrument is linked. Such risks generally depend upon factors unrelated to the operations or credit quality of the issuer of the hybrid instrument, which may not be foreseen by the purchaser, such as economic and political events, the supply and demand of the underlying indicators and interest rate movements. Hybrid instruments may be highly volatile.
Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular hybrid instrument, changes in a benchmark, underlying asset or indicator may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument. Also, the prices of the hybrid instrument and the benchmark, underlying asset or indicator may not move in the same direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, hybrid instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain). The latter scenario may result if "leverage" is used to structure the hybrid instrument. Leverage risk occurs when the hybrid instrument is structured so that a given change in a benchmark or underlying indicator is multiplied to produce a greater value change in the hybrid instrument, thereby magnifying the risk of loss as well as the potential for gain.
If MFS attempts to use a hybrid instrument as a hedge against, or as a substitute for, a portfolio investment, the hybrid instrument may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving hybrid instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Hybrid instruments may also carry liquidity risk since the instruments are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt instruments. Under certain conditions, the redemption value of such an investment could be zero. In addition, because the purchase and sale of hybrid investments could take place in an over-the-counter market without the guarantee of a central clearing organization, or in a transaction between the Fund and the issuer of the hybrid instrument, hybrid instruments are subject to the creditworthiness of the issuer of the hybrid instrument, and their values may decline substantially if the issuer's creditworthiness deteriorates. Hybrid instruments also may not be subject to regulation by the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.
INFLATION-INDEXED BONDS. Inflation-indexed bonds are debt instruments whose principal value is adjusted periodically according to a rate of inflation (usually a consumer price index). Two structures are most common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the inflation accruals as part of a semiannual coupon.
U.S. Treasury Inflation Protected Securities (TIPS) currently are issued with maturities of five, ten, or thirty years, although it is possible that securities with other maturities will be issued in the future. The principal amount of TIPS adjusts for inflation, although the inflation-adjusted principal is not paid until maturity. Semi-annual coupon payments are determined as a fixed percentage of the inflation-adjusted principal at the time the payment is made.
If the rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. At maturity, TIPS are redeemed at the greater of their inflation-adjusted principal or at the par amount at original issue. If an inflation-indexed bond does not provide a guarantee of principal at maturity, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. For example, if inflation were to rise at a faster rate than nominal interest rates, real interest rates would likely decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates would likely rise, leading to a decrease in value of inflation-indexed bonds.
While these securities, if held to maturity, are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If nominal interest rates rise due to reasons other than inflation (for example, due to an expansion of non-inflationary economic activity), investors in these securities may not be protected to the extent that the increase in rates is not reflected in the bond's inflation measure.
The inflation adjustment of TIPS is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of price changes in the cost of living, made up of components such as housing, food, transportation, and energy. There can be no assurance that the CPI-U will accurately measure the real rate of inflation in the prices of goods and services.
INVERSE FLOATING RATE OBLIGATIONS. Inverse floating rate obligations have variable interest rates that typically move in the opposite direction from movements in prevailing interest rates, most often short-term rates. Accordingly, the value of inverse floating rate obligations or other obligations or certificates structured to have similar features generally moves in the opposite direction as interest rates. The value of an inverse floating rate instrument can be considerably more volatile than the value of other debt instruments of comparable maturity and quality. Inverse floating rate obligations incorporate varying degrees of leverage. Generally, greater leverage results in greater price volatility for any given change in interest rates. Inverse floating rate obligations may be subject to legal or contractual restrictions on resale and therefore may be less liquid than other types of securities.
LENDING OF PORTFOLIO SECURITIES. Portfolio securities will be lent to qualified investors such as member firms of the New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the Federal Reserve System, and would be required to be secured by collateral in cash, an irrevocable letter of credit, or U.S. Government securities maintained on a current basis at an amount at least equal to the market value of the securities loaned. When one party lends portfolio securities to another party, the lender has the right to call the loan and obtain the securities loaned at any time on customary industry settlement notice (which will not usually exceed five business days). For the duration of a loan, the borrower pays the lender an amount equal to any interest or dividends received on the securities loaned. The lender also receives a fee from the borrower or compensation from the investment of the collateral, less a fee paid to the borrower (if the collateral is in the form of cash). The lender does not, however, have the right to vote any securities having voting rights during the existence of the loan, but it can 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. A Fund's performance will continue to reflect changes in the value of the securities loaned and will also reflect the receipt of interest, through investment of cash collateral by the Fund or a fee. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, the lender could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If the lender is not able to recover the securities loaned, the lender may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased.
LOANS AND OTHER DIRECT INDEBTEDNESS. Loans and other direct indebtedness are interests in amounts owed by corporations, governmental or other borrowers to lenders or lending syndicates (loans and loan participations), to suppliers of goods and services (trade claims and other receivables), or to other parties. Some loans may be unsecured in part or in full. Loans may be in default at the time of purchase. Loans that are fully secured should protect the purchaser to a greater extent than unsecured loans in the event of nonpayment of scheduled interest or principal. However, there can be no assurance that the liquidation of collateral acquired in connection with the default of a secured loan would satisfy the borrower's obligation, or that such collateral could be liquidated.
Loans generally are made to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs or other corporate activities. Such loans typically are originated, negotiated and structured by a syndicate of lenders represented by an agent lender that has negotiated and structured the loan and that is responsible for collecting interest and principal payments and other amounts due on behalf of all of the lenders in the syndicate, and for enforcing the lenders' rights against the borrower. Typically, the agent is given broad discretion in monitoring the borrower's performance and is obligated to use the same care it would use in the management of its own property. Upon an event of default, the agent typically will enforce the loan agreement after instruction from the lenders. The borrower compensates the agent for these services. This compensation may include special fees paid when the loan is structured or funded and other fees paid on a continuing basis. The typical practice of an agent or a lender to rely exclusively or primarily on reports from the borrower involves a risk of fraud by the borrower.
If an agent becomes insolvent, or has a receiver, conservator or similar official appointed for it by an appropriate authority, or if it becomes a debtor in a bankruptcy proceeding, the agent's appointment may be terminated, and a successor agent typically may be appointed by the lenders. If an appropriate authority determines that assets held by the agent for the benefit of lenders or purchasers of loans are subject to the claims of the agent's general or secured creditors, then such lenders or purchasers might incur certain costs and delays in realizing payment on a loan or suffer a loss of principal and/or interest. Furthermore, in the event of the borrower's bankruptcy or insolvency, the borrower's obligation to repay a loan may be subject to certain defenses that the borrower can assert as a result of improper conduct by the agent.
Loans may be acquired by participating directly in a lending syndicate as a lender. Alternatively, loans or an interest in loans may be acquired by novation, by assignment or by participation from members of the lending syndicate or from other participants. In a novation or an assignment, the acquirer assumes all of the rights of the lender in the loan or of the participant in the participants' portion of the loan and, in the case of a novation or an assignment from a member of the lending syndicate, becomes a party of record with respect to the loan. In a participation, the acquirer purchases a portion of the lender's or the participants' interest in the loan, but has no direct contractual relationship with the borrower. An investment in a loan by participation gives rise to several risks. The acquirer must rely on another party not only for the enforcement of the acquirer's rights against the borrower, but also for the receipt and processing of principal, interest or other payments due under the loan and may be subject to the credit risk of the other party in addition to the borrower. The acquirer may be subject to delays, expenses, and risks that are greater than those that would be involved if the acquirer could enforce its rights directly against the borrower. In addition, under the terms of a participation agreement, the acquirer may be regarded as a creditor of the seller of the participation interest (rather than of the borrower), so that the acquirer also may be subject to the risk that such seller could become insolvent. A participation agreement also may limit the rights of the acquirer to vote on changes that may be made to the underlying loan agreement, such as waiving a breach of a covenant.
Direct indebtedness includes trade or other claims against companies, which generally represent monies owed by such companies to suppliers of goods or services. Such claims may be purchased when such companies are in default.
The ability to receive payments of principal and interest on loans and other direct indebtedness will depend primarily on the financial condition of the borrower. Because an acquirer may be required to rely on another party to collect and to pass on to it amounts payable with respect to the loan or other direct indebtedness and to enforce the acquirer's rights under the loan or other direct indebtedness, an insolvency, bankruptcy or reorganization of such other party may delay or prevent the acquirer from receiving such amounts. The highly leveraged nature of many loans and other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions.
Revolving credit facilities and other standby financing commitments obligate the purchaser to fund additional cash on a certain date or on demand. A revolving credit facility differs from other types of financing commitments in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit facility. These commitments may have the effect of requiring a purchaser to increase its investment in a company at a time when the purchaser 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).
Floating rate loans generally are subject to legal or contractual restrictions on resale. Floating rate loans currently are not listed on any securities exchange or automatic quotation system. As a result, no active market may exist for some floating rate loans, and to the extent a secondary market exists for other floating rate loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Additionally, the supply of floating rate loans may be limited from time to time due to a lack of sellers in the market for existing floating rate loans or to the number of new floating rate loans currently being issued. As a result, the floating rate loans available for purchase may be of lower quality or may have a higher price.
With respect to its management of investments in bank loans, MFS will normally seek to avoid receiving material, non-public information ("MNPI") about the issuers of bank loans being considered for acquisition by the Fund or held in the Fund's portfolio. In many instances, borrowers may offer to furnish MNPI to prospective investors, and to holders, of the issuer's loans. MFS' decision not to receive MNPI may place MFS at a disadvantage relative to other investors in loans (which could have an adverse effect on the price the Fund pays or receives when buying or selling loans). Also, in instances where holders of loans are asked to grant amendments, waivers or consent, MFS' ability to assess their significance or desirability may be adversely affected. For these and other reasons, it is possible that MFS' decision not to receive MNPI under normal circumstances could adversely affect the Fund's investment performance.
Notwithstanding its intention generally not to receive MNPI with respect to its management of investments in loans, MFS may from time to time come into possession of MNPI about the issuers of loans that may be held in the Fund's portfolio. Possession of such information may in some instances occur despite MFS' efforts to avoid such possession, but in other instances MFS may choose to receive such information (for example, in connection with participation in a creditors' committee with respect to a financially distressed issuer). As, and to the extent, required by applicable law, MFS' ability to trade in these loans for the account of the Fund could potentially be limited by its possession of such information. Such limitations on MFS' ability to trade could have an adverse effect on the Fund by, for example, preventing the Fund from selling a loan that is experiencing a material decline in value. In some instances, these trading restrictions could continue in effect for a substantial period of time.
LOWER QUALITY DEBT INSTRUMENTS. Lower quality debt instruments are considered speculative with respect to the issuer's continuing ability to meet principal and interest payments and, while generally expected to provide greater income than investments in higher quality debt instruments, will involve greater risk of principal and income (including the possibility of default or bankruptcy of the issuers of such instruments) and may involve greater volatility of price (especially during periods of economic uncertainty or change) than higher quality debt instruments. In addition, because yields vary over time, no specific level of income can ever be assured. These lower quality debt instruments generally tend to reflect economic changes (and the outlook for economic growth), short-term corporate and industry developments and the market's perception of their credit quality to a greater extent than higher quality debt instruments, which react primarily to fluctuations in the general level of interest rates (although these lower quality debt instruments are also affected by changes in interest rates). In the past, economic downturns or an increase in interest rates have, under certain circumstances, resulted in a higher incidence of default by the issuers of these instruments and may do so in the future, especially in the case of highly leveraged issuers. The prices for these instruments may be affected by legislative and regulatory developments. The market for these lower quality debt instruments may be less liquid than the market for investment grade debt instruments. Furthermore, the liquidity of these lower quality debt instruments may be affected by the market's perception of their credit quality.
Instruments in the lowest tier of investment-grade debt instruments, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade securities.
See Appendix H for a description of bond ratings.
MONEY MARKET INSTRUMENTS. Money market instruments, or short-term debt instruments, consist of obligations such as commercial paper, bank obligations (e.g., certificates of deposit and bankers' acceptances), repurchase agreements, and various government obligations, such as Treasury bills. Money market instruments may be structured to be, or may employ a trust or other form so that they are, eligible investments for money market funds. For example, put features can be used to modify the maturity of a security or interest rate adjustment features can be used to enhance price stability. If a structure fails to function as intended, adverse tax or investment consequences may result. Neither the Internal Revenue Service (IRS) nor any other regulatory authority has ruled definitively on certain legal issues presented by certain structured securities. Future tax or other regulatory determinations could adversely affect the value, liquidity, or tax treatment of the income received from these securities. Commercial paper is a money market instrument issued by banks or companies to raise money for short-term purposes. Unlike some other debt obligations, commercial paper is typically unsecured. Commercial paper may be issued as an asset-backed security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that represent direct or indirect participation in, or are collateralized by and payable from, mortgage loans secured by real property or instruments derived from such loans. Mortgage-backed securities include various types of securities such as pass-throughs, stripped mortgage-backed securities, and collateralized mortgage obligations. There are a wide variety of mortgage types underlying these securities, including mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
Generally, mortgage-backed securities represent interests in pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association (GNMA), by government-related organizations, such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), as well as by private issuers, such as commercial banks, savings and loan institutions and mortgage bankers. Government mortgage-backed securities are backed by the full faith and credit of the United States as to payment of principal and interest. GNMA, the principal U.S. guarantor of these securities, is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Government-related mortgage-backed securities are not backed by the full faith and credit of the United States. Issuers of government-related mortgage-backed securities include FNMA and FHLMC. FNMA is a congressionally chartered corporation owned entirely by private stockholders, and is subject to general regulation by the Secretary of Housing and Urban Development. Private mortgage-backed securities may be less liquid than government or government-related mortgage-backed securities.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. FHLMC is a stockholder-owned government-sponsored enterprise established by Congress. Participation certificates representing interests in mortgages from FHLMC's national portfolio are guaranteed as to the timely payment of interest and principal by FHLMC. Private mortgage-backed securities represent interest in pass-through pools consisting principally of conventional residential mortgage loans created by non-government issuers, such as commercial banks and savings and loan associations and private mortgage insurance companies. Private, government, or government-related entities may create mortgage loan pools offering pass-through investments in addition to those described above. Interests in pools of mortgage-related securities differ from other forms of debt instruments, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities typically provide a monthly payment which consists of both interest and principal payments. In effect, these payments generally are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs incurred.
Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. Prepayments of principal by mortgagors or mortgage foreclosures shorten the term of the mortgage pool underlying the mortgage-backed security. The occurrence of prepayments is a function of several factors, including interest rates, general economic conditions, the location of the mortgaged property, the age of the mortgage or other underlying obligations, and other social and demographic conditions. Because prepayment rates of individual mortgage pools vary widely, the average life of a particular pool is difficult to predict. A Fund's ability to maintain positions in mortgage-backed securities is affected by the reductions in the principal amount of such securities resulting from prepayments. The values of mortgage-backed securities vary with changes in market interest rates generally and the differentials in yields among various kinds of U.S. government securities, mortgage-backed securities, and asset-backed securities. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgages supporting a mortgage-backed security. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase thereby shortening the average life of such a pool. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, mortgage-backed securities typically have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
Collateralized mortgage obligations (CMOs) are mortgage-backed securities that are collateralized by whole loan mortgages or mortgage pass-through securities. The bonds issued in a CMO transaction are divided into groups, and each group of bonds is referred to as a "tranche." Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the CMO bondholders. The bonds issued under a traditional CMO structure are retired sequentially as opposed to the pro-rata return of principal found in traditional pass-through obligations. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds. Under a CMO structure, the repayment of principal among the different tranches is prioritized in accordance with the terms of the particular CMO issuance. The "fastest-pay" tranches of bonds, as specified in the prospectus for the issuance, would initially receive all principal payments. When those tranches of bonds are retired, the next tranche, or tranches, in the sequence, as specified in the prospectus, receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate, and long final maturities, as well as varied expected average lives and risk characteristics. In recent years, new types of CMO tranches have evolved. These include floating rate CMOs, parallel pay CMOs planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these new structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-backed securities.
A primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) will affect the yield, average life, and price of CMOs. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other securities.
Stripped mortgage-backed securities (SMBSs) are derivative multi-class mortgage-backed securities. SMBSs may be issued by agencies or instrumentalities of the U.S. 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 entities formed or sponsored by any of the foregoing. SMBSs may be less liquid than other types of mortgage-backed securities.
SMBSs are usually structured with two classes that receive different proportions of the interest and principal distributions on 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 price and yield-to-maturity on an IO class 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 a Fund's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to recoup some or all of its initial investment in these securities, even if the security is in one of the highest rating categories. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. In mortgage "dollar roll" transactions, the investor sells mortgage-backed securities for delivery in the future and simultaneously contracts to repurchase substantially similar securities on a specified future date. During the roll period, the investor foregoes principal and interest paid on the mortgage-backed securities. The lost interest is compensated by the difference between the current sales price and the lower price for the future purchase (often referred to as the "drop") as well as by the interest earned on, and gains from, the investment of the cash proceeds of the initial sale. A commitment fee may also be received for participation in such transaction.
If the income and capital gains from the investment of the cash from the initial sale do not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will result in a lower return than would have been realized without the use of the dollar rolls. Dollar roll transactions involve the risk that the market value of the securities that are required to be purchased in the future may decline below the agreed upon repurchase price of those securities. If the party to whom the securities are sold becomes insolvent, the right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the investor's ability to correctly predict interest rates and prepayments.
A dollar roll can be viewed as a borrowing. If a Fund makes additional investments while a dollar roll is outstanding, this may be considered a form of leverage.
MUNICIPAL INSTRUMENTS. Debt instruments issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies or instrumentalities, are known as "municipal instruments." Generally, interest received on municipal instruments is exempt from federal income tax. The tax-exempt nature of the interest on a municipal instrument is generally the subject of a bond counsel opinion delivered in connection with the issuance of the instrument. There is no assurance that the IRS will agree with bond counsel's opinion that such interest is tax-exempt or that the interest payments on such municipal instruments will continue to be tax exempt for the life of the municipal instrument. Issuers or other parties generally enter into covenants requiring continuing compliance with federal tax requirements to preserve the tax-free status of interest payments over the life of the municipal instrument. If at any time the covenants are not complied with, or if the IRS otherwise determines that the issuer did not comply with relevant tax requirements, interest payments from a municipal instrument could become federally taxable, possibly retroactively to the date the municipal instrument was issued and an investor may need to file an amended income tax return. Certain types of structured securities are designed so that tax exempt interest from municipal instruments held by the underlying entity will pass through to the holders of the structured security. There is no assurance that the IRS will agree that such interest is tax exempt.
The value of municipal instruments can be affected by changes in their actual or perceived credit quality. The credit quality of municipal instruments can be affected by, among other things, the financial condition of the issuer or guarantor, the issuer's future borrowing plans and sources of revenue, the economic feasibility of the revenue bond project or general borrowing purpose, political or economic developments in the region where the instrument is issued and the liquidity of the security. Municipal instruments generally trade in the over-the-counter market.
General obligation bonds are backed by the issuer's pledge of its full faith and credit and taxing power for the repayment of principal and the payment of interest. Issuers of general obligation bonds include states, counties, cities, towns, and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads, and water and sewer systems. The rate of taxes that can be levied for the payment of debt service on these bonds may be limited. Additionally, there may be limits as to the rate or amount of special assessments or taxes that can be levied to meet these obligations.
Some general obligation bonds are backed by both a pledge of a specific revenue source, such as a special assessment or tax and an issuer's pledge of its full faith and credit and taxing power. Debt service from these general obligation bonds is typically paid first from the specific revenue source and second, if the specific revenue source is insufficient, from the general taxing power.
Revenue bonds are generally backed by the net revenues derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source, such as a state's or local government's proportionate share of the payments from the Tobacco Master Settlement Agreement. Revenue bonds are issued to finance a wide variety of capital projects. Examples include electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Industrial development bonds, a type of revenue bond, are issued by or on behalf of public authorities to raise money to finance various privately operated facilities for a variety of purposes, including economic development, solid waste disposal, transportation, and pollution control. Although the principal security for revenue bonds is typically the revenues of the specific facility, project, company or system, many revenue bonds are secured by additional collateral in the form of a mortgage on the real estate comprising a specific facility, project or system, a lien on receivables and personal property, as well as the pledge of various reserve funds available to fund debt service, working capital, capital expenditures or other needs. Net revenues and other security pledged may be insufficient to pay principal and interest due which will cause the price of the bonds to decline. In some cases, revenue bonds issued by an authority are backed by a revenue stream unrelated to the issuer, such as a hotel occupancy tax, a sales tax, or a special assessment. In these cases, the ability of the authority to pay debt service is solely dependent on the revenue stream generated by the special tax. Furthermore, the taxes supporting such issues may be subject to legal limitations as to rate or amount.
Municipal insurance policies typically insure, subject to the satisfaction of the policy conditions, timely and scheduled payment of all principal and interest due on the underlying municipal instruments. The insurance may be obtained by either (i) the issuer at the time the municipal instrument is issued, commonly referred to as primary market insurance or (ii) another party after the municipal instrument has been issued, commonly referred to as secondary market insurance. The financial strength of the companies issuing the bond insurance can vary.
In general, municipal insurance does not insure any risk other than nonpayment.
Municipal insurance does not insure against market fluctuations which affect the
price of a security. In addition, a municipal insurance policy will not insure
(i) the payment of regularly scheduled debt service payments until maturity if
an issuer redeems the municipal bonds prior to maturity in accordance with the
call provisions of the municipal instrument; (ii) over the loss of prepayment or
other acceleration payment which at any time may become due in respect of any
instrument, (except for a mandatory sinking fund redemption; (iii) the payment
of a prepayment or acceleration premium; or (iv) nonpayment of principal or
interest caused by negligence or bankruptcy of the paying agent. A municipal
insurance policy often reserves to the insurer the exclusive right to accelerate
the instruments upon a payment default.
Because a significant portion of the municipal instruments issued and outstanding are insured by a small number of insurance companies, an event involving one or more of these insurance companies could have a significant adverse effect on the value of the securities insured by that insurance company and on the municipal market as a whole.
Education. In general, there are two types of education-related bonds: (i) those issued to finance projects for public and private colleges and universities, charter schools and private schools, and (ii) those representing pooled interests in student loans. Bonds issued to supply educational institutions with funding are subject to many risks, including the risks of unanticipated revenue decline, primarily the result of decreasing student enrollment, decreasing state and federal funding, or a change in general economic conditions. Additionally, higher than anticipated costs associated with salaries, utilities, insurance or other general expenses could impair the ability of a borrower to make annual debt service payments. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which may be supported by reserves or other forms of credit enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous factors, including the rate of student loan defaults, seasoning of the loan portfolio, and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Electric Utilities. The electric utilities industry has been experiencing increased competitive pressures. Federal and state legislation in recent years has been moving the industry toward opening transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel, (b) the availability and cost of capital, (c) the effects of conservation on energy demand, (d) the effects of rapidly changing environmental, safety, and licensing requirements, and other federal, state, and local regulations, (e) timely and sufficient rate increases thereby assisting utilities in recovering increasing energy costs, and (f) opposition to nuclear power.
Health Care. The health care industry is subject to regulatory action by a number of governmental agencies, including federal, state, and local governmental agencies. A major source of revenues for the health care industry is payments from the Medicare and Medicaid programs. As a result, the industry is sensitive to legislative changes and reductions in governmental spending for such programs. A second major source of revenues for the health care industry is payments from private insurance companies and health maintenance organizations. As such, any changes to and reductions in reimbursement rates from these entities for services provided could be detrimental to the revenues of the providers. Numerous other factors may affect the industry, such as general and local economic conditions; demand for services; expenses (including for example, labor, malpractice insurance premiums and pharmaceutical products); and competition among health care providers. In the future, the following factors may adversely affect health care facility operations: adoption of legislation proposing a national health insurance program; other state or local health care reform measures; medical and technological advances which dramatically alter the need for health services or the way in which such services are delivered; changes in medical coverage which alter the traditional fee-for-service revenue stream; and efforts by employers, insurers, and governmental agencies to reduce the costs of health insurance and health care services.
Housing. Housing revenue bonds typically are issued by a state, county, or local housing authority and are secured by the revenues of mortgages originated by the authority using the proceeds of the bond issue. These bonds may be used to make mortgage loans for single-family housing, multi-family housing, or a combination of the two. Because of the impossibility of precisely predicting demand for mortgages from the proceeds of such an issue, there is a risk that the proceeds of the issue will be in excess of demand, which would result in early retirement of the bonds by the issuer. Moreover, such housing revenue bonds depend for their repayment upon the cash flow from the underlying mortgages, which cannot be precisely predicted when the bonds are issued. Any difference in the actual cash flow from such mortgages from the assumed cash flow could have an adverse impact upon the ability of the issuer to make scheduled payments of principal and interest on the bonds, or could result in early retirement of the bonds. Additionally, such bonds depend in part for scheduled payments of principal and interest upon reserve funds established from the proceeds of the bonds, assuming certain rates of return on investment of such reserve funds. If the assumed rates of return are not realized because of changes in interest rate levels or for other reasons, the actual cash flow for scheduled payments of principal and interest on the bonds may be inadequate. The financing of multi-family housing projects is affected by a variety of factors which may impact the borrower's ability to pay debt service and may impair the value of the collateral securing the bonds, if any. These factors include 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. Some authorities provide additional security for the bonds in the form of insurance, subsidies, additional collateral, or state pledges (without obligation) to make up deficiencies.
Transportation. Transportation debt may be issued to finance the construction of airports, toll roads, highways, or other transit facilities. Airport bonds are dependent on the economic conditions of the airport's service area and may be affected by the business strategies and fortunes of specific airlines. They may also be subject to competition from other airports and modes of transportation. Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs, transportation taxes and fees, and availability of fuel also affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public transportation.
Tobacco Settlement Revenue Bonds. Tobacco settlement revenue bonds are secured by a single source of revenue --a state or jurisdiction's proportionate share of periodic payments made by tobacco companies under the Master Settlement Agreement (the "MSA") entered into by participating cigarette manufacturers, 46 states, and other jurisdictions in November of 1998 in settlement of certain smoking-related litigation. Annual payments on the bonds are dependent on the receipt by the issuer of future settlement payments under the MSA. These annual payments are subject to numerous adjustments. The actual amount of future settlement payments depends on annual domestic cigarette shipments, inflation, market share gains by non-participating cigarette manufacturers, and other factors. MSA adjustments may cause bonds to be repaid faster or slower than originally projected. Tobacco bonds are subject to additional risks, including the risk that cigarette consumption declines, that a tobacco company defaults on its obligation to make payments to the state or that the MSA or state legislation enacted pursuant to the MSA is void or unenforceable.
Water and Sewer. Water and sewer revenue bonds are generally secured by the fees charged to each user of the service. The issuers of water and sewer revenue bonds generally enjoy a monopoly status and latitude in their ability to raise rates. However, lack of water supply due to insufficient rain, run-off, or snow pack can be a concern and has led to past defaults. Further, public resistance to rate increases, declining numbers of customers in a particular locale, costly environmental litigation, and Federal environmental mandates are challenges faced by issuers of water and sewer bonds.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations and participations in municipal leases are undivided interests in a portion of an obligation in the form of a lease or installment purchase or conditional sales contract which is issued by a state, local government, or a municipal financing corporation to acquire land, equipment, and/or facilities (collectively hereinafter referred to as "lease obligations"). Generally lease obligations do not constitute general obligations of the municipality for which the municipality's taxing power is pledged. Instead, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate, and make the payments due under the lease obligation. As a result of this structure, municipal lease obligations are generally not subject to state constitutional debt limitations or other statutory requirements that may apply to other municipal securities.
Lease obligations may contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. If the municipality does not appropriate in its budget enough to cover the payments on the lease obligation, the lessor may have the right to repossess and relet the property to another party. Depending on the property subject to the lease, the value of the property may not be sufficient to cover the debt.
In addition to the risk of "non-appropriation," municipal lease securities may not have as highly liquid a market as conventional municipal bonds. Furthermore, municipal lease obligations have the same risk characteristics as Municipal Instruments do generally.
OPTIONS. An option is a contract which conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific amount or value of a particular underlying interest at a specific price (called the "exercise" or "strike" price) at one or more specific times before the option expires. The underlying interest of an option contract can be a security, currency, index, future, swap or other type of financial instrument. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option purchaser is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date.
Options can be traded either through established exchanges ("exchange traded options") or privately negotiated transactions (over-the-counter or "OTC options"). Exchange traded options are standardized with respect to, among other things, the underlying interest, expiration date, contract size and strike price. The terms of OTC options are generally negotiated by the parties to the option contract which allows the parties greater flexibility in customizing the agreement, but OTC options are generally less liquid than exchange traded options.
All option contracts involve credit risk if the counterparty to the option contract fails to perform. Credit risk is low in exchange traded options because the performance of the contract by the counterparty is backed by the clearing agency for the exchange on which the options are traded. The credit risk in OTC options is dependent on the credit worthiness of the individual counterparty to the contract and may be greater than the credit risk associated with exchange traded options.
When purchasing a put option, the purchaser obtains the right (but not the obligation) to sell a specific amount or value of a particular interest to the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical put option can expect to realize a gain if the price of the underlying interest falls. However, if the underlying interest's price does not fall enough to offset the cost of purchasing the option, the purchaser of a put option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The purchaser of a put option may terminate its position by allowing the option to expire, exercising the option or closing out its position in the secondary market at the option's current price, if a liquid secondary markets exists. If the option is allowed to expire, the purchaser will lose the entire premium. If the option is exercised, the purchaser would complete the sale of the underlying interest to the option writer at the strike price.
When purchasing a call option, the purchaser obtains the right (but not the obligation) to purchase a specified amount or value of a particular interest from the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical call option can expect to realize a gain if the price of the underlying interest rises. However, if the underlying interest's price does not rise enough to offset the cost of purchasing the option, the buyer of a call option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The writer of a put or call option takes the opposite side of the transaction from the option's purchaser. In return for receipt of the premium, the writer assumes the obligation to buy or sell (depending on whether the option is a put or a call) a specified amount or value of a particular interest at the strike price if the purchaser of the option chooses to exercise it.
Generally, an option writer sells options with the goal of obtaining the premium paid by the option purchaser. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" when the option is exercised. A call option is in-the-money if the value of the underlying interest exceeds the strike price of the option. A put option is in-the-money if the strike price of the option exceeds the value of the underlying interest. Generally, any profit realized by an option purchaser represents a loss for the option writer. The writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option in the same manner as if the writer were entering into a futures contract.
The writer of a put option may seek to terminate a position in the put option before exercise by closing out the option in the secondary market at its current price. If the secondary market is not liquid for a put option, however, the writer must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes.
A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put) of the underlying interest when the option is exercised. A cash-settled option gives its owner the right to receive a cash payment based on the difference between a determined value of the underlying interest at the time the option is exercised and the fixed exercise price of the option. In the case of physically settled options, it may not be possible to terminate the position at any particular time or at an acceptable price. A cash-settled call conveys the right to receive a cash payment if the determined value of the underlying interest at exercise exceeds the exercise price of the option, and a cash-settled put conveys the right to receive a cash payment if the determined value of the underlying interest at exercise is less than the exercise price of the option.
Combination option positions are positions in more than one option at the same time. A spread involves being both the buyer and writer of the same type of option on the same underlying interest but different exercise prices and/or expiration dates. A straddle consists of purchasing or writing both a put and a call on the same underlying interest with the same exercise price and expiration date.
The principal factors affecting the market value of a put or call option include supply and demand, interest rates, the current market price of the underlying interest in relation to the exercise price of the option, the volatility of the underlying interest and the remaining period to the expiration date.
If a trading market in particular options were to become unavailable, investors in those options would be unable to close out their positions until trading resumes, and option writers may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. Exchanges or other facilities on which options are traded may establish limitations on options trading, may order the liquidation of positions in excess of these limitations, or may impose other sanctions that could adversely affect parties to an options transaction.
Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a Fund.
PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer and is therefore subject to the same risks as other equity securities. Preferred stock has precedence over common stock in the event the issuer is liquidated or declares bankruptcy, but is junior to the interests of the debt instruments of the issuer. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. The value of preferred stock is sensitive to changes in interest rates and to changes in the issuer's credit quality.
REAL ESTATE RELATED INVESTMENTS. Investment in real estate related investments are subject to similar risks to those associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning or applicable tax law; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; and changes in interest rates.
Real estate investment trusts ("REITs") are pooled investment vehicles that invest primarily in income producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs, or a combination of equity and mortgage REITs. Equity REITs invest most of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest most of their assets in real estate mortgages and derive income from interest payments. An investor will indirectly bear its proportionate share of any expenses (such as operating expenses and advisory fees) paid by REITs in which it invests in addition to the expenses paid by the investor.
Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skills of the REIT's manager and generally are not diversified. Equity and mortgage REITs are also subject to heavy cash flow dependency, borrower default, and self-liquidation.
Mortgage REITs are also subject to different combinations of prepayment, extension, interest rate and other market risks. The real estate mortgages underlying mortgage REITs are generally subject to a faster rate of principal repayments in a declining interest rate environment and to a slower rate of principal repayments in an increasing interest rate environment.
In addition, a REIT may be unable to obtain financing to satisfy income and gain distributions required by federal tax law, may fail to qualify for the federal tax exemption for distributed income, or may be adversely affected by changes in federal tax law, for example, by limiting their permissible businesses or investments.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a buyer would acquire a security for a relatively short period of time (usually not more than a week) subject to the obligation of the seller to repurchase and the buyer to resell such security at a fixed time and price (representing the buyer's cost plus interest). The buyer bears the risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the buyer is delayed or prevented from exercising its rights to dispose of the collateral. This risk includes the risk of procedural costs or delays in addition to a loss on the securities if their value should fall below their repurchase price.
RESTRICTED SECURITIES. Restricted securities are securities that are subject to legal restrictions on their re-sale. Difficulty in selling securities may result in a loss or be costly to an investor. Restricted securities generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, the holder of a registered security may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the holder might obtain a less favorable price than prevailed when it decided to seek registration of the security.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, an investor sells securities and receives cash proceeds, subject to its agreement to repurchase the securities at a later date for a fixed price reflecting a market rate of interest. There is a risk that the counter party to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the investor. Unless the appreciation and income on assets purchased with proceeds from reverse repurchase agreements exceed the costs associated with them, the investor's performance is lower than it otherwise would have been. A reverse repurchase agreement can be viewed as a borrowing. If a Fund makes additional investments while a reverse repurchase agreement is outstanding, this may be considered a form of leverage.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment companies include shares of closed-end investment companies, unit investment trusts, exchange-traded funds, and open-end investment companies, represent interests in professionally managed portfolios that may invest in any type of interest. Investing in other investment companies involves substantially the same risks as investing directly in the underlying interests, but involve additional expenses at the investment company-level, such as a proportionate share of portfolio management fees and operating expenses. Certain types of investment companies, such as closed-end investment companies and exchange-traded funds, trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value (NAV) per share. The extent to which a Fund can invest in securities of other investment companies is limited by the Investment Company Act of 1940.
SHORT SALES. A seller may make short sales that are made "against the box" and also those that are not made "against the box." A short sale that is not made "against the box" is a transaction in which a party sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the seller must borrow the security to make delivery to the buyer. The seller then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. It may not be possible to liquidate or close out the short sale at any particular time or at an acceptable price. The price at such time may be more or less than the price at which the security was sold by the seller. Until the security is replaced, the seller is required to repay the lender any dividends or interest which accrue during the period of the loan. To borrow the security, the seller also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. The seller also will incur transaction costs in effecting short sales.
The seller will incur a loss as a result of the short sale if the price of the security or index increases between the date of the short sale and the date on which the seller replaces the borrowed security. Such loss may be unlimited. The seller will realize a gain if the price of the security declines between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends or interest the seller may be required to pay in connection with a short sale.
A seller may also make short sales "against the box," i.e., when a security identical to one owned by the seller is borrowed and sold short. If the seller enters into a short sale against the box, it is required to hold securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) while the short sale is outstanding. The seller will incur transaction costs, including interest, in connection with opening, maintaining, and closing short sales against the box and will forgo an opportunity for capital appreciation in the security.
SOVEREIGN DEBT OBLIGATIONS. Sovereign debt obligations are issued or guaranteed by foreign governments or their agencies, including debt of developing countries. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of developing countries may involve a high degree of risk, and may be in default or present the risk of default. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and pay interest when due, and may require renegotiation or rescheduling of debt payments. In addition, prospects for repayment of principal and payment of interest may depend on political as well as economic factors. Although some sovereign debt, such as Brady Bonds, is collateralized by U.S. Government securities, repayment of principal and payment of interest is not guaranteed by the U.S. Government.
SWAPS AND RELATED DERIVATIVES. A swap is an agreement between two parties pursuant to which each party agrees to make one or more payments to the other, based on different interest rates, currency exchange rates, security or commodity prices, the prices or rates of other types of financial instruments, assets, the levels of specified indices, or other indicators. Swaps can be closed out by physical delivery of the underlying indicator(s) or payment of the cash settlement on settlement date, depending on the terms of the particular agreement. For example, in a typical credit default swap on a specific security, in the event of a credit event one party agrees to pay par on the security while the other party agrees to deliver the security. In the case of physically settled swaps, it may not be possible to close out the swap at any particular time or at an acceptable price. For example, in a typical interest rate swap, one party agrees to pay a fixed rate of interest determined by reference to a specified interest rate or index multiplied by a specified amount (the "notional amount"), while the other party agrees to pay an amount equal to a floating rate of interest determined by reference to an interest rate or index which is reset periodically and multiplied by the same notional amount. On each payment date, the obligations of parties are netted against each other, with only the net amount paid by one party to the other.
Swap agreements are typically individually negotiated and structured to provide exposure to a variety of different types of investments or market factors. Swap agreements may be entered into for hedging or non-hedging purposes. Swap agreements can take many different forms and are known by a variety of names and other types of swap agreements may be available.
Other types of over-the-counter derivatives, such as "caps," "floors," "collars" and options on swaps, or "swaptions," may be entered into for the same types of hedging or non-hedging purposes as swaps. A "cap" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the amount by which a specified fixed or floating rate or other indicator exceeds another rate or indicator (multiplied by a notional amount). A "floor" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the excess, if any, of a specified rate or other indicator over a different rate or indicator (multiplied by a notional amount). A "collar" transaction is a combination of a cap and a floor in which one party pays the floating amount on the cap and the other party pays the floating amount on the floor. A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into the underlying swap on the agreed-upon terms.
The most significant factor in the performance of swaps, caps, floors, and collars is the change in the underlying price, rate, index level or other indicator that determines the amount of payments to be made under the arrangement.
If MFS attempts to use a swap or related investment as a hedge against, or as a substitute for, a portfolio investment, the swap or related derivative may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving swaps and related derivatives can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Swaps and related derivatives may also be subject to liquidity risk since the derivatives are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such derivatives in the secondary market may be smaller than that for more traditional debt instruments. The swaps market is largely unregulated. It is possible that developments in the swaps market, including potential government regulations, could adversely affect an investor's ability to terminate its existing swap agreements or to realize amounts received under such agreements.
In addition, because the purchase and sale of swap and related derivatives takes place in an over-the-counter market, swaps and related derivatives are subject to the creditworthiness of the counterparty to the swap or related derivative, and their values may decline substantially if the counterparty's creditworthiness deteriorates. If the counterparty defaults, the other party's risk of loss consists of the net amount of payments that the non-defaulting party is contractually entitled to receive. The counterparties may be able to eliminate or reduce their exposure under these arrangements by assignment or other disposition or by entering into an offsetting agreement with the same or another counterparty.
TEMPORARY DEFENSIVE POSITIONS. In response to market, economic, political, or other conditions, MFS may depart from its investment strategies for a Fund by temporarily investing for defensive purposes. MFS may invest a large portion or all of a Fund's assets in cash (including foreign currency) or cash equivalents, including, but not limited to, obligations of banks (including certificates of deposit, bankers' acceptances, time deposits and repurchase agreements), commercial paper, short-term notes, U.S. Government Securities and related repurchase agreements.
TENDER OPTION BONDS. Tender option bonds, also known as put bonds or puttable securities, give the bondholder the right to require the issuer or a specified third party acting as agent for the issuer to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. These securities may be floating or variable rate securities. The issuer or third party agent may be unable to purchase the bonds on the purchase date due to a variety of circumstances, which may result in a loss of value of the bonds.
WARRANTS. Warrants are instruments which entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued or delivered as anticipated. If a Fund makes additional investments while a delayed delivery purchase is outstanding, this may result in a form of leverage.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities are debt instruments that provide for periodic adjustments in the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that may change with changes to the level of prevailing interest rates or the issuer's credit quality. There is a risk that the current interest rate on variable and floating rate securities may not accurately reflect current market interest rates or adequately compensate the holder for the current creditworthiness of the issuer. Some variable or floating rate securities are structured with liquidity features such as (1) put options or tender options that permit holders (sometimes subject to conditions) to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries or (2) auction rate features, remarketing provisions, or other maturity-shortening devices designed to enable the issuer to refinance or redeem outstanding debt securities (market-dependent liquidity features). The market-dependent liquidity features may not operate as intended as a result of the issuer's declining creditworthiness, adverse market conditions, or other factors or the inability or unwillingness of a participating broker-dealer to make a secondary market for such securities. As a result, variable or floating rate securities that include market-dependent liquidity features may lose value and the holders of such securities may be required to retain them for an extended period of time or until maturity.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS. Zero coupon and deferred interest bonds are debt instruments which are issued at a discount from face value. The discount approximates the total amount of interest the instruments 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 instrument 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. Bonds on which the interest is payable in kind are known as "PIK bonds." PIK bonds are debt instruments which provide that the issuer may, at its option, pay interest on such instruments in cash or in the form of additional debt instruments. Such instruments 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 instruments may experience greater volatility in market value than debt instruments which make regular payments of interest.
PART II - APPENDIX F
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions which cannot be changed without the approval of a Majority Shareholder Vote.
As fundamental investment restrictions, the Fund may not:
(1) borrow money except to the extent such borrowing is not prohibited by the Investment Company Act of 1940, as amended (the "1940 Act") and exemptive orders granted under such Act;
(2) underwrite securities issued by other persons, except that all or any portion of the assets of the Fund may be invested in one or more investment companies, to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act, and except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933, as amended, in selling a portfolio security;
(3) issue any senior securities except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; for purposes of this restriction, collateral arrangements with respect to any type of swap, option, Forward Contracts and Futures Contracts and collateral arrangements with respect to initial and variation margin are not deemed to be the issuance of a senior security;
(4) make loans except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; and
(5) purchase or sell real estate (excluding securities secured by real estate or interests therein and securities of companies, such as real estate investment trusts, which deal in real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (excluding currencies and any type of option, Futures Contracts and Forward Contracts) in the ordinary course of its business; the Fund reserves the freedom of action to hold and to sell real estate, mineral leases, commodities or commodity contracts (including currencies and any type of option, Futures Contracts and Forward Contracts) acquired as a result of the ownership of securities.
* * * * * *
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that this restriction shall not apply to securities or obligations issued or guaranteed by banks or bank holding companies, finance companies or utility companies.
FOR THE MFS FLOATING RATE HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry. For purposes of this restriction, loan participations will be considered investments in the industry of the underlying borrower, rather than that of the seller of the loan participation.
FOR THE MFS HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund may invest up to 40% of the value of its assets in each of the electric utility and telephone industries.
FOR THE MFS UTILITIES FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the utilities industry.
FOR THE MFS TECHNOLOGY FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the securities of issuers principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements.
FOR ALL OTHER FUNDS:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry.
* * * * * *
In addition, the Funds have adopted the following non-fundamental policies, which may be changed without shareholder approval.
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 10% of the Fund's net assets (taken at market value) would be invested in such securities; repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities; securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 10% limitation.
FOR ALL OTHER FUNDS:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 15% of the Fund's net assets (taken at market value) would be invested in such securities. Repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities. Securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 15% limitation.
* * * * * *
FOR ALL FUNDS:
Except for investment restriction no. 1 and the Fund's non-fundamental policy on investing in illiquid securities, these investment restrictions are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy. In the event the investments exceed the percentage specified in the Fund's non-fundamental policy on illiquid investments, the Fund will reduce the percentage of its assets invested in illiquid investments in due course, taking into account the best interests of shareholders.
For purposes of investment restriction no. 6, investments in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and tax-exempt obligations issued or guaranteed by a U.S. territory or possession, a state or local government, or a political subdivision of any of the foregoing, are not considered an investment in any particular industry.
For purposes of investment restriction no. 6, investments in other investment companies are not considered an investment in any particular industry and portfolio securities held by an underlying fund in which the Fund may invest are not considered to be securities purchased by the Fund.
For purposes of investment restriction no. 6 for MFS Technology Fund, MFS considers an issuer to be principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements if at least 50% of any issuer's assets, income, sales, or profits are committed to, or derived from, such activities, or a third party has given the issuer an industry or sector classification consistent with such activities.
FOR MFS LIFETIME RETIREMENT INCOME FUND, MFS LIFETIME 2010 FUND, MFS LIFETIME 2020 FUND, MFS LIFETIME 2030 FUND, MFS LIFETIME 2040 FUND, MFS INTERNATIONAL DIVERSIFICATION FUND, MFS AGGRESSIVE GROWTH ALLOCATION FUND, MFS CONSERVATIVE ALLOCATION FUND, MFS GROWTH ALLOCATION FUND AND MFS MODERATE ALLOCATION FUND:
In accordance with the Fund's investment program as set forth in its Prospectus, the Fund may invest more than 25% of its assets in any one underlying fund. Although the Fund does not have a policy to concentrate its investments in a particular industry, 25% or more of the Fund's total assets may be indirectly exposed to a particular industry or group of related industries through its investment in one or more underlying funds.
PART II - APPENDIX G
RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS NAME OF RECIPIENT PURPOSE OF DISCLOSURE MSCI BARRA, Inc. Analytical Tool Bloomberg L.P. Analytical Tool Board of Trustees Fund Governance Bowne Typesetting and Printing Services CDS/Computer Software Vendor Checkfree Software Vendor eA Data Automation Services, LLC Data Formatting and Organization Service Eagle Investment Systems Corp. Accounting System Ernst & Young LLP Independent Registered Public Accounting Firm FactSet Research Systems Inc. Analytical Tool GainsKeeper, Inc. Accounting System GFP Acquisition Company, Inc. D.B.A. GCom2 Solutions Software Vendor G.H. Dean Co. Typesetting and Printing Services Institutional Shareholder Services Inc. Proxy Service Provider Investor Tools Perform Analytical Tool ITG, Inc. Analytical Tool JPMorgan Chase Bank Fund Custodian Lipper Inc. Publication Preparation The MacGregor Group Software Vendor Massachusetts Financial Services Co. Fund Management MFS Fund Distributors, Inc. Fund Distribution OMGEO LLC Software Vendor Plexus Analytical Tool Radianz Software Vendor Ropes & Gray LLP Legal Counsel Saloman Analytics Inc. Analytical Tool Siemens Business Services, Inc. IT Client Services and Desktop Architecture Sir Speedy Printing/Copying Services Standard & Poor's Securities Evaluations Services Fund Pricing State Street Bank and Trust Company Custodian Sun Capital Advisers LLC* Fund Management Wilshire Analytics/Axiom Analytical Tool Valley Forge Capital Advisors, Inc.** Fund Management * Sun Capital Advisers LLC receives non-public portfolio holdings disclosure regarding the portion of the MFS Diversified Income Fund for which it serves as sub-adviser. ** Valley Forge Capital Advisors, Inc., receives non-public portfolio holdings disclosure regarding the MFS Sector Rotational Fund for which it serves as sub-adviser. |
This list is current as of May 31, 2007, and any additions, modifications or deletions to the list that have occurred since May 31, 2007 are not reflected.
PART II - APPENDIX H
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of various debt instruments. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE
Moody's long-term obligation ratings are opinions of the relative credit risk of fixed income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.
AAA: Obligations rated "Aaa" are judged to be of the highest quality, with minimal credit risk.
AA: Obligations rated "Aa" are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated "A" are considered upper-medium grade and are subject to low credit risk.
BAA: Obligations rated "Baa" are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
BA: Obligations rated "Ba" are judged to have speculative elements and are subject to substantial credit risk.
B: Obligations rated "B" are considered speculative and are subject to high credit risk.
CAA: Obligations rated "Caa" are judged to be of poor standing and are subject to very high credit risk.
CA: Obligations rated "Ca" are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations rated "C" are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's applies numerical modifiers "1", "2" and "3" to each generic rating classification from "Aa" through "Caa." The modifier "1" indicates that the obligation ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
Issue credit ratings are based, in varying degrees, on the following considerations: (1) likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, AND C: Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the applicable rating category.
N.R.: Not rated.
FITCH RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR).
Investment Grade
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. "A" ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. "BB" ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC: Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.
CC: Default of some kind appears probable.
C: Default is imminent.
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation, or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated "D" upon a default. Defaulted and distressed obligations typically are rated along the continuum of "C" to "B" ratings categories, depending upon their recovery prospects and other relevant characteristics.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
The modifiers "+" or "-`' may be appended to a rating to denote relative status within major ratings categories. Such suffixes are not added to the "AAA" Long-term ratings category, to categories below "CCC," or to Short-term ratings other than "F1." (The +/- modifiers are only used to denote issues within the "CCC" category, whereas issuers are only rated "CCC" without the use of modifiers.)
INVESTMENT ADVISER
MFS Investment Management
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 55824, Boston, MA 02205-5824
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street, Boston, MA 02116 MFS-PART2-SAI-7/07
Class A Shares
Class B Shares
Class C Shares
Class I Shares
MFS INTERNATIONAL VALUE FUND
PROSPECTUS OCTOBER 1, 2007
The Prospectus describes the MFS International Value Fund. The investment objective of the fund is to seek capital appreciation.
RISK RETURN SUMMARY 1 EXPENSE SUMMARY 8 CERTAIN INVESTMENT POLICIES AND RISKS 10 MANAGEMENT OF THE FUND 11 DESCRIPTION OF SHARE CLASSES 15 HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES 24 OTHER INFORMATION 33 FINANCIAL HIGHLIGHTS 37 The Securities and Exchange Commission has not approved or disapproved the fund's shares or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. |
RISK RETURN SUMMARY
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS (Massachusetts Financial Services Company, the fund's investment adviser) normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies that it believes are undervalued compared to their perceived worth (value companies). Value companies tend to have stock prices that are low relative to their earnings, dividends, assets, or other financial measures.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
PRINCIPAL INVESTMENT TYPES
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, and depository receipts for those securities.
DERIVATIVES: Derivatives are financial instruments whose value is based on the value of one or more indicators, such as a security, asset, currency, interest rate, credit rating or index. Derivatives often involve a counterparty to the transaction.
Derivatives include futures, forward contracts, options, structured notes, inverse floating rate instruments, swaps, caps, floors, and collars.
PRINCIPAL RISKS
As with any mutual fund, you could lose money on your investment in the fund. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The principal risks of investing in the fund are:
STOCK MARKET RISK: The price of an equity security fluctuates in response to issuer, market, economic, industry, political, and regulatory developments. Prices can decrease significantly in response to these developments, and these developments can affect a single issuer, issuers within a broad market sector, industry or geographic region, or the market in general. Different parts of the market and different types of securities can react differently to these developments. For example, the stocks of growth companies can react differently from the stocks of value companies, and the stocks of large cap companies can react differently from the stocks of small cap companies. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events, can have a dramatic adverse effect on stock markets.
COMPANY RISK: Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of an investment. The price of securities of smaller, less well-known companies can be more volatile than the price of securities of larger companies or the market in general.
VALUE COMPANY RISK: The stocks of value companies can continue to be undervalued for long periods of time and not realize their expected value.
FOREIGN RISK: Investments in securities of foreign companies, securities of companies with significant foreign exposure, and foreign currencies can involve additional risks relating to market, economic, political, or regulatory conditions and developments. Political, social, and economic instability, the imposition of currency or capital controls, or the expropriation or nationalization of assets in a particular country can cause dramatic declines in that country's economy. Less stringent regulatory, accounting, and disclosure requirements for issuers and markets are more common in certain foreign countries. Enforcing legal rights can be difficult, costly, and slow in certain foreign countries, and can be particularly difficult against foreign governments. Additional risks of foreign investments include trading, settlement, custodial, and other operational risks, and withholding and other taxes. These factors can make foreign investments, especially those in emerging markets, more volatile and less liquid than U.S. investments. In addition, foreign markets can react differently to market, economic, political, or regulatory developments than the U.S. market.
EMERGING MARKETS RISK: Emerging markets investments can involve additional and greater risks than the risks associated with investments in developed foreign markets securities. Emerging markets typically have less economic development, market structure and depth and regulatory oversight than developed countries. Emerging markets can also be subject to greater political, social, and economic instability. These factors can make emerging market investments more volatile and less liquid than investments in developed markets.
CURRENCY RISK: A decline in the value of a foreign currency relative to the U.S. dollar reduces the value of the foreign currency and investments denominated in that currency. In addition, the use of foreign exchange contracts to reduce foreign currency exposure can eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. The value of foreign currencies relative to the U.S. dollar fluctuates in response to, among other factors, interest rate changes, intervention (or failure to intervene) by U.S. or foreign governments, central banks, or supranational entities such as the International Monetary Fund, the imposition of currency controls, and other political or regulatory developments in the U.S. or abroad. Foreign currency values can decrease significantly both in the short term and over the long term in response to these and other developments.
GEOGRAPHIC CONCENTRATION RISK: Because MFS may invest a relatively large percentage of the fund's assets in issuers located in a single country, a small number of countries, or a particular geographic region, the fund's performance could be closely tied to the market, currency, economic, political, or regulatory conditions and developments in those countries or that region, and could be more volatile than the performance of more geographically-diversified funds.
DERIVATIVES RISK: Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicator(s). Gains or losses from derivatives can be substantially greater than the derivatives' original cost, and therefore, can involve leverage. Derivatives can be complex instruments and can involve analysis that differs from that required for other investment types used by the fund. If the value of a derivative does not correlate well with the particular market or other asset class the derivative is intended to provide exposure to, the derivative may not have the effect anticipated. Derivatives can also reduce the opportunity for gain or result in losses by offsetting positive returns in other investments. Derivatives can be less liquid than other types of investments.
INVESTMENT SELECTION RISK: The MFS analysis of an investment can be incorrect and its selection of investments can lead to an investment focus that results in the fund underperforming other funds with similar investment strategies and/or underperforming the markets in which the fund invests.
COUNTERPARTY AND THIRD PARTY RISK: Transactions involving a counterparty other than the issuer of the instrument, or a third party responsible for servicing the instrument, are subject to the credit risk of the counterparty or third party,
and to the counterparty's or third party's ability to perform in accordance with the terms of the transaction.
LIQUIDITY RISK: Certain investments and types of investments are subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. As a result, it may not be possible to sell the investment at any particular time or at an acceptable price.
LEVERAGING RISK: Certain transactions, including when-issued, delayed-delivery, and forward commitment purchases loans of portfolio securities, and the use of some derivatives, can result in leverage. Leverage involves investment exposure in an amount exceeding the initial investment. In transactions involving leverage, a relatively small market movement or change in other underlying indicator can lead to significantly larger losses to the fund. Leverage can cause increased volatility by magnifying gains or losses on underlying investments.
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of the risks of investing in the fund by showing changes in the fund's performance over time. The performance table also shows:
- how the fund's performance over time compares with that of a broad measure of market performance and one or more other performance measures, and
- returns before the deduction of taxes and returns after the deduction of certain taxes for Class A shares.
The chart and table provide past performance information. The fund's past performance (before and after taxes) does not necessarily indicate how the fund will perform in the future. The performance information in the chart and table is based upon calendar year periods, while the performance information presented under the caption "Financial Highlights" and in the fund's shareholder reports is based upon the fund's fiscal year. Therefore, these performance results may differ.
BAR CHART. The bar chart shows changes over time in the annual total return of Class A shares for the past ten calendar years, and assumes the reinvestment of distributions. The chart and related notes do not take into account any sales charges (loads) that you may be required to pay upon purchase or redemption of the fund's shares. If these sales charges were included, they would reduce these returns. The return of the fund's other classes of shares will differ from the Class A share returns shown in the bar chart, depending upon the expenses of those classes.
[CHART]
CALENDAR YEAR 1997 5.53% 1998 20.26% 1999 17.55% 2000 (4.08)% 2001 (15.75)% 2002 (6.95)% 2003 32.03% 2004 26.77% 2005 14.25% 2006 28.08% |
The total return for the six-month period ended June 30, 2007 was 8.06%. During the periods shown in the bar chart, the highest quarterly return was 17.43% (for the calendar quarter ended December 31, 1999) and the lowest quarterly return was (14.72)% (for the calendar quarter ended September 30, 2002).
PERFORMANCE TABLE. This table shows how the average annual total returns of each class of the fund, before the deduction of taxes ("Returns Before Taxes"), compare to a broad measure of market performance and one or more other performance measures, and assumes the deduction of the maximum applicable sales loads (initial sales charge and/or contingent deferred sales charge (CDSC), as applicable), and the reinvestment of distributions. In addition, for Class A shares, this table shows Class A average annual total returns:
- after the deduction of taxes on distributions made on Class A shares, such as capital gains and income distributions ("Class A Shares' Return After Taxes on Distributions"), and
- after the deduction of taxes on both distributions made on Class A shares and on redemption of Class A shares, assuming that the shares are redeemed at the end of the periods for which returns are shown ("Class A Shares' Return After Taxes on Distributions and Sale of Class A Shares").
Average Annual Total Returns (for the Period Ended December 31, 2006)
SHARE CLASS 1 YEAR 5 YEARS 10 YEARS ------------------------------------------------------------------------------------------ RETURNS BEFORE TAXES B Shares, with CDSC (Declining over Six Years from 4% to 0%) 23.29% 17.01% 10.04% C Shares, with CDSC (1% for 12 Months) 26.25% 17.23% 10.04% I Shares, at Net Asset Value 28.52% 18.42% 11.11% A Shares, with Initial Sales Charge (5.75%) 20.71% 16.52% 9.98% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, with Initial Sales Charge (5.75%) 18.70% 15.63% 9.11% A Shares' Returns After Taxes on Distributions and Sale of Class A Shares, with Initial Sales Charge (5.75%) 14.86% 14.26% 8.45% BENCHMARK COMPARISONS (RETURNS BEFORE TAXES) MSCI EAFE Value Index*+ 31.05% 18.19% 10.62% MSCI EAFE Index**+ 26.86% 15.43% 8.06% |
* Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Value Index - a market capitalization index that is designed to measure developed market equity performance for value securities, excluding the U.S. and Canada.
** Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Index - a market capitalization index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
+ Source: FactSet Research Systems Inc.
All performance results reflect any applicable fee and expense waivers in effect during the periods shown; without these, the results would have been lower.
After-tax returns are calculated using the historical highest individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your own tax situation, and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns are shown for only one of the fund's classes of shares, and after-tax returns for the fund's other classes of shares will vary from the returns shown.
The fund commenced investment operations on October 24, 1995, with the offering of Class A and Class B shares, and subsequently offered Class C shares on July 1, 1996, and Class I shares on January 2, 1997.
Performance for Class I shares includes the performance of the fund's Class A shares for periods prior to their offering. Blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class specific operating expenses (such as Rule 12b-1 fees). Compared to performance these share classes would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance for share classes with higher operating expenses than those of the share class to
which they are blended, and lower performance for share classes with lower operating expenses than those of the share class to which they are blended.
Prior to November 30, 1998, Foreign & Colonial Management Ltd. ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), managed certain assets of the fund. MFS assumed all portfolio management responsibilities from FCM and FCEM for the fund on November 30, 1998. Performance information for periods prior to November 30, 1998 reflects this former sub-investment advisory relationship.
EXPENSE SUMMARY
EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy, redeem, and hold shares of the fund. The annual fund operating expenses are based on expenses incurred during the fund's most recently completed fiscal year adjusted to reflect annualized expenses. The fund's annual operating expenses may vary in future years.
Shareholder Fees (fees paid directly from your investment):
SHARE CLASS A B C I ------------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.75% N/A N/A N/A Maximum Deferred Sales Charge (Load)(as a percentage of original purchase price or redemption proceeds, whichever is less) See Below(#) 4.00% 1.00% N/A |
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets):
SHARE CLASS A B C I
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Management Fees 0.90% 0.90% 0.90% 0.90%
Distribution and/or Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A
Other Expenses(2) 0.27% 0.27% 0.27% 0.27%
---- ---- ---- ----
Total Annual Fund Operating Expenses(2) 1.52% 2.17% 2.17% 1.17%
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# A contingent deferred sales charge (referred to as a CDSC) of 1% may be deducted from your redemption proceeds if you buy $1 million or more of Class A shares or if you are investing through a retirement plan and your Class A purchase meets certain requirements and you redeem your investment within 12 months of your purchase.
(1) The fund's Rule 12b-1 plan permits it to pay distribution and/or service fees to support the sale and distribution of the fund's Class A, Class B, and Class C shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "Distribution and Service Fees."
(2) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Total Annual Fund Operating Expenses" would be lower. "Other Expenses" also include the estimated payment of a portion of the transfer-agent-related expenses of the MFS Funds that invest in the fund ("MFS Funds-of-Funds"). See "Management of the Fund-Special Servicing Agreement."
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you redeem your shares at the end of the time periods (unless otherwise indicated);
- Your investment has a 5% return each year and dividends and other distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10 ---------------------------------------------------------------------------- A Shares $721 $1,028 $1,356 $2,283 B Shares(1) Assuming redemption at end of period $620 $ 979 $1,364 $2,339 Assuming no redemption $220 $ 679 $1,164 $2,339 C Shares Assuming redemption at end of period $320 $ 679 $1,164 $2,503 Assuming no redemption $220 $ 679 $1,164 $2,503 I Shares $119 $ 372 $ 644 $1,420 |
(1) Class B shares convert to Class A shares approximately eight years after purchase; therefore, years nine and ten reflect Class A expenses.
CERTAIN INVESTMENT POLICIES AND RISKS
TURNOVER
MFS may engage in active and frequent trading in pursuing the fund's principal investment strategies. Frequent trading increases transaction costs, which may reduce the fund's return. Frequent trading can also result in the realization of a higher percentage of short-term capital gains and a lower percentage of long-term capital gains as compared to a fund that trades less frequently. Because short-term capital gains are distributed as ordinary income, this would generally increase your tax liability unless you hold your shares through a tax-deferred or exempt vehicle.
TEMPORARY DEFENSIVE POLICY
In response to market, economic, political, or other conditions, MFS may depart from the fund's principal investment strategies by temporarily investing for defensive purposes. When MFS invests defensively, different factors could affect the fund's performance and the fund may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Information about investment strategies and investment types not described in the Prospectus and the risks associated with those investment strategies and investment types are described in the fund's Statement of Additional Information ("SAI").
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS"), located at 500 Boylston Street, Boston, Massachusetts, serves as the investment adviser for the fund. Subject to the supervision of the Board of Trustees, MFS is responsible for managing the fund's investments, executing transactions and providing related administrative services and facilities under an Investment Advisory Agreement between the fund and MFS.
For the fiscal year ended May 31, 2007, the fund paid MFS an effective management fee equal to 0.90% of the fund's average daily net assets.
The management fee set forth in the Investment Advisory Agreement is 0.90% annually of the first $1 billion of the fund's average daily net assets; 0.80% of the next $1 billion of the fund's average daily net assets; and 0.70% in excess of $2 billion of the fund's average daily net assets.
A discussion regarding the basis for the Board of Trustees' approval of the Investment Advisory Agreement is available in the fund's most recent semi-annual report for the six-month period that ends November 30.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $202 billion as of June 30, 2007.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of the MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, and inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries with respect to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The lawsuits assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940, the Employee Retirement Income Security Act of 1974 (ERISA), as well as fiduciary duties and other violations of common law. The lawsuits variously have been commenced as class actions or individual actions on behalf of investors who purchased, held, or redeemed shares of the MFS funds during specified periods, as
ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT
LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER),
NO. 1:04-MD-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS funds include RIGGS V. MFS ET AL., CASE NO. 04-CV-01162-JFM
(direct), HAMMERSLOUGH V. MFS ET AL., CASE NO. 04-MD-01620 (derivative), ANITA
WALKER V. MFS ET AL., CASE NO. 1:04-CV-01758 (ERISA), and REAVES V. MFS SERIES
TRUST I, ET AL., CASE NO. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District of
Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., ET AL., NO. 04CV10584 (GAO)
(a consolidated action, first filed on March 25, 2004) and MARCUS DUMOND, ET AL.
V. MASSACHUSETTS FINANCIAL SERVS. CO., ET AL., NO. 04CV11458 (GAO) (filed on May
4, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages,
punitive damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. Insofar as any of the actions is appropriately
brought derivatively on behalf of any of the MFS funds, any recovery will inure
to the benefit of the MFS funds. Several claims of the various lawsuits have
been dismissed; MFS and the other named defendants continue to defend the
various lawsuits.
DISCLOSURE OF PORTFOLIO HOLDINGS. The MFS funds have established a policy with respect to the disclosure of fund portfolio holdings. A description of this policy is provided in the SAI. In addition, by clicking on a fund name under "Select a fund" on the MFS Web site (Mfs.com), the following information is generally available to you:
INFORMATION APPROXIMATE DATE OF POSTING TO WEB SITE --------------------------------------------------------------------------- Fund's top 10 securities holdings as of each month's end 14 days after month end Fund's full securities holdings as of each month's end 24 days after month end |
If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for funds that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings
within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the funds or MFS may suspend the posting of this information or modify the elements of this web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
PORTFOLIO MANAGER(S)
Information regarding the portfolio manager(s) of the fund is set forth below. Further information regarding the portfolio manager(s), including other accounts managed, compensation, ownership of fund shares, and possible conflicts of interest, is available in the fund's SAI. The portfolio manager is primarily responsible for the day-to-day management of the fund.
PORTFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
----------------------------------------------------------------------------
Barnaby Wiener Portfolio Manager 2003 Investment Officer of MFS;
employed in the investment
management area of MFS since
1998.
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ADMINISTRATOR
MFS provides the fund with certain financial, legal, and other administrative services under a Master Administrative Services Agreement between the fund and MFS. Under the Agreement, MFS is paid an annual fee for providing these services.
DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of the fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. MFSC may receive a fee based on the costs it incurs in providing these services plus a target profit margin, including payments made to affiliated and unaffiliated service providers that provide certain sub-accounting and other shareholder services (shareholder servicing payments) and out-of-pocket expenses.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund-of-Funds and the fund, the fund may pay a portion of the transfer agent-related expenses of each MFS Fund-of-Funds, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of benefits realized or expected to be realized by the fund from the investment in the fund by the MFS Fund-of-Funds.
DESCRIPTION OF SHARE CLASSES
The fund offers Class A, Class B, Class C, and Class I shares through this prospectus. The fund also offers an additional class of shares, Class W shares. Class W shares are made available to fee-based wrap programs through a separate prospectus provided to investors eligible to purchase them.
Shareholders of another class of the fund may request that their shares be converted into Class W shares of the fund, if they satisfy the eligibility requirements for Class W shares. Conversions to Class W shares may not be available if your account is not held through a financial intermediary sponsor of a fee-based wrap program that has entered into an agreement with MFD to offer Class W shares to clients of the fee-based wrap program. If your account is held through a financial intermediary of a fee-based wrap program, please contact your financial intermediary sponsor of the fee-based wrap program to determine if Class W shares are available to you and to learn about other rules that may apply.
If a shareholder of another class of the fund converts to Class W shares of the fund, the transaction will be based on the respective net asset value of each class as of the trade date for the conversion. Consequently, the converting shareholder may receive fewer shares or more shares than originally owned, depending on that day's net asset values. The total value of the initially held shares, however, will equal the total value of the converted shares. A conversion between share classes in the same fund is a nontaxable event.
Class I shares generally are available only to the following eligible investors:
- certain retirement plans established for the benefit of employees and former employees of MFS or its affiliates;
- funds distributed by MFD that invest primarily in shares of MFS funds;
- retirement plans, endowments or foundations that: (i) have, at the time of purchase of Class I shares, aggregate assets of at least $100 million; and (ii) invest at least $10 million in Class I shares of the fund and other MFS funds;
- bank trust departments or law firms acting as trustee or manager for trust accounts which, on behalf of their clients (i) initially invest at least $100,000 in Class I shares of the fund, or (ii) have, at the time of purchase of Class I shares, aggregate assets of at least $10 million invested in Class I shares of the fund and other MFS funds; and
- certain retirement plans offered, administered, or sponsored by insurance companies, as permitted by MFD based on their overall relationship with MFS.
In addition, MFD may accept, in its sole discretion, investments in Class I shares from purchasers not listed above or that do not meet these qualification requirements.
SALES CHARGES AND WAIVERS OR REDUCTIONS
You may be subject to an initial sales charge when you purchase Class A, or a
CDSC when you redeem Class A, Class B, or Class C shares. These sales charges
are paid
to MFD.
In the circumstances described below, you may qualify for a sales charge waiver or reduction for purchases or redemptions of Class A, Class B, or Class C shares. In addition, other sales charge waivers or reductions may apply to certain transactions by retirement plans, section 529 tuition programs, and certain other groups (e.g., affiliated persons of MFS) and with respect to certain types of investment programs (e.g., certain wrap accounts or fund supermarket investments). Details regarding the types of investment programs and categories of investors eligible for these waivers or reductions are provided in the SAI, which is available to you free of charge, and on the fund's Web site at mfs.com. Some of these programs and waivers or reductions may not be available to you if your shares are held through certain types of accounts, such as retirement accounts and 529 plans, or certain accounts that you may have with your financial intermediary. Waivers or reductions may be eliminated, modified, and added at any time without providing advance notice.
CLASS A SHARES. You may purchase Class A shares at the offering price (which includes the applicable initial sales charge). In some cases, you may purchase Class A shares without an initial sales charge; in these cases, you will generally be subject to a 1% CDSC upon redemption within 12 months of your purchase.
The amount of the initial sales charge you pay when you buy Class A shares differs depending upon the amount you invest, as follows:
GROSS PURCHASE AMOUNT
AMOUNT OF PURCHASE (OFFERING PRICE*) NET AMOUNT INVESTED
-------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1,000,000 2.00% 2.04%
$1,000,000 or more None** None**
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* Offering price is calculated by dividing the net asset value of a share by the difference between 1 and the initial sales charge percentage. Because the offering price is rounded to two decimal places, actual sales charges you pay may be more or less than those calculated using these percentages.
** A 1% CDSC will generally apply to such purchases.
You pay no initial sales charge when you invest $1 million or more in Class A shares (or, with respect to certain retirement plans, if MFD determines in its sole discretion that the total purchases by the retirement plan (or by multiple plans maintained by the same plan sponsor) will equal or exceed within a reasonable period of time a specified threshold determined by MFD). However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS B SHARES. You may purchase Class B shares at net asset value without an initial sales charge, but if you redeem your shares within the first six years after purchase, you may be subject to a CDSC (declining from 4% during the first year to 0% after six years).
The CDSC is imposed according to the following schedule:
If you hold Class B shares for approximately eight years, they will convert to Class A shares of the fund. All Class B shares you acquire through the reinvestment of dividends and distributions will be held in a separate sub-account. Each time any Class B shares in your account convert to Class A shares, a proportionate number of the Class B shares in the sub-account will also convert to Class A shares.
CLASS C SHARES. You may purchase Class C shares at net asset value without an initial sales charge. However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS I SHARES. Eligible investors may purchase Class I shares at net asset value without an initial sales charge or a CDSC upon redemption.
SALES CHARGE WAIVERS OR REDUCTIONS. Below is a summary of certain investor programs whereby the applicable sales charge may be waived or reduced. You or your financial intermediary must inform MFSC upon purchasing fund shares of your intention to invest in a fund under one of the programs below. You can provide this information in your account application or through a separate document provided by your financial intermediary.
INVESTMENTS ELIGIBLE FOR:
-----------------------------------------
WAIVED INITIAL REDUCED INITIAL WAIVED
PROGRAM SALES CHARGE SALES CHARGE CDSC
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Letter of Intent X
Right of Accumulation X
Automatic Exchange Plan X*
Exchange Privilege X*
Systematic Withdrawal Plan X**
Distribution Reinvestment X
Distribution Investment Program X
Other Sales Charge Waivers X X
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* Investments under the Automatic Exchange Plan or certain other exchanges under the Exchange Privilege may be subject to a sales charge in certain cases.
** Not available for Class A shares and limited for Class B and Class C shares.
- LETTER OF INTENT (LOI). You may pay a reduced or no initial sales charge on purchases of Class A shares if you intend to invest a specific dollar amount, based on the gross amount of your investment (including the amount of any sales charge paid), including investments through any linked accounts in any class of any MFS fund (and the MFS Fixed Fund, a bank collective investment trust) within a 13-month period (36 months for a $1 million commitment). Distributions reinvested in additional shares of the fund or distributions from other MFS funds automatically invested in shares of the fund will not apply toward the satisfaction of the LOI.
For each purchase you make under the LOI you will pay the initial sales charge rate applicable to the total amount you intended to purchase. If, however, you do not purchase the intended amount within the relevant time period, your account will be adjusted by redemption of the amount of shares needed to pay the higher initial sales charge level for the amount actually purchased.
To establish a LOI, you may complete the Letter of Intent section of your account application or service application. In order to benefit from the LOI, you or your financial intermediary must inform MFSC that the LOI is in effect each time shares of a fund are purchased.
- RIGHT OF ACCUMULATION (ROA). Under the ROA, you may pay a reduced or no initial sales charge on purchases of Class A shares by aggregating the total dollar amount of your investment with your existing investments or any linked accounts in any class of any MFS fund (and the MFS Fixed Fund), based on the current maximum public offering price of the funds. For example, you will pay a sales charge on your current purchase at the rate applicable to the total value of all eligible accounts based on the sales charge schedule above.
- LINKING ACCOUNTS FOR LOI AND ROA. For purposes of obtaining reduced sales charges under the LOI and ROA, you may combine the value of your current purchase of shares of an MFS fund with the value of existing accounts held with the MFS funds (or the MFS Fixed Fund) by you, your spouse (or legal equivalent under applicable state law), and your children under the age of 21.
Eligible accounts that you may link under a LOI and ROA may include:
- Individual accounts;
- Joint accounts;
- Trust accounts of which you, your spouse (or legal equivalent under applicable state law), or child under the age of 21 is the grantor;
- MFS 529 College Savings Plan accounts;
- Certain single-participant retirement plan accounts;
- Certain Individual Retirement Accounts;
- Uniform Gifts/Transfers to Minor Acts accounts; and
- Accounts held in the name of your financial intermediary on your behalf, except accounts investing in Class W shares of certain MFS funds.
In order to link such accounts under a LOI or ROA, the broker/dealer at the time of your current purchase must be the broker/dealer (or the clearing broker/dealer for your broker/dealer so long as your account is not aggregated by the clearing broker/dealer with other accounts) for any additional accounts to be linked. MFS fund shares held as follows cannot be combined with your current purchase for purposes of a LOI or ROA:
- Shares held indirectly through financial intermediaries other than the broker/dealer for your current purchase (for example, shares held in a different broker/dealer's brokerage account or with a bank, an insurance company separate account or an investment adviser); or
- Shares held directly in a MFS fund account on which the broker/dealer is different than the broker/dealer for your current purchase.
It is your responsibility to inform the broker/dealer for each current purchase of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. If you have not designated a broker/dealer, you should inform MFSC directly of any accounts held with the MFS funds that you believe are eligible to be linked under a
LOI or a ROA. You should provide your financial intermediary (including MFSC if you have not designated a broker/dealer) with certain supporting information at the time of each purchase regarding accounts held with the MFS funds that are eligible to be combined for purposes of a LOI or ROA. Such information may include shareholder identification numbers or applicable account numbers or account statements. You should request that your financial intermediary provide this information to the funds or their agents when placing each purchase order.
SPECIAL NOTE FOR LOI OR ROA ELIGIBLE ACCOUNTS LINKED PRIOR TO MAY 1, 2006. Any LOI or ROA eligible accounts linked prior to May 1, 2006, will remain linked to the extent the broker/dealer information for such accounts is not modified. In the event you change the broker/dealer for any such account, your accounts will no longer be eligible to be linked under a LOI or ROA. In addition, you will not be able to link additional accounts to the extent they do not meet the criteria discussed above.
- AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $2,000 in the fund, you may participate in the automatic exchange plan, a dollar-cost averaging program. This plan permits you to make automatic periodic exchanges from your account in the fund for shares of the same class of other MFS funds. Exchanges will generally be made at net asset value without any sales charges. If you exchange shares out of the MFS Money Market Fund or MFS Government Money Market Fund, or if you exchange Class A shares out of the MFS Cash Reserve Fund into Class A shares of any other MFS fund, you will pay an initial sales charge if you have not already paid this charge on these shares.
- SYSTEMATIC WITHDRAWAL PLAN. If you have an account balance of at least $5,000 in your account in the fund, you may elect to receive (or designate someone else to receive) regular periodic payments (of at least $50 if by check) through an automatic redemption of Class A, Class B, Class C and Class I. For Class B and Class C shares, you may incur a CDSC when Class B or Class C shares are redeemed under the plan (or plans if more than one plan is established) if amounts greater than 10% of the value of your account are withdrawn under the plan(s) in any one year (with respect to Class B shares, determined at the time of your first withdrawal under the plan(s) or January 1, 2007, whichever is later and reset annually thereafter and with respect to Class C shares, determined at the time the plan is established). For Class A shares, you may incur a CDSC when Class A shares are redeemed under this plan.
- DISTRIBUTION REINVESTMENT. You may automatically reinvest dividend and capital gain distributions in the same fund without paying an initial sales charge.
- DISTRIBUTION INVESTMENT PROGRAM. You may automatically reinvest dividend and capital gain distributions into the same class of another MFS fund without paying a CDSC or an initial sales charge.
CALCULATION OF CDSC. As discussed above, certain investments in Class A, Class B, and Class C shares are subject to a CDSC. For purposes of calculating the CDSC, purchases made on any day during a calendar month will age one month on the last day of that month, and on the last day of each subsequent month. For example, a 1% CDSC on Class A shares purchased on August 10 will expire at the close of business on July 31 of the following calendar year, and a redemption of those shares made on or after August 1 of the following calendar year will not be subject to the CDSC.
Shares acquired through reinvestment of distributions are not subject to a CDSC. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. For purposes of determining the CDSC, if you sell only some of your shares, shares not subject to a CDSC are sold first, followed by shares held the longest.
DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"). Under the Distribution Plan, the fund pays distribution and service fees to MFD to support the sale and distribution of Class A, Class B, and Class C shares, as well as shareholder servicing and account maintenance activities. The fund has not adopted a Rule 12b-1 plan with respect to its Class I shares. These distribution and service fees equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
MAXIMUM TOTAL
DISTRIBUTION AND
CLASS MAXIMUM DISTRIBUTION FEE MAXIMUM SERVICE FEE SERVICE FEE
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Class A 0.10% 0.25% 0.35%
Class B 0.75% 0.25% 1.00%
Class C 0.75% 0.25% 1.00%
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These fees are paid out of fund assets of the applicable class of shares. Because these fees are an ongoing expense of the fund, they increase the cost of your investment over time and may cost you more than other types of sales charges.
FINANCIAL INTERMEDIARY COMPENSATION
The term "financial intermediary" includes any broker/dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administrator, insurance company, and any other institutions having a selling, administration, or any similar agreement with MFD, MFS, or one of its affiliates.
Financial intermediaries receive various forms of compensation in connection with the sale of shares of a fund and/or the servicing of shareholder accounts. Financial intermediaries may receive such compensation (i) in the form of up front commissions and ongoing asset-based compensation paid by MFD based on sales charges received and expected to be received by MFD from shareholders and Distribution Plan distribution and service payments received by MFD from the fund, (ii) in the form of shareholder servicing payments paid by MFD and/or one or more of its affiliates (for purposes of this section only, collectively, "MFD") based on the receipt of such payments by MFD from the fund, and (iii) in the form of payments paid by MFD from MFD's own additional resources.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories and such payments can be significant to the financial intermediary. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular fund or share class.
Financial intermediaries may receive up front commissions of up to the following percentage amounts for sales of the following share classes:
UP FRONT COMMISSION AS A
SHARE CLASS PERCENTAGE OF OFFERING PRICE
------------------------------------------
Class A 5.75%
Class B 3.75%
Class C 1.00%
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Financial intermediaries may also receive all or a portion of the following payments: Distribution Plan distribution and service fees as described in "Description of Share Classes - Distribution and Service Fees"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
In addition, financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS funds, to cooperate with MFD's promotional efforts and/or in recognition of their marketing, administrative services, and/or processing support. This compensation from MFD is not reflected in the fees and expenses listed in the fee table section of the fund's prospectus. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary and the quality of the overall relationship with the financial intermediary.
These additional payments by MFD may take the form of payments to financial intermediaries that provide marketing support and administrative services to
MFD with respect to fund shares sold or held through the financial intermediary's retail distribution network and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. MFD may also make payments to financial intermediaries to help offset the cost associated with client account maintenance support, statement preparation, and transaction processing. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, MFD may make other payments or allow other promotional incentives or payments to financial intermediaries.
You can find further details in the SAI about the payments made by MFD and the services provided by financial intermediaries. Financial intermediaries may charge you additional fees and/or commissions other than those disclosed in this prospectus. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries that sell fund shares may also act as a broker/dealer in connection with a MFS fund's purchase or sale of portfolio securities. However, the fund and MFS do not consider financial intermediaries' sales of shares of a MFS fund as a factor when choosing broker/dealers to effect portfolio transactions for the MFS funds.
HOW TO PURCHASE, REDEEM, AND EXCHANGE SHARES
You may purchase, redeem, and exchange shares of the fund in the manner described below. If you buy or sell shares of a fund through a retirement account, 529 plan, or financial intermediary, the procedures for buying, selling, and exchanging shares of the fund and the features, policies and fees may differ from those discussed in this prospectus.
HOW TO PURCHASE SHARES
Your shares will be bought at the offering price (the net asset value per share plus any applicable initial sales charge) next calculated after your purchase order is received in proper form. MFSC reserves the right to reject any purchase order that is not in proper form. The specific requirements for proper form vary among account types and transactions. Certain restrictions apply to the use of a transfer on death registration. You or your financial intermediary should contact MFSC to obtain a Transfer on Death registration form and for information regarding MFSC's other requirements for transfer on death registrations.
The fund may reject for any reason, or cancel as permitted or required by law, any purchase orders, including exchanges. The fund may stop offering shares completely, or may offer shares only on a limited basis, for a period of time or permanently.
The fund is required by law to obtain from you certain personal information that will be used to verify your identify. If you do not provide the information, the fund may not be able to open your account. The fund must also take certain steps to verify that the account information you provide is correct.
CLASS A, CLASS B, AND CLASS C SHARES. With respect to Class A, Class B, and Class C shares, you can establish an account by having your financial intermediary process your purchase. The minimum initial investment is generally $1,000, except for: fee-based and wrap accounts offered through certain financial intermediaries, for which there is no minimum initial investment; and IRAs, for which the minimum initial investment is generally $250 ($200 for rollovers from certain Serviced Plans). In addition, the minimum initial investment is $50 for automatic investment or exchange plans. MFSC waives or lowers the initial investment minimum for certain types of investors and investments.
Purchases of Class B shares are subject to a total account value limitation at the time of purchase of $99,999, and purchases of Class C shares are subject to a total account value limitation at the time of purchase of $999,999. If your existing accounts for all share classes held with the MFS funds have a total value equal to $99,999 for Class B share purchases or $999,999 for Class C share purchases, you will not be able to purchase Class B or Class C shares, as applicable. For the purpose of determining your total account value, existing accounts for all share classes held with the MFS funds that are linked under a LOI or ROA will be included.
The fund or its agents may at their discretion accept a purchase request for Class B shares or Class C shares that would otherwise exceed the total account value limitation of $99,999 and $999,999, respectively, under certain circumstances, including, but not limited to, purchases by certain types of group retirement plans sponsored or serviced by MFS or an affiliate.
You may have your financial intermediary process your subsequent purchases or you may contact MFS directly. Generally, there is no minimum for subsequent investments except there is generally a $50 minimum for subsequent investments by check and through automatic exchange plans.
- ADDITIONAL PURCHASES DIRECTLY THROUGH MFSC.
- BY MAIL. You may purchase additional shares by mailing a check with the returnable portion of your statement to MFSC.
- BY TELEPHONE. You may purchase additional shares by transferring money by phone from your pre-designated bank account. You must elect this privilege on your account application or service application.
- ELECTRONICALLY. You may purchase additional shares from a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- BY WIRE. To purchase additional shares by wire, call MFSC for instructions.
- AUTOMATIC INVESTMENT PLAN. You may purchase additional shares by automatically investing a designated amount from your checking or savings account on any day of the month. You must elect this privilege on your account application or service application.
- ADDITIONAL PURCHASES THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary purchase shares on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
CLASS I SHARES. With respect to Class I shares, you can establish an account through your MFD representative, by contacting MFSC directly, or by having your financial intermediary process your purchase. Generally, there are no initial or subsequent investment minimums except as may be required to be an eligible purchaser of Class I shares.
HOW TO REDEEM SHARES
Your shares will be sold at the net asset value per share next calculated after
your redemption order is received in proper form, minus any applicable CDSC.
MFSC
reserves the right to reject any redemption request that is not in proper form. The specific requirements for proper form vary among types of accounts and transactions. In certain circumstances, you may need to have your signature guaranteed and/or submit additional documentation to redeem your shares. In general, no signature guarantee is required for a redemption order for up to $100,000 that is signed by all owners or fiduciaries identified in the account registration, paid as registered, and mailed to the address of record.
The fund normally sends out your redemption proceeds within seven days after your request is received in proper form. Under unusual circumstances, such as when the New York Stock Exchange is closed, trading on the Exchange is restricted, or as permitted by the SEC, the fund may suspend redemptions or postpone payment for more than seven days. Redemption proceeds (other than exchanges) may be delayed until money from prior purchases sufficient to cover your redemption has been received and collected. This can take up to seven days after a purchase.
You may redeem your shares either by having your financial intermediary process your redemption or by contacting MFSC directly.
REDEEMING DIRECTLY THROUGH MFSC.
- BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the name of the fund, your account number, and the number of shares or dollar amount to be redeemed.
- BY TELEPHONE. If a signature guarantee is not required, you can call MFSC to have shares redeemed from your account and proceeds mailed to the address of record on the account. You can also call MFSC to have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account. You must elect this privilege on your account application or service application if you wish to have proceeds wired to your bank account.
- ELECTRONICALLY. You can have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- SYSTEMATIC WITHDRAWAL PLAN. For Class A, Class B, Class C and Class I shares, you may elect to automatically receive (or designate someone else to receive) regular periodic payments through an automatic redemption of such classes. Please contact MFSC for details.
REDEEMING THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary process a redemption on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. If a signature guarantee is required, your signature may be guaranteed by an eligible bank, broker/dealer, credit union, national securities exchange, registered securities association, clearing agency, or savings association. MFSC may require additional documentation for certain types of registrations and under certain circumstances. Signature guarantees and this additional documentation shall be accepted in accordance with policies established by MFSC, and MFSC may, at its discretion, make certain exceptions to these requirements. Please contact MFSC with any questions and for the requirements for your particular situation.
SHARE CERTIFICATES. If certificates are outstanding for your shares, you may only redeem such shares by mailing the certificates to MFSC. Telephone, electronic, and systematic withdrawal plan redemptions and checkwriting are not available if certificates are outstanding for your shares.
REDEMPTIONS IN KIND. If, during any 90-day period, you redeem shares in an amount greater than the lesser of $250,000 or 1% of fund net assets, the fund has the right to pay the redemption amount above such threshold by a distribution in-kind of portfolio securities (redemption in kind). In the event that the fund makes a redemption in kind, you should expect to incur brokerage and other transaction charges when converting the securities to cash, and the securities may increase or decrease in value before you sell them.
INVOLUNTARY REDEMPTIONS. Because it is costly to maintain small accounts, the MFS funds have reserved the right to redeem your shares without your permission when your account contains less than $500 due to your redemptions or exchanges. Before the fund makes such a redemption, you will be notified and given 60 days to increase your investment to at least $500.
In addition, the MFS funds have reserved the right to redeem your shares without your permission in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Any applicable CDSC will be assessed upon redemption of your shares.
HOW TO EXCHANGE SHARES
An exchange involves the redemption of shares of one fund and the purchase of shares of another fund.
EXCHANGE PRIVILEGE. You can exchange your shares for shares of the same class of most other MFS funds by having your financial intermediary process your exchange request or by contacting MFSC directly. Your shares will be bought at the net asset value next calculated after your exchange order is received in proper form.
You can exchange your Class A shares and your Class I shares for shares of the MFS Money Market Fund or the MFS Government Money Market Fund.
Certain qualified retirement plans may make certain exchanges between the MFS funds and the MFS Fixed Fund. With respect to Class C shares subject to a CDSC,
you will only be eligible to make the exchange to the MFS Fixed Fund if the CDSC would have been waived had the Class C shares been redeemed. Contact MFSC for information concerning transactions involving the MFS Fixed Fund.
The MFS funds allow certain financial intermediaries to place exchange orders on behalf of a group of their discretionary investment advisory clients ("group exchange orders"). As with any exchange request, the funds and their agents reserve the right to reject any group exchange order, and the funds' agents will generally reject any group exchange order received by the funds or their agents after 1 p.m., Eastern time. In addition, MFD has agreements with certain financial intermediaries which set forth the terms and conditions under which group exchange orders may be placed by these financial intermediaries. These conditions may be more restrictive than those applicable to individual exchange orders, and may include the requirement to provide the funds or their agents with advance notice of group exchange orders.
The minimum exchange amount is generally $1,000 (generally $50 for exchanges made under the automatic exchange plan) or all the shares in an account. MFSC waives or lowers the minimum exchange amount for certain types of investors and investments.
Shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged fund and the original purchase date of the shares subject to the CDSC.
Other funds may have different exchange restrictions. You should read the prospectus of the MFS fund into which you are exchanging and consider the differences in objectives, policies, and risks before making any exchange. The exchange privilege may be changed or discontinued at any time, and all exchanges are subject to certain limitations and MFS funds' policies concerning excessive trading practices, which are designed to protect the funds and their shareholders from the harmful effects of frequent trading.
OTHER CONSIDERATIONS
FREQUENT TRADING
- RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. The Board of Trustees of the MFS funds has adopted the purchase and exchange limitation policies described below, which it believes are reasonably designed to discourage frequent fund share transactions. MFSC seeks to monitor and enforce these policies, subject to oversight by the Board of Trustees, pursuant to procedures approved by the Board of Trustees. The MFS funds may alter their policies at any time without notice to shareholders.
- GENERAL PURCHASE AND EXCHANGE LIMITATION POLICIES. The MFS funds reserve the right to restrict, reject, or cancel (with respect to
cancellations, within one business day of the order), without any prior notice, any purchase or exchange order, including transactions believed to represent frequent trading activity. For example, MFSC may in its discretion restrict, reject, or cancel a purchase or exchange order even if the transaction is not subject to specific exchange or other limitations described in this prospectus if MFSC determines that accepting the order could interfere with the efficient management of a fund's portfolio, increase costs to the fund, dilute the value of an investment in the fund to long-term shareholders, or otherwise not be in the fund's best interests. In the event that MFSC rejects or cancels an exchange request, neither the redemption nor the purchase side of the exchange will be processed. Each MFS fund reserves the right to delay for one business day the processing of exchange requests in the event that, in MFSC's judgment, such delay would be in the fund's best interest, in which case both the redemption and purchase side of the exchange will receive the fund's net asset values at the conclusion of the delay period.
- SPECIFIC EXCHANGE AND PURCHASE LIMITATION POLICIES. Under the MFS Funds' purchase and exchange limitation policy, MFSC will generally restrict, reject or cancel purchase and exchange orders if MFSC determines that an accountholder has made two exchanges, each in an amount of $5,000 or more, out of an account in an MFS fund during a calendar quarter ("two exchange limit"). This policy does not apply to exchanges:
- out of the MFS money market funds; or
- initiated by a retirement plan trustee or sponsor rather than by a plan participant, and other similar non-discretionary exchanges (e.g., in connection with fund mergers/acquisitions/liquidations).
In circumstances where shareholders hold shares through financial intermediaries, the MFS funds may rely upon the financial intermediary's policy to restrict frequent trading and its monitoring of such policy in lieu of the MFS funds' two-exchange limit if MFSC believes that the financial intermediary's policy is reasonably designed to identify and curtail trading activity that is not in the best interest of the fund.
In addition, MFSC may make exceptions to this policy if, in its judgment, the transaction does not represent frequent trading activity, such as purchases made through systematic purchase plans or payroll contributions. In applying this policy, MFSC considers the information available to it at the time and reserves the right to consider trading multiple accounts under common ownership, control, or influence to be trading out of a single account.
Exchanges made on the same day in the same account are aggregated for purposes of counting the number and dollar amount of exchanges made by the accountholder (e.g., a shareholder who on the same day
exchanges $6,000 from one MFS fund into two other MFS funds, by exchanging $3,000 into each of the two MFS funds, will be viewed as having made one exchange transaction exceeding $5,000 in value).
- LIMITATIONS ON THE ABILITY TO DETECT AND CURTAIL FREQUENT TRADING PRACTICES. Shareholders seeking to engage in frequent trading practices may deploy a variety of strategies to avoid detection, and, despite the efforts of MFSC to prevent frequent trading, there is no assurance that MFSC will be able to identify such shareholders or curtail their trading practices. The ability of MFSC to detect and curtail frequent trading practices may also be limited by operational systems and technological limitations.
MFSC receives purchase, exchange, and redemption orders through certain financial intermediaries that hold omnibus accounts with an MFS fund. Omnibus account arrangements are common forms of holding shares of MFS funds, particularly among certain financial intermediaries such as brokers, retirement and 529 plans, investment advisors, and variable insurance products. A financial intermediary's policy restricting frequent trading may be more or less restrictive than the MFS funds' policies, may permit certain transactions not permitted by the MFS funds' policies, or prohibit transactions not subject to the MFS funds' policies.
MFSC is generally not able to identify trading by a particular underlying shareholder within an omnibus account, which makes it difficult or impossible to determine if a particular underlying shareholder has violated the two exchange limit or is otherwise engaged in frequent trading. However, MFSC reviews trading activity at the omnibus level to detect suspicious trading activity. If MFSC detects suspicious trading activity at the omnibus level it will contact the financial intermediary to request underlying shareholder level activity to determine whether there is underlying shareholder level frequent trading. In certain instances, a financial intermediary may be unwilling or unable to provide MFSC with information about underlying shareholder level activity.
If frequent trading is identified, MFSC will take appropriate action. MFSC's ability to monitor and deter frequent trading in omnibus accounts at the underlying shareholder level is dependent upon the capability and cooperation of the financial intermediary. Accordingly, depending upon the composition of a fund's shareholder accounts, the level of cooperation provided by the financial intermediary and in light of efforts made by certain shareholders to evade these limitations, MFSC may not be in a position to monitor and deter frequent trading with respect to a significant percentage of a fund's shareholders. You should consult your financial intermediary regarding the application of these limitations and whether your financial intermediary imposes any additional or different limitations.
- FREQUENT TRADING RISKS. To the extent that the MFS funds or their agents are unable to curtail excessive trading practices in a fund, these practices may interfere with the efficient management of the fund's portfolio, may result in increased transaction and administrative costs, and may adversely impact the fund's performance.
In addition, to the extent that the fund invests in foreign securities, the interests of long-term shareholders may be diluted as a result of time-zone arbitrage, a short-term trading practice that seeks to exploit changes in the value of the fund's investments that result from events occurring after the close of the foreign markets on which the investments trade, but prior to the time the fund determines its net asset value. The fund's use of fair valuation can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that the fund's fair valuation policies and procedures will prevent dilution of the fund's net asset value by short-term traders.
To the extent that the fund invests in securities that trade infrequently or are difficult to value, such as the securities of smaller companies, high yield debt instruments, and floating rate loans, the interests of long-term shareholders may be diluted as a result of price arbitrage, a short-term trading strategy that seeks to exploit perceived pricing inefficiencies in the fund's investments. Such short-term trading strategies may interfere with efficient management of the fund's portfolio to a greater degree than funds that invest in more frequently traded or liquid securities, in part because the fund may have difficulty selling these portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage may also cause dilution in the value of fund shares held by other shareholders.
UNAUTHORIZED TRANSACTIONS. MFS will not be responsible for losses that result from unauthorized transactions unless MFSC does not follow procedures reasonably designed to verify your identity. If an account has more than one owner or authorized person, MFSC will accept telephone and online instructions from any one owner or authorized person. It is important that you contact MFSC immediately about any transactions you believe to be unauthorized.
ABILITY TO CONTACT MFSC. Certain methods of contacting MFSC, such as by mail, telephone, or electronically, may be unavailable or delayed (for example, after natural disasters or during periods of significant/major political, social, or economic instability).
RESERVATION OF OTHER RIGHTS. In addition to the rights expressly stated elsewhere in this prospectus, MFSC reserves the right to: 1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; and 2) freeze any account or suspend account services when MFSC has received reasonable notice (written or otherwise) of a dispute between registered or
beneficial account owners or when MFSC believes a fraudulent transaction may occur or has occurred.
ANTI-MONEY LAUNDERING RESTRICTIONS. Federal law requires the fund to implement policies and procedures reasonably designed to prevent, detect and report money laundering and other illegal activity. The fund, consistent with applicable federal law, may redeem your shares and close your account; suspend, restrict or cancel purchase and redemption orders; process redemption requests and withhold your proceeds; and take other action if it is unable to verify your identity within a reasonable time or conduct required due diligence on your account or as otherwise permitted by its anti-money laundering policies and procedures. Any applicable CDSC will be assessed upon redemption of your shares.
CONFIRMATIONS IN QUARTERLY STATEMENTS. Transactions made under certain periodic investment and withdrawal programs (including reinvestment plans) will be confirmed on quarterly account statements.
OTHER INFORMATION
VALUATION
The price of each class of the fund's shares is based on its net asset value. The net asset value of each class of shares is determined each day the New York Stock Exchange (the Exchange) is open for trading as of the close of regular trading on the Exchange (generally 4:00 p.m. Eastern time). However, net asset value may be calculated earlier as permitted by the SEC. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. On days when the Exchange is closed (such as week-ends and holidays), net asset value is not calculated, and the fund does not transact purchase and redemption orders. To the extent the fund's assets are traded in other markets on days when the fund does not price its shares, the value of the fund's assets may change when you will not be able to purchase or redeem shares.
To determine net asset value, the fund's investments for which reliable market quotations are readily available are valued at market value. Certain short term debt instruments are valued at amortized cost.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund's investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees.
Under the fund's valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. These valuations can be based on both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as a foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net
asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund's net asset value may differ from quoted or published prices for the same investments.
DISTRIBUTIONS
The fund intends to declare and pay a dividend to shareholders at least annually.
Any capital gains are distributed at least annually.
DISTRIBUTION OPTIONS
The following distribution options are generally available:
- Dividend and capital gain distributions reinvested in additional shares (THIS OPTION WILL BE ASSIGNED IF NO OTHER OPTION IS SPECIFIED);
- Dividend distributions in cash; capital gain distributions reinvested in additional shares;
- Dividend and capital gain distributions in cash; or
- Dividend and capital gain distributions reinvested into the same class of shares of another MFS Fund.
The distribution option for accounts with dividend distributions of less than $10 will generally be changed to reinvestment in additional shares of the fund. If you have elected to receive distributions in cash, and the postal service is unable to deliver checks to your address of record, or you do not respond to mailings from MFSC with regard to uncashed distribution checks, your distribution option may be converted to having all distributions reinvested in additional shares. You should contact MFSC to change your distribution option, and your request to do so must be received by MFSC before the record date for a distribution in order to be effective for that distribution. No interest will accrue on amounts represented by uncashed distribution checks.
TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in the fund may have on your particular
tax situation, including possible foreign, state, and local taxes. Also, this discussion does not apply to shares of the fund held through tax-exempt retirement plans.
The fund expects to distribute substantially all of its income and gains annually. Distributions from the fund are taxable whether you receive them in cash or reinvest them in additional shares. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Any gain resulting from the sale or exchange of your shares will generally also be subject to tax.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the fund owned the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains from the sale of investments that the fund owned for more than one year and that are properly designated by the fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the fund owned for one year or less will be taxable as ordinary income. For taxable years beginning before January 1, 2011, if some or all of the fund's income derives from "qualified dividend income" and if you are an individual who meets holding period and other requirements with respect to the fund's shares, those distributions that are properly designated by the fund as derived from "qualified dividend income" are taxed at the rates applicable to long-term capital gains.
Long-term capital gain rates applicable to most individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
The fund's investments in foreign securities may be subject to foreign withholding taxes, which will decrease the fund's return on those securities. The fund generally will be eligible to elect to "pass through" to you foreign income taxes that it pays, in which case you must include your share of those taxes in gross income as a distribution from the fund and you will be allowed to claim a credit (or a deduction, if you itemize deductions) for such amounts on your federal income tax return, subject to certain limitations. In addition, the fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the fund's recognition of ordinary income and may affect the timing, amount, or character of the fund's distributions.
The Form 1099 that is mailed to you every January details your distributions and how they are treated for federal tax purposes.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS AND PROSPECTUSES
The fund produces financial reports every six months and updates its prospectus annually. To avoid sending duplicate copies of materials to households, only one copy of the fund's annual and semiannual report and prospectus will be mailed to
shareholders having the same residential address on the fund's records. However, any shareholder may contact MFSC (please see back cover for address and telephone number) to request that copies of these reports and prospectuses be sent personally to that shareholder.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a fund's financial performance for the past five years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent registered public accounting firm, whose report, together with the fund's financial statements, are included in the fund's Annual Report to shareholders. The fund's Annual Report is available upon request by contacting MFS Service Center, Inc. (please see back cover for address and telephone number). The financial statements contained in the Annual Report are incorporated by reference into the SAI. The fund's independent registered public accounting firm is Ernst & Young LLP.
YEARS ENDED 5/31
-----------------------------------------------
2007 2006 2005 2004 2003
CLASS A
Net asset value, beginning of period $ 29.16 $ 24.20 $ 21.06 $ 16.14 $ 16.97
-------- -------- -------- ------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.49 $ 0.38 $ 0.41 $ 0.13 $ 0.08
Net realized and unrealized gain (loss) on investments
and foreign currency 5.75 6.62 3.34 4.85 (0.91)
-------- -------- -------- ------- --------
Total from investment operations $ 6.24 $ 7.00 $ 3.75 $ 4.98 $ (0.83)
-------- -------- -------- ------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.42) $ (0.21) $ (0.06) $ (0.06) $ --
From net realized gain on investments and foreign
currency transactions (2.24) (1.83) (0.55) -- --
-------- -------- -------- ------- --------
Total distributions declared to shareholders $ (2.66) $ (2.04) $ (0.61) $ (0.06) $ --
-------- -------- -------- ------- --------
Net asset value, end of period $ 32.74 $ 29.16 $ 24.20 $ 21.06 $ 16.14
======== ======== ======== ======= ========
Total return (%) (r)(s)(t) 22.17 30.04 17.89 30.88 (4.89)
-------- -------- -------- ------- --------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 1.49 1.63 1.68 2.04 2.16
Expenses after expense reductions (f) 1.49 1.60 1.65 1.90 2.08
Net investment income 1.61 1.41 1.78 0.67 0.51
Portfolio turnover 49 54 37 82 92
Net assets at end of period (000 omitted) $386,570 $242,369 $142,789 $66,216 $ 39,161
|
YEARS ENDED 5/31
-------------------------------------------
2007 2006 2005 2004 2003
CLASS B
Net asset value, beginning of period $ 28.19 $ 23.47 $ 20.51 $ 15.75 $ 16.65
------- ------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.25 $ 0.17 $ 0.21 $ 0.01 $ 0.00(w)
Net realized and unrealized gain (loss) on investments
and foreign currency 5.57 6.45 3.30 4.75 (0.90)
------- ------- ------- ------- -------
Total from investment operations $ 5.82 $ 6.62 $ 3.51 $ 4.76 $ (0.90)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.22) $ (0.07) $ -- $ -- $ --
From net realized gain on investments and foreign
currency transactions (2.24) (1.83) (0.55) -- --
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (2.46) $ (1.90) $ (0.55) $ -- $ --
------- ------- ------- ------- -------
Net asset value, end of period $ 31.55 $ 28.19 $ 23.47 $ 20.51 $ 15.75
======= ======= ======= ======= =======
Total return (%) (r)(s)(t) 21.36 29.22 17.16 30.22 (5.41)
------- ------- ------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 2.14 2.28 2.33 2.58 2.66
Expenses after expense reductions (f) 2.14 2.25 2.30 2.44 2.58
Net investment income 0.86 0.64 0.93 0.07 0.02
Portfolio turnover 49 54 37 82 92
Net assets at end of period (000 omitted) $79,000 $70,758 $57,356 $37,076 $26,608
|
YEARS ENDED 5/31
-----------------------------------------------
2007 2006 2005 2004 2003
CLASS C
Net asset value, beginning of period $ 27.67 $ 23.14 $ 20.24 $ 15.55 $16.44
------- ------- -------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.28 $ 0.18 $ 0.29 $ 0.03 $ 0.02
Net realized and unrealized gain (loss)
on investments and foreign currency 5.43 6.34 3.16 4.68 (0.91)
------- ------- -------- ------- ------
Total from investment operations $ 5.71 $ 6.52 $ 3.45 $ 4.71 $(0.89)
------- ------- -------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.25) $ (0.16) $ -- $ (0.02) $ --
From net realized gain on investments and foreign
currency transactions (2.24) (1.83) (0.55) -- --
------- ------- -------- ------- ------
Total distributions declared to shareholders $ (2.49) $ (1.99) $ (0.55) $ (0.02) $ --
Net asset value, end of period $ 30.89 $ 27.67 $ 23.14 $ 20.24 $15.55
======= ======= ======== ======= ======
Total return (%) (r)(s)(t) 21.36 29.27 17.09 30.27 (5.41)
------- ------- -------- ------- ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 2.14 2.28 2.33 2.58 2.66
Expenses after expense reductions (f) 2.14 2.25 2.30 2.44 2.58
Net investment income 0.96 0.68 1.29 0.14 0.13
Portfolio turnover 49 54 37 82 92
Net assets at end of period (000 omitted) $91,372 $62,896 $ 35,808 $13,322 $8,248
|
YEARS ENDED 5/31
-------------------------------------------
2007 2006 2005 2004 2003
CLASS I
Net asset value, beginning of period $ 29.94 $ 24.75 $ 21.52 $16.45 $17.20
-------- -------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.64 $ 0.60 $ 0.79 $ 0.18 $ 0.10
Net realized and unrealized gain
(loss) on investments and foreign currency 5.88 6.68 3.12 5.01 (0.85)
-------- -------- ------- ------ ------
Total from investment operations $ 6.52 $ 7.28 $ 3.91 $ 5.19 $(0.75)
-------- -------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.51) $ (0.26) $ (0.13) $(0.12) $ --
From net realized gain on investments and foreign
currency transactions (2.24) (1.83) (0.55) -- --
-------- -------- ------- ------ ------
Total distributions declared to shareholders $ (2.75) $ (2.09) $ (0.68) $(0.12) $ --
-------- -------- ------- ------ ------
Net asset value, end of period $ 33.71 $ 29.94 $ 24.75 $21.52 $16.45
======== ======== ======= ====== ======
Total return (%) (r)(s) 22.56 30.54 18.23 31.57 (4.30)
-------- -------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL
DATA:
Expenses before expense reductions (f) 1.14 1.28 1.34 1.58 1.66
Expenses after expense reductions (f) 1.14 1.25 1.31 1.44 1.58
Net investment income 2.04 2.17 3.32 0.80 0.74
Portfolio turnover 49 54 37 82 92
Net assets at end of period (000 omitted) $617,518 $301,533 $87,707 $ 627 $ 260
|
Any redemption fees charged by the fund during the 2004 and 2005 fiscal years resulted in a per share impact of less than $0.01.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
(t) Total returns do not include any applicable sales charges.
(w) Per share amount was less than $0.01.
MFS INTERNATIONAL VALUE FUND
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF TRUSTEES. The Board of Trustees of the MFS funds has adopted procedures by which shareholders may send communications to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [fund name], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116-3741, Attention: Frank Tarantino, Independent Chief Compliance Officer of the Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the MFS fund to which they relate and (iii) identify the class and number of shares held by the shareholder.
IF YOU WANT MORE INFORMATION ABOUT MFS INTERNATIONAL VALUE FUND , THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's actual investments. Annual reports discuss the effect of recent market conditions and investment strategies on the fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated October 1, 2007, provides more detailed information about the fund and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: mfs.com
Information about the fund (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other information about the fund are available on the Edgar Database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-4492.
Class W Shares
MFS INTERNATIONAL VALUE FUND
PROSPECTUS OCTOBER 1, 2007
The Prospectus describes the MFS International Value Fund. The investment objective of the fund is to seek capital appreciation.
RISK RETURN SUMMARY 1 EXPENSE SUMMARY 8 CERTAIN INVESTMENT POLICIES AND RISKS 10 MANAGEMENT OF THE FUND 11 DESCRIPTION OF SHARE CLASSES 15 HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES 18 OTHER INFORMATION 24 FINANCIAL HIGHLIGHTS 28 The Securities and Exchange Commission has not approved or disapproved the fund's shares or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. |
RISK RETURN SUMMARY
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS (Massachusetts Financial Services Company, the fund's investment adviser) normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies that it believes are undervalued compared to their perceived worth (value companies). Value companies tend to have stock prices that are low relative to their earnings, dividends, assets, or other financial measures.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
PRINCIPAL INVESTMENT TYPES
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, and depository receipts for those securities.
DERIVATIVES: Derivatives are financial instruments whose value is based on the value of one or more indicators, such as a security, asset, currency, interest rate, credit rating or index. Derivatives often involve a counterparty to the transaction.
Derivatives include futures, forward contracts, options, structured notes, inverse floating rate instruments, swaps, caps, floors, and collars.
PRINCIPAL RISKS
As with any mutual fund, you could lose money on your investment in the fund. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The principal risks of investing in the fund are:
STOCK MARKET RISK: The price of an equity security fluctuates in response to issuer, market, economic, industry, political, and regulatory developments. Prices can decrease significantly in response to these developments, and these developments can affect a single issuer, issuers within a broad market sector, industry or geographic region, or the market in general. Different parts of the market and different types of securities can react differently to these developments. For example, the stocks of growth companies can react differently from the stocks of value companies, and the stocks of large cap companies can react differently from the stocks of small cap companies. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events, can have a dramatic adverse effect on stock markets.
COMPANY RISK: Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of an investment. The price of securities of smaller, less well-known companies can be more volatile than the price of securities of larger companies or the market in general.
VALUE COMPANY RISK: The stocks of value companies can continue to be undervalued for long periods of time and not realize their expected value.
FOREIGN RISK: Investments in securities of foreign companies, securities of companies with significant foreign exposure, and foreign currencies can involve additional risks relating to market, economic, political, or regulatory conditions and developments. Political, social, and economic instability, the imposition of currency or capital controls, or the expropriation or nationalization of assets in a particular country can cause dramatic declines in that country's economy. Less stringent regulatory, accounting, and disclosure requirements for issuers and markets are more common in certain foreign countries. Enforcing legal rights can be difficult, costly, and slow in certain foreign countries, and can be particularly difficult against foreign governments. Additional risks of foreign investments include trading, settlement, custodial, and other operational risks, and withholding and other taxes. These factors can make foreign investments, especially those in emerging markets, more volatile and less liquid than U.S. investments. In addition, foreign markets can react differently to market, economic, political, or regulatory developments than the U.S. market.
EMERGING MARKETS RISK: Emerging markets investments can involve additional and greater risks than the risks associated with investments in developed foreign markets securities. Emerging markets typically have less economic development, market structure and depth and regulatory oversight than developed countries. Emerging markets can also be subject to greater political, social, and economic instability. These factors can make emerging market investments more volatile and less liquid than investments in developed markets.
CURRENCY RISK: A decline in the value of a foreign currency relative to the U.S. dollar reduces the value of the foreign currency and investments denominated in that currency. In addition, the use of foreign exchange contracts to reduce foreign currency exposure can eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. The value of foreign currencies relative to the U.S. dollar fluctuates in response to, among other factors, interest rate changes, intervention (or failure to intervene) by U.S. or foreign governments, central banks, or supranational entities such as the International Monetary Fund, the imposition of currency controls, and other political or regulatory developments in the U.S. or abroad. Foreign currency values can decrease significantly both in the short term and over the long term in response to these and other developments.
GEOGRAPHIC CONCENTRATION RISK: Because MFS may invest a relatively large percentage of the fund's assets in issuers located in a single country, a small number of countries, or a particular geographic region, the fund's performance could be closely tied to the market, currency, economic, political, or regulatory conditions and developments in those countries or that region, and could be more volatile than the performance of more geographically-diversified funds.
DERIVATIVES RISK: Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicator(s). Gains or losses from derivatives can be substantially greater than the derivatives' original cost, and therefore, can involve leverage. Derivatives can be complex instruments and can involve analysis that differs from that required for other investment types used by the fund. If the value of a derivative does not correlate well with the particular market or other asset class the derivative is intended to provide exposure to, the derivative may not have the effect anticipated. Derivatives can also reduce the opportunity for gain or result in losses by offsetting positive returns in other investments. Derivatives can be less liquid than other types of investments.
INVESTMENT SELECTION RISK: The MFS analysis of an investment can be incorrect and its selection of investments can lead to an investment focus that results in the fund underperforming other funds with similar investment strategies and/or underperforming the markets in which the fund invests.
COUNTERPARTY AND THIRD PARTY RISK: Transactions involving a counterparty other than the issuer of the instrument, or a third party responsible for servicing the instrument, are subject to the credit risk of the counterparty or third party,
and to the counterparty's or third party's ability to perform in accordance with the terms of the transaction.
LIQUIDITY RISK: Certain investments and types of investments are subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. As a result, it may not be possible to sell the investment at any particular time or at an acceptable price.
LEVERAGING RISK: Certain transactions, including when-issued, delayed-delivery, and forward commitment purchases, loans of portfolio securities, and the use of some derivatives, can result in leverage. Leverage involves investment exposure in an amount exceeding the initial investment. In transactions involving leverage, a relatively small market movement or change in other underlying indicator can lead to significantly larger losses to the fund. Leverage can cause increased volatility by magnifying gains or losses on underlying investments.
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of the risks of investing in the fund by showing changes in the fund's performance over time. The performance table also shows:
- how the fund's performance over time compares with that of a broad measure of market performance and one or more other performance measures, and
- returns before the deduction of taxes and returns after the deduction of certain taxes for Class A shares.
Because Class W shares were initially offered for public sale on May 1, 2006, the class does not yet have a performance record to report. The bar chart and the performance table show performance of the fund's Class A shares, which are offered through a separate prospectus. Although the Class W and Class A shares would have similar annual returns (because they represent interests in the same portfolio of securities), Class W and Class A performance would differ to the extent that Class W has lower expenses. The chart and table provide past performance information. The fund's past performance (before and after taxes) does not necessarily indicate how the fund will perform in the future. The performance information in the chart and table is based upon calendar year periods, while the performance information presented under the caption "Financial Highlights" and in the fund's shareholder reports is based upon the fund's fiscal year. Therefore, these performance results may differ. The returns do not reflect any fees or charges imposed by a fee-based wrap program, through which an investment is made. If these fees or charges were included, they would reduce these returns.
BAR CHART. The bar chart shows changes over time in the annual total return of Class A shares for the past ten calendar years, and assumes the reinvestment of distributions. The chart and related notes do not take into account any sales
charges (loads) that you may be required to pay upon purchase or redemption of the fund's shares. If these sales charges were included, they would reduce these returns.
CALENDAR YEAR 1997 5.53% 1998 20.26% 1999 17.55% 2000 (4.08)% 2001 (15.75)% 2002 (6.95)% 2003 32.03% 2004 26.77% 2005 14.25% 2006 28.08% |
The total return for the six-month period ended June 30, 2007 was 8.06%. During the periods shown in the bar chart, the highest quarterly return was 17.43% (for the calendar quarter ended December 31, 1999) and the lowest quarterly return was (14.72)% (for the calendar quarter ended September 30, 2002).
PERFORMANCE TABLE. This table shows how the average annual total returns of Class A shares of the fund, before the deduction of taxes ("Returns Before Taxes"), compare to a broad measure of market performance and one or more other performance measures, and assumes the deduction of the maximum applicable sales loads (initial sales charge and/or contingent deferred sales charge (CDSC), as applicable), and the reinvestment of distributions. In addition, for Class A shares, this table shows Class A average annual total returns:
- after the deduction of taxes on distributions made on Class A shares, such as capital gains and income distributions ("Class A Shares' Return After Taxes on Distributions"), and
- after the deduction of taxes on both distributions made on Class A shares and on redemption of Class A shares, assuming that the shares are redeemed at the end of the periods for which returns are shown ("Class A Shares' Return After Taxes on Distributions and Sale of Class A Shares").
Average Annual Total Returns (for the Period Ended December 31, 2006)
SHARE CLASS 1 YEAR 5 YEARS 10 YEARS ---------------------------------------------- ------ ------- -------- RETURNS BEFORE TAXES A Shares, With Initial Sales Charge (5.75%) 20.71% 16.52% 9.98% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, With Initial Sales Charge (5.75%) 18.70% 15.63% 9.11% A Shares' Returns After Taxes on Distributions and Sale of Class A Shares With Initial Sales 14.86% 14.26% 8.45% Charge (5.75%) BENCHMARK COMPARISONS (RETURNS BEFORE TAXES) MSCI EAFE Value Index+* 31.05% 18.19% 10.62% MSCI EAFE Index +** 26.86% 15.43% 8.06% |
* Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Value Index - a market capitalization index that is designed to measure developed market equity performance for value securities, excluding the U.S. and Canada.
** Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Index - a market capitalization index that is designed to measure equity market performance in the developed markets, excluding the U.S and Canada.
+ Source: FactSet Research Systems Inc.
All performance results reflect any applicable fee and expense waivers in effect during the periods shown; without these, the results would have been lower.
After-tax returns are calculated using the historical highest individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your own tax situation, and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns are shown for only one of the fund's classes of shares, and after-tax returns for the fund's other classes of shares will vary from the returns shown.
The fund commenced investment operations on October 24, 1995 with the offering of Class A and Class B shares, and subsequently offered Class W shares on May 1, 2006.
Performance for Class W shares will include the performance of the fund's Class A shares for periods prior to their offering. Blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class specific operating expenses (such as Rule 12b-1 fees). Compared to performance Class W shares would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance for share classes with higher operating expenses than those of the share class to which they are blended, and lower performance for share classes with lower operating expenses than those of the share class to which they are blended.
Prior to November 30, 1998, Foreign & Colonial Management Ltd. ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), managed certain assets of the fund. MFS assumed all portfolio management responsibilities from FCM and FCEM for the fund on November 30, 1998. Performance information for periods prior to November 30, 1998 reflects this former sub-investment advisory relationship.
EXPENSE SUMMARY
EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy, redeem, and hold shares of the fund. The annual fund operating expenses are based on expenses incurred during the fund's most recently completed fiscal year adjusted to reflect annualized expenses. These expenses do not reflect the fees or charges imposed by a fee-based wrap program through which an investment is made. If these fees or charges had been included, your expenses would be higher. The fund's annual operating expense may vary in future years.
Shareholder Fees (fees paid directly from your investment)
SHARE CLASS W --------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) N/A Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is less) N/A |
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
SHARE CLASS W
----------------------------------------------------------------
Management Fees 0.90%
Distribution and/or Service (12b-1) Fees(1) 0.10%
Other Expenses(2) 0.27%
----
Total Annual Fund Operating Expenses(2) 1.27%
|
(1) The fund's Rule 12b-1 plan permits it to pay distribution fees to support the sale and distribution of the fund's Class W shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "Distribution Fees."
(2) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Total Annual Fund Operating Expenses" would be lower. "Other Expenses" also include the estimated payment of a portion of the transfer-agent-related expenses of the MFS funds that invest in the fund ("MFS Funds of Funds"). See "Management of the Fund-Special Servicing Agreement."
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. These examples do not reflect the fees and expenses imposed by the investment vehicle through which an investment in the fund is made. If these fees and expenses were included, your expenses would be higher.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you redeem your shares at the end of the time periods (unless otherwise indicated);
- Your investment has a 5% return each year and dividends and other distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your costs would be:
CERTAIN INVESTMENT POLICIES AND RISKS
TURNOVER
MFS may engage in active and frequent trading in pursuing the fund's principal investment strategies. Frequent trading increases transaction costs, which may reduce the fund's return. Frequent trading can also result in the realization of a higher percentage of short-term capital gains and a lower percentage of long-term capital gains as compared to a fund that trades less frequently. Because short-term capital gains are distributed as ordinary income, this would generally increase your tax liability unless you hold your shares through a tax-deferred or exempt vehicle.
TEMPORARY DEFENSIVE POLICY
In response to market, economic, political, or other conditions, MFS may depart from the fund's principal investment strategies by temporarily investing for defensive purposes. When MFS invests defensively, different factors could affect the fund's performance and the fund may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Information about investment strategies and investment types not described in the Prospectus and the risks associated with those investment strategies and investment types are described in the fund's Statement of Additional Information ("SAI").
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS"), located at 500 Boylston Street, Boston, Massachusetts, serves as the investment adviser for the fund. Subject to the supervision of the Board of Trustees, MFS is responsible for managing the fund's investments, executing transactions and providing related administrative services and facilities under an Investment Advisory Agreement between the fund and MFS.
For the fiscal year ended May 31, 2007, the fund paid MFS an effective management fee equal to 0.90% of the fund's average daily net assets.
The management fee set forth in the Investment Advisory Agreement is 0.90% annually of the first $1 billion of the fund's average daily net assets; 0.80% of the next $1 billion of the fund's average daily net assets; and 0.70% in excess of $2 billion of the fund's average daily net assets.
A discussion regarding the basis for the Board of Trustees' approval of the Investment Advisory Agreement is available in the fund's most recent semi-annual report for the six-month period that ends November 30.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $202 billion as of June 30, 2007.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of the MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, and inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries with respect to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The lawsuits assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940, the Employee Retirement Income Security Act of 1974 (ERISA), as well as fiduciary duties and other violations of common law. The lawsuits variously have been commenced as class actions or individual actions on behalf of investors who purchased, held, or redeemed shares of the MFS funds during specified periods, as
ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT
LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER),
NO. 1:04-MD-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS funds include RIGGS V. MFS ET AL., CASE NO. 04-CV-01162-JFM
(direct), HAMMERSLOUGH V. MFS ET AL., CASE NO. 04-MD-01620 (derivative), ANITA
WALKER V. MFS ET AL., CASE NO. 1:04-CV-01758 (ERISA), and REAVES V. MFS SERIES
TRUST I, ET AL., CASE NO. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District of
Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., ET AL., NO. 04CV10584 (GAO)
(a consolidated action, first filed on March 25, 2004) and MARCUS DUMOND, ET AL.
V. MASSACHUSETTS FINANCIAL SERVS. CO., ET AL., NO. 04CV11458 (GAO) (filed on May
4, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages,
punitive damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. Insofar as any of the actions is appropriately
brought derivatively on behalf of any of the MFS funds, any recovery will inure
to the benefit of the MFS funds. Several claims of the various lawsuits have
been dismissed; MFS and the other named defendants continue to defend the
various lawsuits.
DISCLOSURE OF PORTFOLIO HOLDINGS. The MFS funds have established a policy with respect to the disclosure of fund portfolio holdings. A description of this policy is provided in the SAI. In addition, by clicking on a fund name under "Select a fund" on the MFS Web site (MFS.COM), the following information is generally available to you:
INFORMATION APPROXIMATE DATE OF POSTING TO WEB SITE -------------------------------------------------------------------------------- Fund's top 10 securities holdings as of each month's end 14 days after month end Fund's full securities holdings as of each month's end 24 days after month end |
If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for funds that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings
within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the funds or MFS may suspend the posting of this information or modify the elements of this web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
PORTFOLIO MANAGER(S)
Information regarding the portfolio manager(s) of the fund is set forth below. Further information regarding the portfolio manager(s), including other accounts managed, compensation, ownership of fund shares, and possible conflicts of interest, is available in the fund's SAI. The portfolio manager is primarily responsible for the day-to-day management of the fund.
PORTFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
---------------------------------------------------------------------------
Barnaby Wiener Portfolio Manager 2003 Investment Officer of MFS;
employed in the investment
management area of MFS
since 1998.
|
ADMINISTRATOR
MFS provides the fund with certain financial, legal, and other administrative services under a Master Administrative Services Agreement between the fund and MFS. Under the Agreement, MFS is paid an annual fee for providing these services.
DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of the fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. MFSC may receive a fee based on the costs it incurs in providing these services plus a target profit margin, including payments made to affiliated and unaffiliated service providers that provide certain sub-accounting and other shareholder services (shareholder servicing payments) and out-of-pocket expenses.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund-of-Funds and the fund, the fund may pay a portion of the transfer agent-related expenses of each MFS Fund-of-Funds, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of benefits realized or expected to be realized by the fund from the investment in the fund by the MFS Fund-of-Funds.
DESCRIPTION OF SHARE CLASSES
The fund offers Class W shares through this prospectus. The fund also offers Class A, Class B, Class C, and Class I shares. Class A, Class B, Class C, and Class I shares are made available through a separate prospectus provided to investors eligible to purchase these share classes.
CLASS W SHARES
Class W shares generally are available only to fee-based wrap programs sponsored by financial intermediaries that have entered into an agreement with MFD to offer Class W shares to their clients. The use of Class W shares by a financial intermediary will depend on, among other things, the structure of the particular fee-based wrap program.
Shareholders may be able to convert Class W shares to another class of the fund if they satisfy the eligibility requirements for the other share class. Please contact your financial intermediary for additional information on how to convert your Class W shares into another share class.
If a shareholder converts Class W shares of the fund to another class of the fund, the transaction will be based on the respective net asset value of each class as of the trade date for the conversion. Consequently, the converting shareholder may receive fewer shares or more shares than originally owned, depending on that day's net asset values. The total value of the initially held shares, however, will equal the total value of the converted shares. A conversion between share classes of the same fund is a nontaxable event.
SALES CHARGES AND WAIVERS
Eligible investors may purchase Class W shares without an initial sales charge or CDSC upon redemption.
DISTRIBUTION FEES
The fund has adopted a plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"). Under the Distribution Plan the fund pays distribution fees to MFD to support the sale and distribution of Class W shares, as well as shareholder servicing and account maintenance activities. These distribution fees are equal on an annual basis up to 0.10% of the average daily net assets attributable to Class W shares. These fees are paid out of the assets of the Class W shares. Because these fees are an ongoing expense of the fund, they increase the cost of your investment over time and may cost you more than other types of sales charges.
FINANCIAL INTERMEDIARY COMPENSATION
The term "financial intermediary" includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administrator, insurance company, and any other institutions having a selling, administration, or any similar agreement with MFD, MFS, or one of its affiliates.
Financial intermediaries receive various forms of compensation in connection with the sale of shares of a fund and/or the servicing of shareholder accounts. Financial intermediaries may receive such compensation (i) in the form of ongoing asset-based compensation paid by MFD based on Distribution Plan distribution payments received by MFD from the fund, (ii) in the form of shareholder servicing payments paid by MFD and/or one or more of its affiliates (for purposes of this section only, collectively, "MFD") based on the receipt of such payments by MFD from the fund, and (iii) in the form of payments paid by MFD from MFD's own additional resources.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories and such payments can be significant to the financial intermediary. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular fund or share class.
Financial intermediaries may also receive all or a portion of the following payments: Distribution Plan distribution fees as described in "Description of Share Classes - Distribution Fees"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
In addition, financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS funds, to cooperate with MFD's promotional efforts and/or in recognition of their marketing, administrative services, and/or processing support. This compensation from MFD is not reflected in the fees and expenses listed in the fee table section of the fund's prospectus. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary and the quality of the overall relationship with the financial intermediary.
These additional payments by MFD may take the form of payments to financial intermediaries that provide marketing support and administrative services to MFD with respect to fund shares sold or held through the financial intermediary's retail distribution network and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity)
programs. MFD may also make payments to financial intermediaries to help offset the cost associated with client account maintenance support, statement preparation, and transaction processing. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, MFD may make other payments or allow other promotional incentives or payments to financial intermediaries.
You can find further details in the SAI about the payments made by MFD and the services provided by financial intermediaries. Financial intermediaries may charge you additional fees and/or commissions other than those disclosed in this prospectus. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries that sell fund shares may also act as a broker/dealer in connection with a MFS fund's purchase or sale of portfolio securities. However, the fund and MFS do not consider financial intermediaries' sales of shares of a MFS fund as a factor when choosing broker/dealers to effect portfolio transactions for the MFS funds.
HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES
You may purchase, redeem, convert, and exchange your Class W shares only through a fee-based wrap program sponsored by a financial intermediary that has entered into an agreement with MFD to offer Class W shares to the financial intermediary's clients. Please see your financial intermediary for additional information on the procedures for purchasing, redeeming, converting, and exchanging shares of the fund, and additional investment requirements of the fee-based wrap program. Your financial intermediary generally will charge fees, which are in addition to those described in this prospectus.
HOW TO PURCHASE SHARES
Your shares will be bought at the net asset value next calculated after your purchase order is received in proper form. MFSC reserves the right to reject any purchase order that is not in proper form. The specific requirements for proper form vary among account types and transactions. Certain restrictions apply to the use of a transfer on death registration. You or your financial intermediary should contact MFSC to obtain a Transfer on Death registration form and for information regarding MFSC's other requirements for transfer on death registrations.
The fund may reject for any reason, or cancel as permitted or required by law, any purchase orders, including exchanges. The fund may stop offering shares completely, or may offer shares only on a limited basis, for a period of time or permanently.
The fund is required by law to obtain from you certain personal information that will be used to verify your identity. If you do not provide the information, the fund may not be able to open your account. The fund must also take certain steps to verify that the account information you provide is correct.
Generally, there are no initial or subsequent investment minimums except as may be required by your financial intermediary's fee-based wrap program.
HOW TO REDEEM SHARES
Your shares will be sold at the net asset value per share next calculated after your redemption order is received in proper form. MFSC reserves the right to reject any redemption request that is not in proper form. The specific requirements for proper form vary among types of accounts and transactions. In certain circumstances, you may need to have your signature guaranteed and/or submit additional documentation to redeem your shares. In general, no signature guarantee is required for a redemption order for up to $100,000 that is signed by all owners or fiduciaries identified in the account registration, paid as registered, and mailed to the address of record.
The fund sends out your redemption proceeds within seven days after your request is received in proper form. Under unusual circumstances, such as when
the New York Stock Exchange is closed, trading on the Exchange is restricted, or as permitted by the SEC, the fund may suspend redemptions or postpone payment. Redemption proceeds (other than exchanges) may be delayed until money from prior purchases sufficient to cover your redemption has been received and collected. This can take up to seven days after a purchase.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. If a signature guarantee is required, your signature may be guaranteed by an eligible bank, broker, dealer, credit union, national securities exchange, registered securities association, clearing agency, or savings association. MFSC may require additional documentation for certain types of registrations and under certain circumstances. Signature guarantees and this additional documentation shall be accepted in accordance with policies established by MFSC, and MFSC may, at its discretion, make certain exceptions to these requirements. Please contact MFSC for the requirements for your particular situation.
REDEMPTIONS IN KIND. If, during any 90-day period, you redeem shares in an amount greater than the lesser of $250,000 or 1% of fund net assets, the fund has the right to pay the redemption amount above such threshold by a distribution in-kind of portfolio securities (redemption in kind). In the event that the fund makes a redemption in kind, you should expect to incur brokerage and other transaction charges when converting the securities to cash, and the securities may increase or decrease in value before you sell them.
INVOLUNTARY REDEMPTIONS. Because it is costly to maintain small accounts, the MFS funds have reserved the right to redeem your shares without your permission when your account contains less than $500 due to your redemptions or exchanges. Before the fund makes such a redemption, you will be notified and given 60 days to increase your investment to at least $500.
In addition, the MFS funds have reserved the right to redeem your shares without your permission in cases of threatening conduct or suspicious, fraudulent, or illegal activity.
HOW TO EXCHANGE SHARES
An exchange involves the redemption of shares of one fund and the purchase of shares of another fund.
EXCHANGE PRIVILEGE. You can exchange your shares for shares of the same class of certain other MFS funds by having your financial intermediary process your exchange request. Your shares will be bought at the net asset value next calculated after your exchange order is received in proper form. There is no minimum exchange amount. You should read the prospectus of the MFS fund into which you are exchanging and consider the differences in objectives, policies, and risks before making any exchange.
OTHER CONSIDERATIONS
FREQUENT TRADING
- RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. The Board of Trustees of the MFS funds has adopted the purchase and exchange limitation policies described below, which it believes are reasonably designed to discourage frequent fund share transactions. MFSC seeks to monitor and enforce these policies, subject to oversight by the Board of Trustees, pursuant to procedures approved by the Board of Trustees. The MFS funds may alter their policies at any time without notice to shareholders.
- GENERAL PURCHASE AND EXCHANGE LIMITATION POLICIES. The MFS funds reserve the right to restrict, reject, or cancel (with respect to cancellations, within one business day of the order), without any prior notice, any purchase or exchange order, including transactions believed to represent frequent trading activity. For example, MFSC may in its discretion restrict, reject, or cancel a purchase or exchange order even if the transaction is not subject to specific exchange or other limitations described in this prospectus if MFSC determines that accepting the order could interfere with the efficient management of a fund's portfolio, increase costs to the fund, dilute the value of an investment in the fund to long-term shareholders, or otherwise not be in the fund's best interests. In the event that MFSC rejects or cancels an exchange request, neither the redemption nor the purchase side of the exchange will be processed. Each MFS fund reserves the right to delay for one business day the processing of exchange requests in the event that, in MFSC's judgment, such delay would be in the fund's best interest, in which case both the redemption and purchase side of the exchange will receive the fund's net asset values at the conclusion of the delay period.
- SPECIFIC EXCHANGE AND PURCHASE LIMITATION POLICIES. Under the MFS Funds' purchase and exchange limitation policy, MFSC will generally restrict, reject or cancel purchase and exchange orders if MFSC determines that an accountholder has made two exchanges, each in an amount of $5,000 or more, out of an account in an MFS fund during a calendar quarter ("two exchange limit"). This policy does not apply to exchanges:
- out of the MFS money market funds; or
- initiated by a retirement plan trustee or sponsor rather than by a plan participant, and other similar non-discretionary exchanges (e.g., in connection with fund mergers/acquisitions/liquidations).
In circumstances where shareholders hold shares through financial intermediaries, the MFS funds may rely upon the financial intermediary's policy to restrict frequent trading and its monitoring of such policy in
lieu of the MFS funds' two-exchange limit if MFSC believes that the financial intermediary's policy is reasonably designed to identify and curtail trading activity that is not in the best interest of the fund.
In addition, MFSC may make exceptions to this policy if, in its judgment, the transaction does not represent frequent trading activity, such as purchases made through systematic purchase plans or payroll contributions. In applying this policy, MFSC considers the information available to it at the time and reserves the right to consider trading multiple accounts under common ownership, control, or influence to be trading out of a single account.
Exchanges made on the same day in the same account are aggregated for purposes of counting the number and dollar amount of exchanges made by the accountholder (e.g., a shareholder who on the same day exchanges $6,000 from one MFS fund into two other MFS funds, by exchanging $3,000 into each of the two MFS funds, will be viewed as having made one exchange transaction exceeding $5,000 in value).
- LIMITATIONS ON THE ABILITY TO DETECT AND CURTAIL FREQUENT TRADING PRACTICES. Shareholders seeking to engage in frequent trading practices may deploy a variety of strategies to avoid detection, and, despite the efforts of MFSC to prevent frequent trading, there is no assurance that MFSC will be able to identify such shareholders or curtail their trading practices. The ability of MFSC to detect and curtail frequent trading practices may also be limited by operational systems and technological limitations.
MFSC receives purchase, exchange, and redemption orders through certain financial intermediaries that hold omnibus accounts with an MFS fund. Omnibus account arrangements are common forms of holding shares of MFS funds, particularly among certain financial intermediaries such as brokers, retirement and 529 plans, investment advisors, and variable insurance products. A financial intermediary's policy restricting frequent trading may be more or less restrictive than the MFS funds' policies, may permit certain transactions not permitted by the MFS funds' policies, or prohibit transactions not subject to the MFS funds' policies.
MFSC is generally not able to identify trading by a particular underlying shareholder within an omnibus account, which makes it difficult or impossible to determine if a particular underlying shareholder has violated the two exchange limit or is otherwise engaged in frequent trading. However, MFSC reviews trading activity at the omnibus level to detect suspicious trading activity. If MFSC detects suspicious trading activity at the omnibus level it will contact the financial intermediary to request underlying shareholder level activity to determine whether there is underlying shareholder level frequent trading. In certain instances, a
financial intermediary may be unwilling or unable to provide MFSC with information about underlying shareholder level activity.
If frequent trading is identified, MFSC will take appropriate action. MFSC's ability to monitor and deter frequent trading in omnibus accounts at the underlying shareholder level is dependent upon the capability and cooperation of the financial intermediary. Accordingly, depending upon the composition of a fund's shareholder accounts, the level of cooperation provided by the financial intermediary and in light of efforts made by certain shareholders to evade these limitations, MFSC may not be in a position to monitor and deter frequent trading with respect to a significant percentage of a fund's shareholders. You should consult your financial intermediary regarding the application of these limitations and whether your financial intermediary imposes any additional or different limitations.
- FREQUENT TRADING RISKS. To the extent that the MFS funds or their agents are unable to curtail excessive trading practices in a fund, these practices may interfere with the efficient management of the fund's portfolio, may result in increased transaction and administrative costs, and may adversely impact the fund's performance.
In addition, to the extent that the fund invests in foreign securities, the interests of long-term shareholders may be diluted as a result of time-zone arbitrage, a short-term trading practice that seeks to exploit changes in the value of the fund's investments that result from events occurring after the close of the foreign markets on which the investments trade, but prior to the time the fund determines its net asset value. The fund's use of fair valuation can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that the fund's fair valuation policies and procedures will prevent dilution of the fund's net asset value by short-term traders.
To the extent that the fund invests in securities that trade infrequently or are difficult to value, such as the securities of smaller companies, high yield debt instruments, and floating rate loans, the interests of long-term shareholders may be diluted as a result of price arbitrage, a short-term trading strategy that seeks to exploit perceived pricing inefficiencies in the fund's investments. Such short-term trading strategies may interfere with efficient management of the fund's portfolio to a greater degree than funds that invest in more frequently traded or liquid securities, in part because the fund may have difficulty selling these portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage may also cause dilution in the value of fund shares held by other shareholders.
UNAUTHORIZED TRANSACTIONS. MFS will not be responsible for losses that result from unauthorized transactions unless MFSC does not follow procedures reasonably designed to verify your identity. If an account has more than one owner or authorized person, MFSC will accept telephone and online instructions from any one owner or authorized person. It is important that you contact MFSC immediately about any transactions you believe to be unauthorized.
ABILITY TO CONTACT MFSC. Certain methods of contacting MFSC, such as by mail, telephone, or electronically, may be unavailable or delayed (for example, after natural disasters or during periods of significant/major political, social, or economic instability).
RESERVATION OF OTHER RIGHTS. In addition to the rights expressly stated elsewhere in this prospectus, MFSC reserves the right to: 1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; and 2) freeze any account or suspend account services when MFSC has received reasonable notice (written or otherwise) of a dispute between registered or beneficial account owners or when MFSC believes a fraudulent transaction may occur or has occurred.
ANTI-MONEY LAUNDERING RESTRICTIONS. Federal law requires the fund to implement policies and procedures reasonably designed to prevent, detect and report money laundering and other illegal activity. The fund, consistent with applicable federal law, may redeem your shares and close your account; suspend, restrict or cancel purchase and redemption orders; process redemption requests and withhold your proceeds; and take other action if it is unable to verify your identity within a reasonable time or conduct required due diligence on your account or as otherwise permitted by its anti-money laundering policies and procedures. Any applicable CDSC will be assessed upon redemption of your shares.
CONFIRMATIONS IN QUARTERLY STATEMENTS. Transactions made under certain periodic investment and withdrawal programs (including reinvestment plans) will be confirmed on quarterly account statements.
OTHER INFORMATION
VALUATION
The price of each class of the fund's shares is based on its net asset value. The net asset value of each class of shares is determined each day the New York Stock Exchange (the Exchange) is open for trading as of the close of regular trading on the Exchange (generally 4:00 p.m. Eastern time). However, net asset value may be calculated earlier as permitted by the SEC. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. On days when the Exchange is closed (such as week-ends and holidays), net asset value is not calculated, and the fund does not transact purchase and redemption orders. To the extent the fund's assets are traded in other markets on days when the fund does not price its shares, the value of the fund's assets may change when you will not be able to purchase or redeem shares.
To determine net asset value, the fund's investments for which reliable market quotations are readily available are valued at market value. Certain short term debt instruments are valued at amortized cost.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund's investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees.
Under the fund's valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. These valuations can be based on both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as a foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net
asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund's net asset value may differ from quoted or published prices for the same investments.
DISTRIBUTIONS
The fund intends to declare and pay a dividend to shareholders at least annually.
Any capital gains are distributed at least annually.
DISTRIBUTION OPTIONS
The following distribution options are generally available:
- Dividend and capital gain distributions reinvested in additional shares (THIS OPTION WILL BE ASSIGNED IF NO OTHER OPTION IS SPECIFIED);
- Dividend distributions in cash; capital gain distributions reinvested in additional shares;
- Dividend and capital gain distributions in cash; or
- Dividend and capital gain distributions reinvested into the same class of shares of another MFS Fund.
The distribution option for accounts with dividend distributions of less than $10 will generally be changed to reinvestment in additional shares of the fund. If you have elected to receive distributions in cash, and the postal service is unable to deliver checks to your address of record, or you do not respond to mailings from MFSC with regard to uncashed distribution checks, your distribution option may be converted to having all distributions reinvested in additional shares. You should contact MFSC to change your distribution option, and your request to do so must be received by MFSC before the record date for a distribution in order to be effective for that distribution. No interest will accrue on amounts represented by uncashed distribution checks.
TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in the fund may have on your particular
tax situation, including possible foreign, state, and local taxes. Also, this discussion does not apply to shares of the fund held through tax-exempt retirement plans.
The fund expects to distribute substantially all of its income and gains annually. Distributions from the fund are taxable whether you receive them in cash or reinvest them in additional shares. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Any gain resulting from the sale or exchange of your shares will generally also be subject to tax.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the fund owned the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains from the sale of investments that the fund owned for more than one year and that are properly designated by the fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the fund owned for one year or less will be taxable as ordinary income. For taxable years beginning before January 1, 2011, if some or all of the fund's income derives from "qualified dividend income" and if you are an individual who meets holding period and other requirements with respect to the fund's shares, those distributions that are properly designated by the fund as derived from "qualified dividend income" are taxed at the rates applicable to long-term capital gains.
Long-term capital gain rates applicable to most individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
The fund's investments in foreign securities may be subject to foreign withholding taxes, which will decrease the fund's return on those securities. The fund generally will be eligible to elect to "pass through" to you foreign income taxes that it pays, in which case you must include your share of those taxes in gross income as a distribution from the fund and you will be allowed to claim a credit (or a deduction, if you itemize deductions) for such amounts on your federal income tax return, subject to certain limitations. In addition, the fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the fund's recognition of ordinary income and may affect the timing, amount, or character of the fund's distributions.
The Form 1099 that is mailed to you every January details your distributions and how they are treated for federal tax purposes.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS AND PROSPECTUSES
The fund produces financial reports every six months and updates its prospectus annually. To avoid sending duplicate copies of materials to households, only one copy of the fund's annual and semiannual report and prospectus will be mailed to
shareholders having the same residential address on the fund's records. However, any shareholder may contact MFSC (please see back cover for address and telephone number) to request that copies of these reports and prospectuses be sent personally to that shareholder.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a fund's financial performance for the past five years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent registered public accounting firm, whose report, together with the fund's financial statements, are included in the fund's Annual Report to shareholders. The fund's Annual Report is available upon request by contacting MFS Service Center, Inc. (please see back cover for address and telephone number). The financial statements contained in the Annual Report are incorporated by reference into the SAI. The fund's independent registered public accounting firm is Ernst & Young LLP.
YEARS ENDED 5/31
----------------
2007 2006(I)
CLASS W
Net asset value, beginning of period $29.16 $30.18
------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (d) $ 0.89 $ 0.20
Net realized and unrealized gain (loss) on investments and foreign currency 5.43 (1.22)(g)
------ ------
Total from investment operations $ 6.32 $(1.02)
------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.49) $ --
From net realized gain on investments and foreign currency transactions (2.24) --
------ ------
Total distributions declared to shareholders $(2.73) $ --
------ ------
Net asset value, end of period $32.75 $29.16
====== ======
Total return (%) (r)(s) 22.48 (3.38)(n)
------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 1.24 1.37(a)
Expenses after expense reductions (f) 1.24 1.35(a)
Net investment income 3.22 8.00(a)
Portfolio turnover 49 54
Net assets at end of period (000 omitted) $1,031 $ 97
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(a) Annualized.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(g) The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because of the timing of sales of fund shares and the per share amount of realized and unrealized gains and losses at such time.
(i) For the period from the class' inception, May 1, 2006 (Class W) through the stated period end.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
MFS INTERNATIONAL VALUE FUND
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF TRUSTEES. The Board of Trustees of the MFS funds has adopted procedures by which shareholders may send communications to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [fund name], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116-3741, Attention: Frank Tarantino, Independent Chief Compliance Officer of the Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the MFS fund to which they relate and (iii) identify the class and number of shares held by the shareholder.
IF YOU WANT MORE INFORMATION ABOUT MFS INTERNATIONAL VALUE FUND, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's actual investments. Annual reports discuss the effect of recent market conditions and investment strategies on the fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated October 1, 2007, provides more detailed information about the fund and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: mfs.com
Information about the fund (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other information about the fund are available on the Edgar Database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-4492.
[MFS(R) INVESTMENT MANAGEMENT LOGO] STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 2007
MFS INTERNATIONAL VALUE FUND
A SERIES OF MFS SERIES TRUST X
500 BOYLSTON STREET, BOSTON, MA 02116
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This Statement of Additional Information ("SAI") contains additional information about the Fund and should be read in conjunction with the Fund's Prospectus dated October 1, 2007. The Fund's financial statements are incorporated into this SAI by reference to the Fund's most recent Annual Report to shareholders. A copy of the Annual Report accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual Report without charge by contacting the Fund's transfer agent, MFS Service Center, Inc. (please see the back cover of Part II of this SAI for address and telephone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains information that is particular to the Fund, while Part II contains information that generally applies to all of the funds in the MFS Family of Funds (the "MFS Funds"). Each part of this SAI has a variety of appendices which can be found at the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION (SAI) - PART I
Part I of this SAI contains information that is particular to the Fund.
DEFINITIONS 1 MANAGEMENT OF THE FUND 1 SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS 3 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS 3 TAX CONSIDERATIONS 3 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS 3 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS 4 APPENDIX A - TRUSTEE COMPENSATION AND COMMITTEES A-1 APPENDIX B - SHARE OWNERSHIP B-1 APPENDIX C - PORTFOLIO MANAGER(S) C-1 APPENDIX D - CERTAIN SERVICE PROVIDER COMPENSATION D-1 APPENDIX E - SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS E-1 APPENDIX F - PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS F-1 |
DEFINITIONS
"Fund" - MFS International Value Fund, a series of the Trust, was known as MFS International Investors Trust prior to September 27, 2002 and MFS International Growth and Income Fund prior to January 1, 2001. The Fund was known as MFS/Foreign & Colonial International Growth and Income Fund prior to September 8, 1997.
"Trust" - MFS Series Trust X, a Massachusetts business trust organized in 1985. The Trust was previously known as MFS Government Mortgage Fund (prior to June 2, 1995), MFS Government Income Plus Fund (prior to March 1, 1993), MFS Government Income Plus Trust (prior to August 3, 1992) and MFS Government Securities High Yield Trust (prior to October 16, 1989).
"MFS" or "Adviser" - Massachusetts Financial Services Company, a Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the fund, dated October 1, 2007, as amended or supplemented from time to time.
MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. The Trust is an open-end management investment company.
Part I-1
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the Trust are set forth in APPENDIX A to Part II of this SAI.
TRUSTEE COMPENSATION AND COMMITTEES
Compensation paid to the non-interested Trustees for certain specified periods, as well as information regarding committees of the Board of Trustees, is set forth in APPENDIX A to this Part I.
SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and officers of the Trust as a group, as well as the dollar value range of each Trustee's share ownership in the Fund and, on an aggregate basis, in all MFS Funds overseen by the Trustee, by investors who are deemed to "control" the Fund, if any, and by investors who own 5% or more of any class of Fund shares, if any, is set forth in APPENDIX B to this Part I.
PORTFOLIO MANAGER(S)
Information regarding the Fund's portfolio manager(s), including other accounts managed, compensation, ownership of Fund shares, and possible conflicts of interest, is set forth in APPENDIX C to this Part I.
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to certain of its service providers for advisory services, administrative services, and transfer agency services, for certain specified periods, are set forth in APPENDIX D to this Part I.
CUSTODIAN
State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, serves as the custodian of the assets of the Fund (the "Custodian"). The Custodian is responsible for safekeeping and controlling the Fund's cash and securities, handling the receipt and delivery of securities, collecting interest and dividends on the Fund's investments, serving as the Fund's foreign custody manager, providing reports on foreign securities depositaries, maintaining books of original entry and other required books and accounts for the Fund, and calculating the daily net asset value of each class of shares of the Fund. The Fund may invest in securities of the Custodian and may deal with the Custodian as principal in securities transactions.
The Fund has an expense offset arrangement that reduces the Fund's custodian fees based upon the amount of cash maintained by the Fund with its custodian.
Part I-2
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid for certain specified periods in connection with the purchase and sale of the Fund's shares are set forth in APPENDIX E to this Part I.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Fund's plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"), for the Fund's most recent fiscal year, are set forth in APPENDIX E to this Part I.
INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS
INVESTMENT STRATEGIES AND RISKS
Certain investment strategies and risks are described in APPENDIX E to Part II of this SAI.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which are described in APPENDIX F of Part II of this SAI.
TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, information concerning purchases by the Fund of securities issued by its regular broker/dealers for its most recent fiscal year, and information concerning the amount of transactions and related commissions to broker/dealer firms that MFS has determined provide valuable research for the Fund's most recent fiscal year, are set forth in APPENDIX F to this Part I. Portfolio transactions and brokerage commissions are more fully described in Part II of this SAI under the heading "Portfolio Transactions and Brokerage Commissions."
Part I-3
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS
Ernst & Young LLP is the Independent Registered Public Accounting Firm, providing audit services, tax return review, and other related services and assistance in connection with the review of various Securities and Exchange Commission filings.
The Fund's Financial Statements and Financial Highlights for the fiscal year ended May 31, 2007, are incorporated by reference into this SAI from the Fund's Annual Report to shareholders and have been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon reports of such firm, given upon their authority as experts in accounting and auditing. A copy of the Fund's Annual Report accompanies this SAI.
Part I-4
PART I - APPENDIX A
TRUSTEE COMPENSATION AND COMMITTEES
The Fund pays the non-interested Trustees an annual fee plus a fee for each meeting attended. In addition, the non-interested Trustees are reimbursed for their out-of-pocket expenses.
TRUSTEE COMPENSATION TABLE
RETIREMENT TOTAL TRUSTEE
TRUSTEE BENEFITS ACCRUED FEES FROM FUND
FEES FROM AS PART OF AND FUND
TRUSTEE NAME FUND(1) FUND EXPENSE COMPLEX(2)
-----------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $1,519 N/A $210,289
Lawrence H. Cohn, M.D. $1,519 $ 0 $208,289
David H. Gunning $1,621 N/A $219,642
William R. Gutow $1,519 N/A $208,289
Michael Hegarty $1,519 N/A $209,289
J. Atwood Ives $2,089 $792 $285,289
Lawrence T. Perera $1,587 $869 $228,289
J. Dale Sherratt $1,822 $ 0 $250,289
Laurie J. Thomsen $1,603 N/A $209,289
Robert W. Uek $1,690 N/A $227,789
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(1) For the fiscal year ended May 31, 2007.
(2) Information provided is for calendar year 2006. Each Trustee receiving compensation served as Trustee of 97 funds within the MFS Fund complex (having aggregate net assets at December 31, 2006, of approximately $102 billion).
Retirement Benefit Deferral Plan-- Under a Retirement Benefit Deferral Plan, certain Trustees have deferred benefits from a prior retirement plan. The value of the benefits is periodically readjusted as though the Trustee had invested an equivalent amount in Class A shares of the Fund(s) designated by such Trustee. The value of the deferred benefits will be paid to the Trustees upon retirement or thereafter. The plan does not obligate a Fund to retain the services of any Trustee or pay any particular level of compensation to any Trustee. The plan is not funded and a Fund's obligation to pay the Trustee's deferred compensation is a general unsecured obligation.
Part I-A-1
COMMITTEES
The Board has established the following Committees:
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
AUDIT COMMITTEE 8 Oversees the accounting and auditing procedures of the Butler*, Gutow*, Sherratt*,
Fund and, among other duties, considers the selection of Thomsen*, and Uek*
the independent accountants for the Fund and the scope
of the audit, and considers the effect on the
independence of those accountants of any non-audit
services such accountants provide to the Fund and any
audit or non-audit services such accountants provide to
other MFS Funds, MFS and/or certain affiliates. The
Committee is also responsible for establishing
procedures for the receipt, retention, and treatment of
complaints received by the Fund regarding accounting,
internal accounting controls, or auditing matters and
the confidential, anonymous submission of concerns
regarding questionable fund accounting matters by
officers of the Fund and employees of the Fund's
investment adviser, administrator, principal
underwriter, or any other provider of accounting-related
services to the Fund.
COMPLIANCE AND 8 Oversees the development and implementation of the Butler*, Cohn*, Gunning*, Gutow*,
GOVERNANCE Fund's regulatory and fiduciary compliance policies, and Sherratt*
COMMITTEE procedures, and practices under the 1940 Act, and other
applicable laws, as well as oversight of compliance
policies of the Fund's investment adviser and certain
other service providers as they relate to Fund
activities. The Fund's Independent Chief
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Part I-A-2
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
Compliance Officer reports directly to the Committee and
assists the Committee in carrying out its
responsibilities. In addition, the Committee advises and
makes recommendations to the Board on matters concerning
Trustee practices and recommendations concerning the
functions and duties of the committees of the Board.
CONTRACTS 5 Requests, reviews, and considers the information deemed All non-interested Trustees of the
REVIEW reasonably necessary to evaluate the terms of the Board (Butler, Cohn, Gunning,
COMMITTEE investment advisory and principal underwriting Gutow, Hegarty, Ives, Perera,
agreements and the Plan of Distribution under Rule 12b-1 Sherratt, Thomsen,
that the Fund proposes to renew or continue, and to make and Uek)
its recommendations to the full Board of Trustees on
these matters.
NOMINATION AND 1 Recommends qualified candidates to the Board in the All non-interested Trustees of the
COMPENSATION event that a position is vacated or created. The Board (Butler, Cohn, Gunning,
COMMITTEE Committee will consider recommendations by shareholders Gutow, Hegarty, Ives, Perera,
when a vacancy exists. Shareholders wishing to recommend Sherratt, Thomsen,
candidates for Trustee for consideration by the and Uek)
Committee may do so by writing to the Fund's Secretary
at the principal executive office of the Fund. Such
recommendations must be accompanied by biographical and
occupational data on the candidate (including whether
the candidate would be an "interested person" of the
Fund), a written consent by the candidate to be named as
a nominee and to serve as Trustee if elected, record and
ownership information for the recommending shareholder
with respect to the Fund, and a description of any
arrangements
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Part I-A-3
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
or understandings regarding recommendation of the
candidate for consideration. The Committee is also
responsible for making recommendations to the Board
regarding any necessary standards or qualifications for
service on the Board. The Committee also reviews and
makes recommendations to the Board regarding
compensation for the non-interested Trustees.
PORTFOLIO 8 Oversees the policies, procedures, and practices of the Cohn*, Gunning*, Hegarty*, and
TRADING AND Fund with respect to brokerage transactions involving Perera*
MARKET REVIEW portfolio securities as those policies, procedures, and
COMMITTEE practices are carried out by MFS and its affiliates. The
Committee also oversees the administration of the Fund's
proxy voting policies and procedures by MFS. In
addition, the Committee receives reports from MFS
regarding the policies, procedures, and practices of MFS
and its affiliates in connection with their marketing
and distribution of shares of the Fund.
PRICING 8 Oversees the determination of the value of the portfolio Hegarty*, Perera*,
COMMITTEE securities and other assets held by the Fund and Thomsen*, and Uek*
determines or causes to be determined the fair value of
securities and assets for which market quotations are
not "readily available" in accordance with the 1940 Act.
The Committee delegates primary responsibility for
carrying out these functions to MFS and MFS' internal
valuation committee pursuant to pricing policies and
procedures approved by the Committee and adopted by the
full Board. These policies include methodologies to be
followed by MFS in determining the fair
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Part I-A-4
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
values of portfolio securities and other assets held by
the Fund for which market quotations are not readily
available. The Committee meets periodically with the
members of MFS' internal valuation committee to review
and assess the quality of fair valuation and other
pricing determinations made pursuant to the Fund's
pricing policies and procedures, and to review and
assess the policies and procedures themselves. The
Committee also exercises the responsibilities of the
Board under the Amortized Cost Valuation Procedures
approved by the Board on behalf of each Fund which holds
itself out as a "money market fund" in accordance with
Rule 2a-7 under the 1940 Act.
SERVICES 8 Reviews and evaluates the contractual arrangements of Gunning*, Sherratt*, Thomsen*,
CONTRACTS the Fund relating to transfer agency, administrative and Uek*
COMMITTEE services, custody, pricing and bookkeeping services, and
lending of portfolio securities, and makes
recommendations to the full Board of Trustees on these
matters.
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1) The Trustees' identification and background are set forth in Appendix A to
Part II.
* Non-interested or independent Trustees. Although Mr. Ives is not a member of all Committees of the Board, he is invited to and attends many of the Committees' meetings in his capacity as Chair of the Trustees.
Part I-A-5
PART I - APPENDIX B
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of August 31, 2007, the current Trustees and officers of the Trust as a group owned less than 1% of any class of the Fund's shares. The following table shows the dollar range of equity securities beneficially owned by each current Trustee in the Fund and, on an aggregate basis, in all MFS Funds overseen by each current Trustee, as of December 31, 2006.
The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. Over $100,000
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE OF EQUITY EQUITY SECURITIES IN ALL MFS
NAME OF TRUSTEE SECURITIES IN THE FUND FUNDS OVERSEEN BY TRUSTEES
-------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N D
Robert C. Pozen N D
NON-INTERESTED TRUSTEES
Robert E. Butler B D
Lawrence H. Cohn, M.D N D
David H. Gunning N D
William R. Gutow N D
Michael Hegarty N D
J. Atwood Ives N D
Lawrence T. Perera N D
J. Dale Sherratt N D
Laurie J. Thomsen N D
Robert W. Uek N D
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25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the Fund's shares (all share classes taken together) as of August 31, 2007, and are therefore presumed to control the Fund. All holdings are of record unless otherwise indicated.
Part I-B-1
NAME AND ADDRESS OF INVESTOR PERCENTAGE OWNERSHIP -------------------------------------------------------------------------------- MFS International Diversification Fund 51.88% 500 Boylston St Boston, MA 02116-3741 |
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any class of the Fund's shares as of August 31, 2007. All holdings are of record unless otherwise indicated.
NAME AND ADDRESS OF INVESTOR PERCENTAGE OWNERSHIP -------------------------------------------------------------------------------- Merrill Lynch, Pierce, Fenner & Smith, Inc. 10.91% of Class A Shares For the Sole Benefit of its Customers 8.39% of Class B Shares 4800 Deer Lake Drive East 29.65% of Class C Shares Jacksonville, FL 32246-6484 Charles Schwab & Co., Inc. 20.55% of Class A Shares FBO Clearing Customers 101 Montgomery St. San Francisco, CA 94104-4151 Citigroup Global Markets, Inc. 5.42% of Class A Shares SURPAS House Account 10.71% of Class B Shares Attn: Cindy Tempesta, 7th Floor 29.03% of Class C Shares 333 W. 34th St. New York, NY 10001-2402 MFS International Diversification Fund 97.62% of Class I Shares 500 Boylston St Boston, MA 02116-3741 Massachusetts Financial Services Company 8.07% of Class W Shares Attn: Thomas B. Hastings 500 Boylston St., Floor 6 Boston, MA 02116-3741 Pershing LLC 27.30% of Class W Shares PO BOX 2052 Jersey City, NJ 07303-2052 HSBC Securities USA INC 5.87% of Class W Shares Tomas Campos Zita JR 452 5th Ave New York, NY 10018-2706 |
Part I-B-2
PART I - APPENDIX C
PORTFOLIO MANAGER(S)
COMPENSATION
Portfolio manager total cash compensation is a combination of base salary and performance bonus:
BASE SALARY - Base salary represents a smaller percentage of portfolio manager total cash compensation (generally below 33%) than incentive compensation.
PERFORMANCE BONUS - Generally, incentive compensation represents a majority of portfolio manager total cash compensation.
The performance bonus is based on a combination of quantitative and qualitative factors, with more weight given to the former (generally over 60%) and less weight given to the latter.
The quantitative portion is based on pre-tax performance of all of the accounts managed by the portfolio manager (which includes the Fund and any other accounts managed by the portfolio manager) over a one-, three-, and five-year period relative to the appropriate Lipper peer group universe and/or one or more benchmark indices with respect to each account. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one- and five-year periods (adjusted as appropriate if the portfolio manager has served for shorter periods).
The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts, and traders) and management's assessment of overall portfolio manager contributions to investor relations and the investment process (distinct from fund and other account performance).
Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors.
Finally, portfolio managers are provided with a benefits package including a defined contribution plan, health coverage and other insurance, which are available to other employees of MFS on substantially similar terms. The percentage such benefits represent of any portfolio manager's compensation depends upon the length of the individual's tenure at MFS and salary level, as well as other factors.
Part I-C-1
OWNERSHIP OF FUND SHARES
The following table shows the dollar range of equity securities of the Fund beneficially owned by the Fund's portfolio manager(s) as of the fund's fiscal year ended May 31, 2007. The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
Barnaby Wiener N
OTHER ACCOUNTS
In addition to the Fund, the Fund's portfolio manager is responsible (either individually or jointly) for the day-to-day management of certain other accounts, the number and total assets of which, as of the fund's fiscal year ended May 31, 2007, were as follows:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES* INVESTMENT VEHICLES OTHER ACCOUNTS
---------------------------------------------------------------------------------------------
NUMBER OF TOTAL NUMBER OF TOTAL NUMBER OF TOTAL
NAME ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS ASSETS
---------------------------------------------------------------------------------------------
Barnaby Wiener 4 $2.2 billion 2 $1.6 billion 1 $3 million
|
* Includes the Fund
Advisory fees are not based upon performance of any of the accounts identified in the table above
POTENTIAL CONFLICTS OF INTEREST
The Adviser seeks to identify potential conflicts of interest resulting from a portfolio manager's management of both the Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts.
The management of multiple funds and accounts (including proprietary accounts) may give rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there may be securities which are suitable for the Fund's portfolio as well as for accounts of the Adviser or its subsidiaries with similar investment objectives. A Fund's trade allocation policies may give rise to conflicts of interest if the Fund's orders do not get fully executed
Part I-C-2
or are delayed in getting executed due to being aggregated with those of other accounts of the Adviser or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely impact the value of the Fund's investments. Investments selected for funds or accounts other than the Fund may outperform investments selected for the Fund.
When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and 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 most cases, however, the Adviser believes that the Fund's ability to participate in volume transactions will produce better executions for the Fund.
The Adviser does not receive a performance fee for its management of the Fund. As a result, the Adviser and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund - for instance, those that pay a higher advisory fee and/or have a performance fee.
Part I-C-3
PART I - APPENDIX D
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund for advisory services, administrative services, and transfer agency services, over the specified periods are set forth below. For information regarding sales charges and distribution payments paid to MFD, see APPENDIX E to this Part I.
AMOUNT PAID AMOUNT AMOUNT AMOUNT
TO MFS FOR WAIVED BY PAID TO MFSC PAID TO MFS
ADVISORY MFS FOR FOR TRANSFER FOR GENERAL
SERVICES ADVISORY AGENCY ADMINISTRATIVE
FISCAL YEAR ENDED AFTER WAIVERS SERVICES SERVICES (1) SERVICES
-----------------------------------------------------------------------------
May 31, 2007 $8,110,576 $0 $996,318 $167,005
May 31, 2006 $4,324,780 $0 N/A $ 67,530
May 31, 2005 $1,744,445 $0 N/A $ 19,770
|
(1) Amount paid to MFSC for transfer agency services includes: a) reimbursements for certain out-of-pocket expenses and payments made under agreements with affiliated and unaffiliated entities that provide subaccounting services; and b) payments made pursuant to the Special Servicing Agreement for transfer agent related expenses of Fund-of-Funds investing in the Fund. In addition to the fees disclosed, the Fund also paid directly $56,903 for transfer agent related services for the fiscal year ended May 31, 2007.
Part I-D-1
APPENDIX E
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
---------------------------------------------------------------------
REALLOWED TO
FISCAL YEAR RETAINED BY FINANCIAL CLASS A CLASS B CLASS C
END TOTAL MFD INTERMEDIARIES SHARES SHARES SHARES
------------------------------------------------------------------------------------
May 31, 2007 $669,141 $96,634 $572,507 $17,403 $75,348 $ 9,013
May 31, 2006 $514,367 $70,512 $443,855 $ 5,354 $72,620 $13,687
May 31, 2005 $534,293 $74,908 $459,385 $ 3,615 $45,802 $ 4,263
|
DISTRIBUTION PLAN PAYMENTS
During the fiscal year ended May 31, 2007, the Fund made the following Distribution Plan payments:
PAID TO FINANCIAL
CLASS OF SHARES PAID BY FUND RETAINED BY MFD INTERMEDIARIES(1)
--------------------------------------------------------------------
Class A Shares $1,087,469 $398,874 $688,595
Class B Shares $ 751,137 $538,717 $212,420
Class C Shares $ 743,538 $215,336 $528,202
Class I Shares N/A N/A N/A
Class W Shares $ 272 $ 272 $ 0
|
(1) May include amounts paid to financial intermediaries affiliated with MFD.
Amounts retained by MFD may represent fees paid to MFD but not yet reallowed to intermediaries as of the close of the period, compensation to MFD for commissions advanced by MFD to financial intermediaries upon sale of Fund shares, and/or compensation for MFD's distribution and shareholder servicing costs.
Part I-E-1
PART I - APPENDIX F
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
The following brokerage commissions were paid by the Fund during the specified time periods:
FISCAL YEAR END BROKERAGE COMMISSIONS PAID BY FUND* ----------------------------------------------------- May 31, 2007 $1,840,201 May 31, 2006 $1,066,932 May 31, 2005 $ 445,981 |
* The increase in brokerage commissions paid by the Fund over the preceding two fiscal years was due to a corresponding increase in Fund assets from May 31, 2005 to May 31, 2007.
SECURITIES ISSUED BY REGULAR BROKER/DEALERS
During the fiscal year ended May 31, 2007, the Fund purchased securities issued by the following regular broker/dealers of the Fund, which had the following values:
TRANSACTIONS WITH RESEARCH FIRMS
During the fiscal year ended May 31, 2007, the Fund allocated the following amount of transactions, and related commissions, to broker/dealer firms that have been deemed by MFS to provide valuable Research ("Research Firms"). The provision of Research was not necessarily a factor in the placement of this business with such Research Firms. (1)
DOLLAR AMOUNT OF TRANSACTIONS WITH COMMISSIONS PAID ON TRANSACTIONS WITH
RESEARCH FIRMS RESEARCH FIRMS
--------------------------------------------------------------------------
$817,112,928 $1,525,942
|
(1) The amounts shown do not include transactions directed to electronic communication networks (ECNs) owned by the Research Firms.
Part I-F-1
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI, updated through July 1, 2007, as amended or supplemented from time to time, describes policies and practices that apply to the Funds in the MFS Family of Funds. References in this Part II to a "Fund" mean each Fund in the MFS Family of Funds, unless noted otherwise. References in this Part II to a "Trust" mean the Massachusetts business trust of which the Fund is a series, or, if the Fund is itself a Massachusetts business trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
DEFINITIONS ............................................................. 3 MANAGEMENT OF THE FUND .................................................. 3 SALES CHARGE WAIVERS .................................................... 10 DISTRIBUTION PLAN ....................................................... 10 FINANCIAL INTERMEDIARY COMPENSATION ..................................... 13 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS .......................... 13 NET INCOME AND DISTRIBUTIONS ............................................ 13 TAX CONSIDERATIONS ...................................................... 14 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS ........................ 27 DISCLOSURE OF PORTFOLIO HOLDINGS ........................................ 31 DETERMINATION OF NET ASSET VALUE ........................................ 35 SHAREHOLDER SERVICES .................................................... 37 DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES .................... 40 APPENDIX A - TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND ...... 42 APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES ....................... 51 APPENDIX C - WAIVERS OF SALES CHARGES ................................... 75 APPENDIX D - FINANCIAL INTERMEDIARY COMPENSATION ........................ 91 APPENDIX E - INVESTMENT STRATEGIES AND RISKS ............................ 102 APPENDIX F - INVESTMENT RESTRICTIONS .................................... 137 APPENDIX G - RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS ........................................................ 141 APPENDIX H - DESCRIPTION OF BOND RATINGS ................................ 143 |
I. DEFINITIONS
"Alliance Plans" - include retirement plans with respect to which MFS (or one of its affiliates) has entered into an administrative arrangement with a third party to provide certain recordkeeping and/or administrative services.
"Financial intermediary" - includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administration, and any other institutions having a selling, administration or other similar agreement with MFD, MFS or one of its affiliates.
"Majority Shareholder Vote" - as defined currently in the 1940 Act to be the lesser of (i) 67% or more of the voting securities present at a meeting at which holders of voting securities representing more than 50% of the outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities.
"Serviced Plans" - include retirement plans for which MFS or one of its affiliates is responsible for providing participant recordkeeping services.
"1940 Act"- the Investment Company Act of 1940 and the rules and regulations thereunder, as amended from time to time, and as such Act, rules or regulations are interpreted by the Securities and Exchange Commission.
II. MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
Board Oversight -- The Board of Trustees which oversees the Fund provides broad supervision over the business and operations of the Fund.
Trustees and Officers -- Identification and Background -- The identification and background of the Trustees and Officers of the Trust are set forth in Appendix A of this Part II.
INVESTMENT ADVISER
MFS provides the Fund with investment advisory services. MFS and its predecessor organizations have a history of money management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc., which in turn is an indirect majority-owned subsidiary of Sun Life Financial Inc. (a diversified financial services company).
Unless otherwise noted, MFS votes proxies on behalf of the Funds pursuant to the proxy voting policies described in Appendix B to this SAI Part II (except for the MFS Union Standard Equity Fund, for which Institutional Shareholders Services, Inc., votes proxies as described in Appendix B to this SAI Part II). Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, 2006 is available without charge by visiting MFS.COM and clicking on "Proxy Voting" and by visiting the SEC's Web site at http://www.sec.gov. Prior to January 1, 2007, JMR/Financial, Inc., voted proxies on behalf of MFS Union Standard Equity Fund.
INVESTMENT SUB-ADVISERS - MFS has engaged Sun Capital Advisers LLC (referred to as Sun Capital) to act as sub-adviser with respect to the real estate related portion of the MFS Diversified Income Fund's portfolio. Sun Capital is located at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Sun Capital is an indirect wholly-owned subsidiary of Sun Life Financial Inc. ("Sun Life Financial"), a corporation organized in Canada as well as an affiliate of MFS. Sun Life Financial and its affiliates currently transact business in Canada, the United States and Asia Pacific region. Sun Life Financial is a reporting company under the Securities Exchange Act of 1934 with common shares listed on the Toronto, New York, and Philippine stock exchanges. Sun Life Financial Inc. is located at 150 King Street West, Toronto, Canada, M5H 1J9.
Sun Capital is a Delaware limited liability company and a registered investment adviser. Sun Capital provides investment management and supervisory services to mutual funds and institutional accounts.
MFS has engaged Valley Forge Capital Advisors, Inc. (referred to as Valley Forge), to act as sub-adviser with respect to the MFS Sector Rotational Fund's portfolio. Valley Forge is located at 83 General Warren Boulevard, Suite 200, Malvern, Pennsylvania 19355. Valley Forge is 56% owned by George M. Mara and 20% owned by Maryanne P. Mara.
Valley Forge is a Delaware corporation and a registered investment adviser. Valley Forge provides investment management and supervisory services to mutual funds, high net worth individuals and institutional accounts.
Unless otherwise noted, all references to "sub-adviser" shall include Sun Capital with respect to that portion of the Diversified Income Fund for which Sun Capital provides day-to-day investment advisory services and Valley Forge for MFS Sector Rotational Fund.
INVESTMENT ADVISORY AGREEMENT -- MFS manages the Fund pursuant to an Investment Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, MFS provides the Fund with investment advisory services. Subject to such policies as the Trustees may determine, MFS makes investment decisions for the Fund. For these services, MFS receives an annual investment advisory fee, computed and paid monthly, as disclosed in the Prospectus under the heading "Management of the Fund(s)."
MFS pays the compensation of the Trust's officers and of any Trustee who is an employee of MFS. MFS also furnishes at its own expense investment advisory and administrative services, office space, equipment, clerical personnel, investment advisory facilities, and executive and supervisory personnel necessary for managing the Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are "not affiliated" with MFS and all expenses of the Fund incurred in its operation and offering of shares (other than those assumed by MFS in writing) including but not limited to: management fees; Rule 12b-1 fees; administrative services fees; retirement plan administration services fees; program management services fees; governmental fees; interest charges; taxes; membership dues in the Investment Company Institute allocable to the Fund; fees and expenses of independent auditors, of legal counsel, and of any transfer agent, registrar, or dividend disbursing agent of the Fund; expenses of repurchasing and redeeming shares and servicing shareholder accounts; expenses of preparing, printing and mailing stock certificates, shareholder reports, notices, proxy statements, confirmations, periodic investment 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; organizational and start up costs; and such non-recurring or extraordinary expenses as may arise, including those relating to actions, suits, or proceedings to which the Fund is a party or otherwise may have an exposure, and the legal obligation which the Fund may have to indemnify the Trust's Trustees and officers with respect thereto. 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 to the extent that the Distribution Agreement with MFS Fund Distributors, Inc. ("MFD"), provides that MFD is to pay all of such expenses. Expenses of the Trust which are not attributable to a specific series are allocated between the series in a manner believed by management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two-year term and continues in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by Majority Shareholder Vote and, in either case, by a majority of the Trustees who are not "interested persons" of the Fund or MFS as defined by the 1940 Act. The Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a Majority Shareholder Vote, or by either party on not more than 60 days' nor less than 30 days' written notice. The Advisory Agreement may be approved, renewed, amended, or terminated as to one Fund in the Trust, even though the Agreement is not approved, renewed, amended, or terminated as to any other Fund in the Trust.
The Advisory Agreement also provides that neither MFS 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, gross negligence, or reckless disregard of its or their duties and obligations under the Advisory Agreement.
SUB-ADVISORY AGREEMENTS - Sun Capital serves as the MFS Diversified Income Fund's Sub-Adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Sun Capital (the "Sun Capital Sub-Advisory Agreement"). The Sun Capital Sub-Advisory Agreement provides that the Adviser delegate to Sun Capital the authority to make investment decisions for a portion of the MFS Diversified Income Fund (for the purposes of this paragraph, the "Fund"). Sun Capital will provide portfolio management services for the Fund for the portion of the portfolio invested in REITs ("real estate investment trust") and other real estate related investments. For these services, the Adviser pays Sun Capital an investment advisory fee, computed daily and paid monthly in arrears, at the annual rate of 0.30% of the Fund's average daily net assets managed by Sun Capital. The Sun Capital Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by a majority of the Independent Trustees. The Sun Capital Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a majority of the Independent Trustees, by a Majority Shareholder Vote, or by the Adviser or Sub-Adviser on not less than 60 days' written notice. The Sun Capital Sub-Advisory Agreement specifically provides that neither the Sub-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 misconduct, bad faith, reckless disregard, or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under the Sun Capital Sub-Advisory Agreement.
Valley Forge serves as the MFS Sector Rotational Fund's sub-adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Valley Forge (for purposes of this paragraph, the "Valley Forge Sub-Advisory Agreement"). The Valley Forge Sub-Advisory Agreement provides that the Adviser delegate to Valley Forge the authority to make investment decisions for the MFS Sector Rotational Fund (for the purposes of this paragraph, the "Fund"). For these services, the Adviser pays Valley Forge an investment advisory fee, computed and paid quarterly in arrears, in an amount equal to 0.35% annually of the first $1 billion of the fund's average daily net assets; 0.30% annually of the fund's average daily net assets in excess of $1 billion and up to $2.5 billion; 0.25% annually of the fund's average daily nets assets in excess of $2.5 billion and up to $5 billion; and 0.20% annually of the fund's average daily net assets in excess of $5 billion. The Valley Forge Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by the Board of Trustees or by the vote of a majority of the Fund's outstanding voting securities, and, in either case, by a majority of the Trustees who are not parties to the Valley Forge Sub-Advisory Agreement or interested persons of any such party. The Valley Forge Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by the Trustees, by vote of a majority of the Fund's outstanding voting securities, or by the Adviser or Valley Forge on not less than 60 days' written notice. The Valley Forge Sub-Advisory Agreement specifically provides that neither Valley Forge 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 duties or by reason of reckless disregard of its obligations and duties under the Valley Forge Sub-Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal and other administrative services under a Master Administrative Services Agreement between the Fund and MFS. Under the Agreement, the fund pays an annual fee to MFS for providing these services.
Effective August 1, 2006, the maximum annual fee payable by each Fund is $17,500 plus an amount equal to the following percentage of the Fund's average daily net assets (except for Funds investing primarily in shares of MFS Funds):
------------------------------------------------------------------- On the first $50,000,000 in assets 0.0000% ------------------------------------------------------------------- $50,000,000 - $750,000,000 in assets 0.0175% ------------------------------------------------------------------- $750,000,000 - $1,500,000,000 in assets 0.0170% ------------------------------------------------------------------- $1,500,000,000 - $2,500,000,000 in assets 0.0165% ------------------------------------------------------------------- $2,500,000,000 - $4,000,000,000 in assets 0.0120% ------------------------------------------------------------------- Over $4,000,000,000 0.0000% ------------------------------------------------------------------- |
The fees are subject to minimum and maximum fees, based on the asset level of the MFS Funds.
In addition, MFS provides, either directly or through affiliated and/or unaffiliated entities, certain administrative, recordkeeping, and communication/educational services to the retirement plans and retirement plan participants which invest in Class R1, Class R2, Class R3, Class R4 and Class R5 shares under a Master Class R Administration and Services Agreement. Under the Agreement, the Fund pays an annual fee to MFS for these services at the following percentages of the average daily net assets attributable to that class of shares: 0.35% for Class R1; 0.25% for Class R2; 0.15% for Class R3; 0.15% for Class R4; and 0.10% for Class R5 shares.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the Fund under a Shareholder Servicing Agent Agreement. Under the Agreement, MFSC may receive a fee based on the costs it incurs in providing these services, plus a target profit margin. MFSC may also contract with other affiliated and unaffiliated service providers to provide some or all of the services described above. State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, performs dividend disbursing agent functions for the Fund.
MFSC may receive a fee from the Fund designed to achieve a target pre-tax annual profit margin. Taking into account this goal, effective April 1, 2007, the Fund (except Funds investing primarily in other MFS Funds) pays MFSC a fee based on its average daily net assets equal to 0.048%. Such fee rate shall continue until modified by agreement between the Fund and MFSC, taking into account MFSC's pre-tax profit margin target.
In addition, MFSC is reimbursed by the Fund for certain expenses incurred by MFSC on behalf of the Fund. These reimbursements include payments for certain out-of-pocket expenses, such as costs related to mailing shareholder statements and the use of third party recordkeeping systems, incurred by MFSC in performing the services described above. MFSC is also reimbursed for payments made under agreements with affiliated and unaffiliated service providers that provide sub-accounting and other shareholder services, including without limitation recordkeeping, reporting and transaction processing services. Payments made under these agreements are based on the Fund's average daily net assets and/or the Fund accounts serviced by the service provider.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund which invests in other MFS Funds ("MFS fund-of-funds") and each underlying fund in which an MFS fund-of-funds invests ("underlying funds"), the underlying fund may pay a portion of each MFS fund-of-fund's transfer agent-related expenses, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the MFS fund-of-funds.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD" or the "Distributor"), a wholly owned subsidiary of MFS, serves as distributor for the continuous offering of shares of the Fund pursuant to a Distribution Agreement. The Agreement obligates MFD to use best efforts to find purchasers for shares of the Fund.
See Appendix D to this Part II for information regarding sales charges and Rule 12b-1 distribution and service payments paid to MFD.
PROGRAM MANAGER(S)
MFD serves as program manager for a qualified tuition program under Section 529 of the Internal Revenue Code through which 529 share classes are available as investment options to program participants. The Fund's 529 share classes may also be offered through qualified tuition programs for which MFD does not serve as program manager. MFD provides, either directly or through third parties, recordkeeping, tax reporting, and account services, as well as services designed to maintain the programs' compliance with the Internal Revenue Code and other regulatory requirements under a Master 529 Administrative Services Agreement.
Under the Agreement, the Fund pays MFD a fee for these services of up to 0.35% annually of the assets attributable to the 529 share classes. The current annual fee has been established at 0.25% of the average daily net assets attributable to each 529 share class up to $10 billion in assets, 0.225% from $10 billion in assets up to $20 billion in assets, and 0.20% from $20 billion in assets and above. The fee may only be increased with the approval of the Fund's Board of Trustees. MFD pays a portion of this fee to third parties who provide these services.
Please consult the program description for your particular qualified tuition program for a discussion of the fees paid to and services received from the program manager.
CODE OF ETHICS
The Fund, its Adviser, its sub-adviser (if applicable) and Distributor have adopted separate codes of ethics as required under the Investment Company Act of 1940 ("the 1940 Act"). Subject to certain conditions and restrictions, each code permits personnel subject to the code to invest in securities for their own accounts, including securities that may be purchased, held or sold by the Fund. Securities transactions by some of these persons may be subject to prior approval of the Adviser's or sub-adviser's Compliance Departments, and securities transactions of certain personnel are subject to quarterly reporting and review requirements.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge paid to MFD and imposed upon
purchases of Class A, Class A1, and Class 529A shares, and the CDSC paid to MFD
and imposed upon redemptions of Class A, Class A1, Class B, Class B1, Class C,
Class 529B, and Class 529C shares, are waived. These circumstances are described
in Appendix C of this Part II. The Fund, MFS, and their affiliates reserve the
right to eliminate, modify, and add waivers at any time in their discretion.
DISTRIBUTION PLAN
The Trustees have approved a plan for all funds (except the MFS Money Market
Fund and the MFS Government Money Market Fund) in accordance with Rule 12b-1
under the 1940 Act for Class A, Class B, Class B1, Class C, Class 529A, Class
529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, Class W and
Class J shares (the "Distribution Plan"). The Fund has not adopted a
Distribution Plan with respect to its Class A1, Class I or Class R5 shares. In
approving the Distribution Plan, the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust as defined in the 1940
Act and have no direct or indirect financial interest in the operation of the
Distribution Plan or any agreements relating to the Distribution Plan
("Distribution Plan Qualified Trustees"), concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders.
The Distribution Plan is designed to promote sales of shares and minimize redemptions, as well as to assist in the servicing and maintenance of shareholder accounts. Increasing a Fund's net assets through sales of shares, or minimizing reductions in net assets by minimizing redemptions, may help reduce a Fund's expense ratio by spreading the Fund's fixed costs over a larger base and may reduce the potential adverse effect of selling a Fund's portfolio securities to meet redemptions. There is, however, no assurance that the net assets of the Fund will increase or not be reduced, or that other benefits will be realized as a result of the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its continuance is specifically approved at least annually by vote of both the Trustees and a majority of the Distribution Plan Qualified Trustees. The Distribution Plan also requires that the Fund and MFD each provide the Trustees, and that the Trustees review, at least quarterly, a written report of the amounts expended (and purposes therefor) under the Distribution Plan. The Distribution Plan may be terminated at any time by vote of a majority of the Distribution Plan Qualified Trustees or by a Majority Shareholder Vote of the shares of the class to which the Distribution Plan relates ("Designated Class"). The Distribution Plan may not be amended to increase materially the amount of permitted distribution expenses without the approval of a majority of the shares of the Designated Class of the Fund, or may not be materially amended in any case without a vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The distribution and service fees paid to MFD equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
-------------------------------------------------------------------------------
MAXIMUM TOTAL
MAXIMUM MAXIMUM SERVICE DISTRIBUTION AND
CLASS DISTRIBUTION FEE FEE SERVICE FEE
-------------------------------------------------------------------------------
Class A 0.10% 0.25% 0.35%
-------------------------------------------------------------------------------
Class B 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class B1 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class C 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class 529A 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class 529B 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class 529C 0.75% 0.25% 1.00%
-------------------------------------------------------------------------------
Class R 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R1 0.50% 0.25% 0.75%
-------------------------------------------------------------------------------
Class R2 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R3 0.25% 0.25% 0.50%
-------------------------------------------------------------------------------
Class R4 0.00% 0.25% 0.25%
-------------------------------------------------------------------------------
Class W 0.10% 0.00% 0.10%
-------------------------------------------------------------------------------
Class J 0.25% 0.70%/0.75% 0.95%/1.00%
-------------------------------------------------------------------------------
Service Class 0.25% 0.00% 0.25%
-------------------------------------------------------------------------------
|
In certain circumstances, the fees described above may not be implemented, are being waived, or do not apply to certain MFS Funds. Current distribution and service fees for each Fund are reflected under the captions "Expense Summary" and "Description of Share Classes -- Distribution and Service Fees" in the Prospectus.
SERVICE FEES
The Distribution Plan provides that the Fund may pay MFD a service fee based on the average daily net assets attributable to the Designated Class, (i.e., Class A, Class B, Class B1, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, or Class J shares, as appropriate) annually. Class W shares do not pay a service fee. MFD may, at its discretion, retain all or a portion of such payments or pay all or a portion of such payments to financial intermediaries. Service fees compensate MFD and/or financial intermediaries for shareholder servicing and account maintenance activities, including, but not limited to, shareholder recordkeeping (including assisting in establishing and maintaining customer accounts and records), transaction processing (including assisting with purchase, redemption and exchange requests), shareholder reporting, arranging for bank wires, monitoring dividend payments from the Funds on behalf of customers, forwarding certain shareholder communications from the Funds to customers, corresponding with shareholders and customers regarding the Funds (including receiving and responding to inquiries and answering questions regarding the Funds), and aiding in maintaining the investment of their respective customers in the Funds. Financial intermediaries may from time to time be required to meet certain criteria in order to receive service fees.
DISTRIBUTION FEES
The Distribution Plan provides that the Fund may pay MFD a distribution fee based on the average daily net assets attributable to the Designated Class as partial consideration for distribution services performed and expenses incurred in the performance of MFD's obligations under its distribution agreement with the Fund. Distribution fees compensate MFD and/or financial intermediaries for their expenses in connection with the distribution of Fund shares, including, but not limited to, commissions to financial intermediaries, printing prospectuses and reports used for sales purposes, the preparation and printing of sales literature, personnel, travel, office expense and equipment, payments made to wholesalers employed by MFD (employees may receive additional compensation if they meet certain targets for sales of one or more MFS Funds), and other distribution-related expenses. The amount of the distribution fee paid by the Fund with respect to each class differs under the Distribution Plan, as does the use by MFD of such distribution fees. While the amount of compensation received by MFD in the form of distribution fees during any year may be more or less than the expenses incurred by MFD under its distribution agreement with the Fund, the Fund is not liable to MFD for any losses MFD may incur in performing services under its Distribution Agreement with the Fund.
In addition, with respect to Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Emerging Growth Fund, MFS High Income Fund, MFS Total Return Fund, MFS Research Fund, MFS Strategic Income Fund, and MFS Bond Fund, to the extent that the annualized aggregate service and distribution fees paid under the Distribution Plan do not exceed 0.35% of Class A shares' average daily net assets, the Fund is permitted to pay such distribution-related expenses or other distribution-related expenses.
FINANCIAL INTERMEDIARY COMPENSATION
MFD and/or its affiliates may pay commissions, Rule 12b-1 distribution and service fees, 529 administrative services fees, retirement plan administrative and service fees, shareholder servicing fees, and other payments to financial intermediaries that sell Fund shares as described in Appendix D of this Part II.
INVESTMENT STRATEGIES, RISKS AND RESTRICTIONS
Set forth in Appendix E of this Part II is a description of investment strategies which the MFS Funds may generally use in pursuing their investment objectives and investment policies to the extent such strategies are consistent with their investment objectives and investment policies, and a description of the risks associated with these investment strategies. Set forth in Appendix F of this Part II is a description of investment restrictions to which the Fund is subject.
NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is determined each day during which the New York Stock Exchange is open for trading (see "Determination of Net Asset Value" below for a list of days that the Exchange is closed).
For this purpose, the net income attributable to shares of a money market fund (from the time of the immediately preceding determination thereof) shall consist of (i) all interest income accrued on the portfolio assets of the money market fund less (ii) all actual and accrued expenses of the money market fund determined in accordance with generally accepted accounting principles. Interest income shall include discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income is determined, the net asset value per share (i.e., the value of the net assets of the money market fund divided by the number of shares outstanding) is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment, representing the reinvestment of dividend income, is reflected by an increase in the number of shares in the shareholder's account.
It is expected that the shares of the money market fund will have a positive net income at the time of each determination thereof. If for any reason the net income determined at any time is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the money market fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to each such account. If and to the extent that such negative amount exceeds such declared dividends at the end of the month (or during the month in the case of an account liquidated in its entirety), the money market fund could reduce the number of its outstanding shares by treating each shareholder of the money market fund as having contributed to its capital that number of full and fractional shares of the money market fund in the account of such shareholder which represents its proportion of such excess. Each shareholder of the money market fund will be deemed to have agreed to such contribution in these circumstances by his or her investment in the money market fund. This procedure would permit the net asset value per share of the money market fund to be maintained at a constant $1.00 per share.
In addition, the money market funds intend to distribute net realized short- and long-term capital gains, if any, at least annually.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute to its shareholders all or substantially all of its net investment income. The net investment income of these Funds consists of non-capital gain income less expenses. In addition, these Funds intend to distribute net realized short- and long-term capital gains, if any, at least annually. Shareholders will be informed of the tax consequences of such distributions, including whether any portion represents a return of capital, after the end of each calendar year.
TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important federal
(and, where noted, state) income tax consequences affecting the Fund and its
shareholders. The discussion is very general, and therefore prospective
investors are urged to consult their tax advisers about the impact an investment
in the Fund may have on their own tax situations.
TAX TREATMENT OF THE FUND
Federal Taxes -- The Fund (even if it is a Fund in a Trust with multiple series) is treated as a separate entity for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has elected (or in the case of a new Fund, intends to elect) to be, and intends to qualify to be treated each year as, a "regulated investment company" under Subchapter M of the Code.
In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in "qualified publicly traded partnerships" (as defined below);
(b) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid-generally, taxable ordinary income and the excess, if any, of the net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year; and
(c) diversify its holdings so that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested (x) in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or businesses or (y) in the securities of one or more qualified publicly traded partnerships (as defined below).
In the case of the Fund's investment in loan participations, the Fund shall treat both the financial intermediary and the issuer of the loan participation as an issuer for the purposes of meeting the diversification requirement described in paragraph (c).
In general, for purposes of the 90% income requirement described in paragraph
(a) above, income derived from a partnership will be treated as qualifying
income only to the extent such income is attributable to items of income of the
partnership which would be qualifying income if realized by the regulated
investment company. However, 100% of the net income derived from an interest in
a "qualified publicly traded partnership" (which is defined as any partnership
(i) whose interests are traded on an established securities market or whose
interests are readily traded on a secondary market or the substantial equivalent
thereof and (ii) that derives less than 90% of its income from the qualifying
income described in paragraph (a)(i) above) will be treated as qualifying
income. In addition, although in general the passive loss rules of the Code do
not apply to regulated investment companies, such rules do apply to a regulated
investment company with respect to items attributable to an interest in a
qualified publicly traded partnership. Finally, for purposes of paragraph (c)
above, the term "outstanding voting securities of such issuer" will include
the equity securities of a qualified publicly traded partnership.
As a regulated investment company, the Fund will not be subject to any federal income or excise taxes on its net investment income and net realized capital gains that it distributes to shareholders in accordance with the timing requirements imposed by the Code. The Fund's foreign-source income, if any, may be subject to foreign withholding taxes. If the Fund failed to qualify as a "regulated investment company" in any year, it would incur a regular federal corporate income tax on all of its taxable income, whether or not distributed, and Fund distributions would generally be taxable as dividend income to the shareholders.
If the Fund fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or later if the Fund is permitted so to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders by the Fund in January of a year generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November, or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
Massachusetts Taxes -- As long as it qualifies as a regulated investment company under the Code, the Fund will not be required to pay Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
Tax Treatment of Distributions -- Subject to the special rules discussed below for Municipal Funds, shareholders of the Fund normally will have to pay federal income tax and any state or local income taxes on the dividends and "Capital Gain Dividends" (as defined below) they receive from the Fund. Except as described below, any distributions from ordinary income or from net short-term capital gains are taxable to shareholders as ordinary income for federal income tax purposes whether paid in cash or reinvested in additional shares.
For taxable years beginning before January 1, 2011, "qualified dividend income" received by an individual will be taxed at the rates applicable to long-term capital gains. In order for some portion of the dividends received by a Fund shareholder to be qualified dividend income, the Fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to the Fund's shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (1) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such date), (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) if the recipient elects to have the dividend income treated as investment interest, or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (b) treated as a passive foreign investment company. Payments in lieu of dividends, such as payments pursuant to securities lending arrangements, also do not qualify to be treated as qualified dividend income.
In general, a distribution of investment income designated by the Fund as derived from qualified dividend income will be treated as qualified dividend income by a shareholder taxed as an individual provided the shareholder meets the holding period and other requirements described above with respect to the Fund's shares. In any event, if the qualified dividend income received by the Fund during any taxable year is 95% or more of its gross income for that taxable year, then 100% of the Fund's dividends (other than Capital Gain Dividends), will be eligible to be treated as qualified dividend income. For this purpose, in the case of a sale or other disposition of the Fund of stock or securities, the only gain included in the term "gross income" is the excess of net short-term capital gain from such sales or dispositions over the net long-term capital loss from such sales or dispositions.
Properly designated distributions of net capital gain (i.e., the excess of net long-term capital gain over the net short-term capital loss) ("Capital Gains Dividends"), whether paid in cash or reinvested in additional shares, are taxable to shareholders as long-term capital gains for federal income tax purposes without regard to the length of time the shareholders have held their shares.
Long-term capital gain rates applicable to individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
Any Fund dividend that is declared in October, November, or December of any calendar year, payable to shareholders of record in such a month and paid during the following January, will be treated as if received by the shareholders on December 31 of the year in which the dividend is declared. The Fund will notify shareholders regarding the federal tax status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the Fund on a daily basis, will have the effect of reducing the per share net asset value of Fund shares by the amount of the distribution. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Capital Loss Carryovers-- Distributions from capital gains are generally made after applying any available capital loss carryovers. The amounts and expiration dates of any capital loss carryovers available to the Fund are shown in the notes to the financial statements for the Fund.
Dividends-Received Deduction-- If the Fund receives dividend income from U.S. corporations, a portion of the Fund's ordinary income dividends is normally eligible for the dividends-received deduction for corporations if the recipient otherwise qualifies for that deduction with respect to its holding of Fund shares. Availability of the deduction for particular corporate shareholders is subject to certain limitations, and deducted amounts may be subject to the alternative minimum tax or result in certain basis adjustments.
Disposition of Shares-- In general, any gain or loss realized upon a disposition of Fund shares by a shareholder that holds such shares as a capital asset will be treated as a long-term capital gain or loss if the shares have been held for more than 12 months and otherwise as a short-term capital gain or loss. However, any loss realized upon a disposition of Fund shares held for six months or less will be treated as a long-term capital loss to the extent of any Capital Gain Dividends made with respect to those shares.
Shares Purchased Through Tax-Qualified Plans -- Distributions by the Fund to
retirement plans that qualify for tax-exempt treatment under federal income tax
laws will not be taxable. Special tax rules apply to investments through such
plans. You should consult your tax adviser to determine the suitability of the
Fund as an investment through such a plan and the tax treatment of distributions
(including distributions of amounts attributable to an investment in the Fund)
from such a plan.
U.S. Taxation of Non-U.S. Persons -- Capital Gain Dividends and exempt-interest
dividends, if any, will not be subject to withholding of federal income tax.
However, distributions properly designated as exempt-interest dividends may be
subject to backup withholding, as discussed below. In general, dividends other
than Capital Gain Dividends and exempt-interest dividends, if any, paid by the
Fund to a shareholder that is not a "U.S. person" within the meaning of the
Code (such shareholder, a "Non-U.S. Person") are subject to withholding of U.S
federal income tax at a rate of 30% (or lower applicable treaty rate) even if
they are derived from income or gains (such as portfolio interest, short-term
capital gains, or foreign-source dividend and interest income) that, if paid to
a Non-U.S. Person directly, would not be subject to withholding. However,
effective for taxable years of the Fund beginning after December 31, 2004, and
before January 1, 2008, the Fund will not be required to withhold any amounts
with respect to (i) distributions (other than distributions to a Non-U.S. Person
(w) that has not provided a satisfactory statement that the beneficial owner is
not a U.S. person, (x) to the extent that the dividend is attributable to
certain interest on an obligation if the Non-U.S. Person is the issuer or is a
10% shareholder of the issuer, (y) that is within certain foreign countries that
have inadequate information exchange with the United States, or (z) to the
extent the dividend is attributable to interest paid by a person that is a
related person of the Non-U.S. Person and the Non-U.S. Person is a controlled
foreign corporation) from U.S.-source interest income that would not be subject
to U.S. federal income tax if earned directly by an individual Non-U.S. Person
(an "interest-related dividend"), and (ii) distributions (other than
distributions to an individual Non-U.S. Person who is present in the United
States for a period or periods aggregating 183 days or more during the year of
the distribution) of net short-term capital gains in excess of net long-term
capital losses (a "short-term capital gain dividend"), in each such case to
the extent such distributions are properly designated by the Fund. This
provision will first apply to the Fund (1) with respect to its direct portfolio
investments (if any) in its taxable year beginning after December 31, 2004, and,
(2) with respect to its investments in underlying Funds (if any), with respect
to designated distributions from such underlying Funds in their taxable years
beginning after December 31, 2004, that are received by the Fund in its taxable
year beginning after December 31, 2004. Depending on the circumstances, the Fund
may make such designations with respect to all, some or none of its potentially
eligible dividends and/or treat such dividends, in whole or in part, as
ineligible for this exemption for withholding. The Fund does not currently
intend to, but may in certain circumstances, designate distributions as
interest-related dividends or as short-term capital gain dividends except with
respect to Research Bond Fund J shares. In order to qualify for this exemption
from withholding, a foreign person will need to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN or substitute Form). In the case of
shares held through an intermediary, the intermediary may withhold even if the
Fund makes a designation with respect to a payment. Foreign persons should
contact their intermediaries with respect to the application of these rules to
their accounts.
If a beneficial holder who is a Non-U.S. Person has a trade or business in the United States, and the dividends are effectively connected with the conduct by the beneficial holder of a trade or business in the United States, the dividend will be subject to U.S. federal net income taxation at regular income tax rates.
In general, special tax rules apply to distributions that a "qualified investment entity" (a "QIE") pays to foreign shareholders that are attributable to gain from the Fund's sale or exchange of "U.S. real property interests" (a "USRPI Distribution"). A Fund will be a QIE if it is both (i) a regulated investment company and (ii) a "U.S. real property holding corporation" (determined without regard to certain exceptions, described below, for 5% holders of publicly traded classes of stock and for interests in domestically-controlled regulated investment companies and real estate investment trusts ("REITs")). Under the Code, a "U.S. real property holding corporation" is any corporation that holds (or held during the previous five-year period) "U.S. real property interests" ("USRPIs") (defined as U.S. real property and interests (other than solely as a creditor) in "U.S. real property holding corporations") with an aggregate fair market value equal to 50% or more of the fair market value of the corporation's real property assets and other trade-or-business assets. A USRPI does not include (i) any class of stock of a corporation that is traded on an established securities market with respect to a person who holds 5% or less of such class of stock at all times during the previous five-year period and (ii) a regulated investment company's interests in domestically controlled REITs and other regulated investment companies.
For taxable years beginning on or after January 1, 2006, where a foreign shareholder has owned more than 5% of a class of shares of a Fund that is a QIE during the one-year period preceding the date of the USRPI Distribution, the Fund will be required to withhold 35% of any USRPI Distribution and the foreign shareholder will have an obligation to file a U.S. tax return and pay tax. For all other foreign shareholders of a Fund that is a QIE, a USRPI Distribution will be treated as ordinary income (notwithstanding any designation by the Fund that such distribution is a Capital Gain Dividend) and the Fund will be required to withhold 30% (or lower applicable treaty rate) of such distribution. If a Fund that is a QIE makes a distribution to its foreign shareholders that is attributable to a USRPI Distribution received by the Fund from a "lower-tier" REIT or regulated investment company that is a QIE, that distribution will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the "lower-tier" REIT or regulated investment company.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend and certain other conditions are met, or (iii) the shares are USRPIs or the Capital Gain Dividends are USRPI Distributions.
Foreign shareholders in the Fund should consult their tax advisers with respect to the potential application of the above rules.
Backup Withholding -- The Fund is also required in certain circumstances to apply backup withholding at the rate of 28% on taxable dividends, including Capital Gain Dividends, redemption proceeds (except for redemptions by money market funds), and certain other payments that are paid to any non-corporate shareholder (including a Non-U.S. Person) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor residents of the United States. The back-up withholding rules also apply to distributions that are properly designated as exempt-interest dividends.
Foreign Income Taxation of a Non-U.S. Person -- Distributions received from the Fund by a Non-U.S. Person may also be subject to tax under the laws of their own jurisdictions.
State and Local Income Taxes: U.S. Government Securities -- Dividends paid by the Fund that are derived from interest on obligations of the U.S. Government and certain of its agencies and instrumentalities (but generally not distributions of capital gains realized upon the disposition of such obligations) may be exempt from state and local income taxes. The Fund generally intends to advise shareholders of the extent, if any, to which its dividends 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.
Certain Investments -- Any investment in zero coupon bonds, deferred interest bonds, payment-in-kind bonds, certain inflation-adjusted debt instruments, certain stripped securities, and certain securities purchased at a market discount (including certain high yield debt obligations) will cause the Fund to recognize income prior to the receipt of cash payments with respect to those securities. To distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund's investments in REIT equity securities may also require the Fund to accrue and distribute income not yet received and may at other times result in the Fund's receipt of cash in excess of the REIT's earnings. If the Fund distributes such amounts, such distribution could constitute a return of capital to Fund shareholders for federal income tax purposes. Income from REIT securities generally will not be eligible for treatment as qualified dividend income. Any investment in residual interests of a Collateralized Mortgage Obligation (a "CMO") that has elected to be treated as a real estate mortgage investment conduit (a "REMIC") can create complex tax problems, especially if the Fund has state or local governments or other tax-exempt organizations as shareholders. Under current law, the Fund serves to block unrelated business taxable income ("UBTI") from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if either: (1) the Fund invests in REITs that hold residual interests in REMICs; or (2) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). If a charitable remainder trust (as defined in Code Section 664) realizes any UBTI for a taxable year, it will lose its tax-exempt status for the year.
Options, Futures Contracts, and Forward Contracts -- The Fund's transactions in options, futures contracts, forward contracts, short sales, and swaps and related transactions will be subject to special tax rules that may affect the amount, timing, and character of Fund income and distributions to shareholders. For example, certain positions held by the Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out on that day), and any gain or loss associated with the positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by the Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," and may be subject to special tax rules that would cause deferral of Fund losses, adjustments in the holding periods of Fund securities, and conversion of short-term into long-term capital losses. Certain tax elections exist for straddles that may alter the effects with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund will limit its activities in options, futures contracts, forward contracts, short sales, and swaps and related transactions to the extent necessary to meet the diversification requirements of Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to foreign investments by the Fund. Foreign exchange gains and losses realized by the Fund may be treated as ordinary income and loss. Use of foreign currencies for non-hedging purposes and investment by the Fund in certain "passive foreign investment companies" may be limited in order to avoid a tax on the Fund. The Fund may elect to mark to market certain investments in "passive foreign investment companies" on the last day of each year. This election may cause the Fund to recognize income prior to the receipt of cash payments with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund.
Foreign Income Taxes -- Investment income received by the Fund and gains with respect to foreign securities may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of tax or an exemption from tax on such income; the Fund intends to qualify for treaty reduced rates where available. It is not possible, however, to determine the Fund's effective rate of foreign tax in advance, since the amount of the Fund's assets to be invested within various countries is not known.
If more than 50% of the total assets of a Fund are represented by direct investments in foreign stock and securities at the close of its taxable year, the Fund may elect to "pass through" to its shareholders foreign income taxes paid by it. If the Fund so elects, shareholders will be required to treat their pro rata portions of the foreign income taxes paid by the Fund as part of the amounts distributed to them by it and thus includable in their gross income for federal income tax purposes. Shareholders who do not itemize deductions would (subject to such limitations) be able to claim a credit but not a deduction. No deduction will be permitted to individuals in computing their alternative minimum tax liability. If the Fund is not eligible, or does not elect, to "pass through" to its shareholders foreign income taxes it has paid, shareholders will not be able to claim any deduction or credit for any part of the foreign taxes paid by the Fund. In addition, the Fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the Fund's recognition of ordinary income and may affect the timing, amount, or character of the Fund's distributions.
Tax Shelter Reporting -- Under Treasury regulations, if a shareholder recognizes a loss with respect to the Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Underlying Funds -- If the Fund invests all of its assets in shares of underlying Funds, its distributable income and gains will normally consist entirely of distributions from the underlying Funds' income and gains and gains and losses on the dispositions of shares of underlying Funds. To the extent that an underlying Fund realizes net losses on its investments for a given taxable year, the Fund will not be able to recognize its share of those losses (so as to offset distributions of net income or capital gains from other underlying Funds) until it disposes of shares of the underlying Fund. Moreover, even when the Fund does make such a disposition, a portion of its loss may be recognized as a long-term capital loss, which will not be treated as favorably for federal income tax purposes as a short-term capital loss or an ordinary deduction. In particular, the Fund will not be able to offset any capital losses from its dispositions of underlying Fund shares against its ordinary income, which includes distributions of any net short-term capital gains realized by an underlying Fund. In addition, in certain circumstances, the "wash sale" rules under Section 1091 of the Code may apply to a Fund's sales of underlying Fund shares that have generated losses. A wash sale occurs if shares of an underlying Fund are sold by the Fund at a loss and the Fund acquires additional shares of that same underlying Fund thirty days before or after the date of the sale. The wash sale rules could defer losses of the Fund on sales of underlying Fund shares (to the extent such sales are wash sales) for extended (and, in certain cases, potentially indefinite) periods of time. As a result of the foregoing rules, and certain other special rules, it is possible that the amounts of net investment income and net capital gains that the Fund will be required to distribute to shareholders will be greater than such amounts would have been had the Fund invested directly in the securities held by the underlying Funds, rather than investing in shares of the underlying Funds. For similar reasons, the character of distributions from a Fund (e.g., capital gains as compared to ordinary income, eligibility for the dividends-received deduction, etc.) will not necessarily be the same as it would have been had the Fund invested directly in the securities held by the underlying Funds.
If the Fund received dividends from an underlying Fund that qualifies as a regulated investment company, and the underlying Fund designates such dividends as "qualified dividend income," then the Fund is permitted in turn to designate a portion of its distributions as "qualified dividend income" as well, provided the Fund meets holding period and other requirements with respect to shares of the underlying Fund.
Depending on the Fund's percentage ownership in an underlying Fund before and after a redemption of shares of such underlying Fund, such a redemption may cause the Fund to be treated as receiving a dividend on the full amount of the distribution instead of receiving capital gain income on the shares of the underlying Fund. This would be the case where the Fund holds a significant interest in an underlying Fund and redeems only a small portion of such interest. It is possible that such a dividend will qualify as "qualified dividend income;" otherwise, it will be taxable as ordinary income.
The fact that a Fund achieves its investment objectives by investing in underlying Funds will generally not adversely affect the Fund's ability to pass on to foreign shareholders the full benefit of the interest-related dividends and short-term capital gain dividends that it receives from its underlying investments in the Funds, except possibly to the extent that (1) interest-related dividends received by the Fund are offset by deductions allocable to the Fund's qualified interest income or (2) short-term capital gain dividends received by the Fund are offset by the Fund's net short- or long-term capital losses, in which case the amount of a distribution from the Fund to a foreign shareholder that is properly designated as either an interest-related dividend or a short-term capital gain dividend, respectively, may be less than the amount that such shareholder would have received had they invested directly in the underlying Funds. Furthermore, if the Fund is a QIE and invests in an underlying Fund that is a QIE, a distribution to a foreign shareholder that is attributable to a USRPI Distribution received by the Fund will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the underlying Fund.
Under the current law, a Fund of Funds cannot pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying Fund. A Fund is permitted to elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and securities at the close of its taxable year. Foreign securities held indirectly through an underlying Fund do not contribute to this 50% threshold.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of Funds whose objective is to invest primarily in obligations that pay interest that is exempt from federal income tax ("Municipal Funds").
Tax-Exempt Distributions -- The portion of a Municipal Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends will increase a corporate shareholder's alternative minimum tax. Except when the Fund provides actual monthly percentage breakdowns, the percentage of income designated as tax-exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Taxable Distributions -- A Municipal Fund may also earn some income that is taxable as ordinary income (including interest from any obligations that lose their federal tax exemption and, subject to a de minimis exception, when a bond purchased at a price less than its stated redemption price at maturity (a so-called "market discount bond") matures or is disposed of by the Municipal Fund) and may recognize capital gains and losses as a result of the disposition of securities and from certain options and futures transactions. Shareholders normally will have to pay federal income tax on the non-exempt interest dividends and capital gain distributions they receive from the Fund, whether paid in cash or reinvested in additional shares. However, such Funds do not expect that the non-tax-exempt portion of their net investment income, if any, will be substantial. Because Municipal Funds expect to earn primarily tax-exempt interest income, it is expected that dividends from such Funds will not qualify for the dividends-received deduction for corporations and will not be treated as "qualified dividend income" taxable to non-corporate shareholders at reduced rates.
Consequences of Distributions by a Municipal Fund: Effect of Accrued Tax-Exempt Income -- Shareholders redeeming shares after tax-exempt income has been accrued but not yet declared as a dividend should be aware that a portion of the proceeds realized upon redemption of the shares will reflect the existence of such accrued tax-exempt income and that this portion 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 redemption. For this reason, if a shareholder wishes to redeem shares of a Municipal Fund that does not declare dividends on a daily basis, the shareholder may wish to consider whether he or she could obtain a better tax result by redeeming immediately after the Fund declares dividends representing substantially all the ordinary income (including tax-exempt income) accrued for that period.
Certain Additional Information for Municipal Fund Shareholders -- Interest on indebtedness incurred by shareholders to purchase or carry Municipal Fund shares will not be deductible for federal income tax purposes. Exempt-interest dividends are taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal income tax. You should consult your tax adviser to determine what effect, if any, an investment in a Fund may have on the federal taxation of your benefits. Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by private activity bonds should consult their tax advisers before purchasing Fund shares.
Consequences of Redeeming Shares -- Any loss realized on a redemption of Municipal Fund shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received with respect to those shares. If not disallowed, any such loss will be treated as a long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares.
State and Local Income Taxes: Municipal Obligations -- The exemption of exempt-interest dividends for federal income tax purposes does not necessarily result in exemption under the income tax laws of any state or local taxing authority. Some states do exempt from tax that portion of an exempt interest dividend that represents interest received by a regulated investment company on its holdings of securities issued by that state and its political subdivisions and instrumentalities. Therefore, the Fund will report annually to its shareholders the percentage of interest income earned by it during the preceding year on Municipal Bonds and will indicate, on a state-by-state basis only, the source of such income.
SPECIAL CONSIDERATIONS FOR 529 SHARE CLASSES
The following special consideration applies specifically to the ownership of a Fund' 529 share classes through a tuition program that qualifies under Section 529 of the Code.
The 529 share classes are an investment option under one or more tuition programs designed to qualify under Section 529 of the Code so that earnings on investments are not subject to federal income tax (to either a contributor to the tuition program or a designated beneficiary) until the earnings are withdrawn. Withdrawals of earnings that are used to pay "qualified higher education expenses" are tax-free for federal income tax purposes. State and local taxes may still apply. These tax benefits are not available to 529 shares that are not owned through a qualifying Section 529 tuition program.
Withdrawals of earnings that are not used for the designated beneficiary's qualified higher education expenses generally are subject not only to federal income tax but also to a 10% penalty tax unless such amounts are transferred within sixty (60) days to another tuition program for the same designated beneficiary (only one such transfer may be made in any twelve (12) month period) or another designated beneficiary who is a member of the family of the designated beneficiary with respect to which the distribution was made and certain other conditions are satisfied. The 10% penalty tax will not apply to withdrawals made under certain circumstances, including certain withdrawals made after the designated beneficiary dies, becomes disabled, or receives a scholarship or other tax-free payment for educational expenses that does not exceed the amount of the distribution. Withdrawals attributable to contributions to the tuition program (including the portion of any rollover from another tuition program that is attributable to contributions to that program) are not subject to tax.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
For the purposes of this section, all references to the "Adviser" shall include
the Sub-Adviser with respect to MFS Diversified Income Fund and MFS Sector
Rotational Fund.
Specific decisions to purchase or sell securities for the Funds are made by persons affiliated with the Adviser. Any such person may serve other clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
In connection with the selection of broker/dealers and the placing of Fund
portfolio transactions, the Adviser seeks to achieve for the Funds the best
overall price and execution available from responsible brokerage firms, taking
account of all factors it deems relevant, including by way of illustration:
price; the size of the transaction; the nature of the market of the security;
the amount of the commission; the timing and impact of the transaction taking
into account market prices and trends; the reputation, experience and financial
stability of the broker/dealer involved; the willingness of the broker/dealer to
commit capital; the need for anonymity in the market; and the quality of
services rendered by the broker/dealer in that and other transactions.
In the case of securities traded in the over-the-counter market, portfolio transactions may be effected either on an agency basis, which involves the payment of negotiated brokerage commissions to the broker/dealer, including electronic communication networks, or on a principal basis at net prices without commissions, but which include compensation to the broker/dealer in the form of a mark-up or mark-down, depending on where the Adviser believes best execution is available. In the case of securities purchased from underwriters, the cost of such securities generally includes a fixed underwriting commission or concession. From time to time, soliciting dealer fees are available to the Adviser on tender or exchange offers. Such soliciting or dealer fees are, in effect, recaptured by the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended ("Section 28(e)"), the Adviser may cause the Funds to pay a broker/dealer which provides "brokerage and research services" (as defined by the Securities Exchange Act of 1934, as amended) to the Adviser an amount of commission for effecting a securities transaction for the Funds in excess of the amount other broker/dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the effecting broker/dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Funds and its other clients. "Commissions," as interpreted by the SEC, include fees paid to brokers for trades conducted on an agency basis, and certain mark-ups, markdowns, commission equivalents and other fees received by dealers in riskless principal transactions placed in the over-the-counter market.
The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement) or required in connection therewith by applicable rules. In determining whether a service or product qualifies as "brokerage and research services," the Adviser evaluates whether the service or product provides lawful and appropriate assistance to the Adviser in carrying out its investment decision-making responsibilities. It is often not possible to place a dollar value on the brokerage and research services the Adviser received from brokers. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions is based primarily on the professional opinions of the persons responsible for the placement and review of such transactions.
Broker/dealers may be willing to furnish statistical, research and other factual information or services ("Research"), for example, investment research reports; access to analysts; execution systems and trading analytics; reports or databases containing corporate, fundamental, and technical analyses; portfolio modeling strategies; and economic research services, such as publications, chart services, and advice from economists concerning macroeconomics information, and analytical investment information about particular corporations to the Adviser for no consideration other than brokerage or underwriting commissions. Such broker/dealers may be involved from time to time in executing, clearing or settling securities transactions on behalf of the Funds ("Executing Brokers"), or may have entered into agreements with one or more Executing Brokers pursuant to which they are responsible for performing one or more functions, the performance of which has been identified by the SEC as being sufficient to constitute effecting securities transactions within the meaning of Section 28(e) as interpreted by the SEC ("Effecting Brokers"). In reliance on this interpretation the Adviser expects to enter into Commission Sharing Agreements with Executing Brokers which will provide for the Executing Brokers to pay a portion of the Commissions paid by the Funds for securities transactions to Effecting Brokers. In addition to effecting securities transactions on behalf of the Funds pursuant to a Commission Sharing Agreement, the Effecting Brokers will also provide Research for the benefit of the Adviser. If a government agency with regulatory authority over the affairs of the Adviser or its subsidiaries, or a court of competent jurisdiction, were to determine that an Effecting Broker is not effecting a securities transaction within the meaning of Section 28(e), the Adviser believes that such Research should be considered as Research provided by the relevant Executing Broker and permitted by Section 28(e), provided that the relationship with such Executing Broker is otherwise consistent with the requirement for Research under Section 28(e). In such circumstances the Adviser will in effect be paying a greater commission in order to obtain third party research. The Adviser may use brokerage commissions from the Funds' portfolio transactions to acquire Research, subject to the procedures and limitations described in this discussion.
The advisory fee paid by each of the Funds to the Adviser is not reduced as a consequence of the Adviser's receipt of Research. To the extent the Funds' portfolio transactions are used to obtain Research, the brokerage commissions paid by the Funds might exceed those that might otherwise be paid for execution only. The Research received may be useful and of value to the Adviser in serving both the Funds and other clients of the Adviser; accordingly, not all of the Research provided by brokers through which the Funds effect securities transactions may be used by the Adviser in connection with the Funds. The Adviser would, through the use of the Research, avoid the additional expenses that would be incurred if it attempted to develop comparable information through its own staff.
From time to time, the Adviser prepares a list of broker/dealer firms that have been deemed by the Adviser to provide valuable Research as determined periodically by the investment staff ("Research Firms"), together with a suggested non-binding amount of brokerage commissions ("non-binding target") to be allocated to each Research Firm, subject to certain requirements. These Research Firms may include Executing Brokers and Effecting Brokers. In instances when the Adviser allocates commissions to Research Firms that are effecting trades within the meaning of Section 28(e) on behalf of client accounts, such trades will be executed in accordance with the Adviser's obligation to seek best execution for its client accounts. Neither the Adviser nor the Funds have an obligation to any Research Firm if the amount of brokerage commissions paid to the Research Firm is less than the applicable non-binding target. The Adviser reserves the right to pay cash to the Research Firm from its own resources in an amount the Adviser determines in its discretion.
If the Adviser determines that any service or product has a mixed use (i.e., it also serves functions that do not assist the investment decision-making or trading process), the Adviser will allocate the costs of such service or product accordingly in its reasonable discretion. The Adviser will allocate brokerage commissions to Research Firms only for the portion of the service or product that the Adviser determines assists it in the investment decision-making or trading process and will pay for the remaining value of the product or service in cash.
In effecting portfolio transactions on behalf of the Funds and the Adviser's other clients, the Adviser from time to time may instruct the broker/dealer that executes a transaction to allocate, or "step out," a portion of such transaction to another broker/dealer. The broker/dealer to which the Adviser has "stepped out" would then settle and complete the designated portion of the transaction, and the executing broker/dealer would settle and complete the remaining portion of the transaction that has not been "stepped out." Each broker/dealer may receive a commission or brokerage fee with respect to that portion of the transaction that it settles and completes.
In certain instances there may be securities that are suitable for the Funds' portfolios as well as for one or more of the other clients of the Adviser or of any subsidiary of the Adviser (or that the Adviser believes should no longer be held by the Funds' portfolios or by other clients of the Adviser or any subsidiary of the Adviser). 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. Transactions for each client are generally effected independently unless the Adviser determines to purchase or sell the same securities for several clients at approximately the same time. The Adviser may, but is not required to, aggregate together purchases and sales for several clients and will allocate the trades in a fair and equitable manner, across participating clients. The Adviser has adopted policies that are reasonably designed to ensure that when two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. Among other things, these policies prohibit allocations of equity initial public offerings, equity limited offerings or fixed income new issues to, among others: (1) Private Portfolio Management accounts; (2) funds or other accounts the beneficial owners of which are principally the Adviser's officers and employees of the Trust or Trustees which are not being offered to the public; and (3) any accounts owned beneficially solely by the Adviser or any direct or indirect subsidiary of the Adviser. However, these policies do not prohibit allocations to funds or other accounts owned beneficially by Sun Life of Canada (U.S.) Financial Services Holdings, Inc., or Sun Life Financial Inc., or their affiliates other than the Adviser and its direct and indirect subsidiaries. In addition, accounts in which the Adviser or any of its direct or indirect subsidiaries is the sole beneficial owner generally will be allocated investment opportunities (other than with respect to equity initial public offerings, equity limited offerings or fixed income new issues) on the same basis as Funds or other clients of the Adviser when the account has been established and seeded by the Adviser or the subsidiary with a limited amount of assets for the purpose of establishing a performance record to enable the Adviser or the subsidiary to offer the account's investment style to unaffiliated third parties.
It is recognized that in some cases this system could have a detrimental effect on the price or availability of a security as far as the Funds are concerned. In other cases, however, the Adviser believes that such practices may produce increased investment opportunities for the Funds.
DISCLOSURE OF PORTFOLIO HOLDINGS
Each Fund has established a policy governing the disclosure of its portfolio
holdings that is reasonably designed to protect the confidentiality of the
Fund's non-public portfolio holdings and prevent inappropriate selective
disclosure of such holdings. The Fund's Board of Trustees has approved this
policy and will be asked to approve any material amendments to this policy.
Exceptions to this policy may be authorized by MFS' general counsel or a senior
member of the MFS legal department acting under the supervision of MFS' general
counsel (an "Authorized Person").
Neither MFS nor the Fund nor, if applicable, a sub-adviser, will receive any compensation or other consideration in connection with its disclosure of Fund portfolio holdings.
PUBLIC DISCLOSURE OF PORTFOLIO HOLDINGS
In addition to the public disclosure of Fund portfolio holdings through required SEC quarterly filings, a Fund may make its portfolio holdings publicly available on the MFS Web site in such scope and form and with such frequency as MFS may reasonably determine.
The following information is generally available to you on the MFS Web site (MFS.COM):
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APPROXIMATE DATE OF POSTING
INFORMATION TO WEB SITE
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Fund's full securities holdings 24 days after month end
as of each month's end
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Fund's top 10 securities holdings
as of each month's end 14 days after month end
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If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for fund's that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the Fund or MFS may suspend the posting of this information or modify the elements of this Web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the Fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
Not all registered investment companies that are advised by MFS publicly disclose portfolio holdings in the form or on the schedule described above, and registered investment companies that are sub-advised by MFS or its affiliates may be subject to different portfolio holdings disclosure policies that may permit public disclosure of portfolio holdings information in different forms and at different times. In addition, separate account and unregistered product clients of MFS or its affiliates have access to their portfolio holdings, and prospective clients have access to representative portfolio holdings. These clients and prospective clients are not subject to the Fund's portfolio holdings disclosure policies. Some of these registered investment companies, sub-advised Funds, separate accounts, and unregistered products, all advised or sub-advised by MFS or its affiliates, have substantially similar or identical investment objectives and strategies to certain Funds. They therefore have potentially substantially similar, and in certain cases nearly identical, portfolio holdings as those Funds.
A Fund's portfolio holdings are considered to be publicly disclosed: (a) upon the disclosure of the portfolio holdings in a publicly available, routine filing with the SEC that is required to include the information; (b) the day after the Fund makes such information available on its Web site (assuming that it discloses in its prospectus that such information is available on its Web site); or (c) at such additional times and on such additional basis as determined by the SEC or its staff.
DISCLOSURE OF NON-PUBLIC PORTFOLIO HOLDINGS
A Fund may, in certain cases, disclose to third parties its portfolio holdings which have not been made publicly available. Disclosure of non-public portfolio holdings to third parties may only be made if an Authorized Person determines that such disclosure is not impermissible under applicable law or regulation. In the case of sub-advisers, as applicable, this determination may be made by a senior member of the sub-adviser's legal or compliance departments (a "Sub-Adviser Authorized Person"). In addition, the third party receiving the non-public portfolio holdings may, at the discretion of an Authorized Person, be required to agree in writing to keep the information confidential and/or agree not to trade directly or indirectly based on the information. Such agreements may not be required in circumstances such as where portfolio securities are disclosed to brokers to obtain bids/prices or in interviews with the media. MFS will seek to monitor a recipient's use of non-public portfolio holdings provided under these agreements and, when appropriate, use its best efforts to enforce the terms of these agreements. The restrictions and obligations described in this paragraph do not apply to non-public portfolio holdings provided to MFS or its affiliates.
In addition, to the extent that an Authorized Person determines that there is a potential conflict with respect to the disclosure of information that is not publicly available between the interests of a Fund's shareholders, on the one hand, and MFS, MFD or an affiliated person of MFS, MFD, or the Fund, on the other hand, the Authorized Person must inform MFS' conflicts officer of such potential conflict, and MFS' conflicts officer shall determine whether, in light of the potential conflict, disclosure is reasonable under the circumstances, and shall report such potential conflict of interest determinations to the Fund's Independent Chief Compliance Officer and the Board of Trustees of the Fund. MFS also reports to the Board of Trustees of the Fund regarding the disclosure of information regarding the Fund that is not publicly available.
Subject to compliance with the standards set forth in the previous two paragraphs, non-public portfolio holdings may be disclosed in the following circumstances:
Employees of MFS or MFD or, if applicable, a sub-adviser, (collectively "Fund representatives") disclose non-public portfolio holdings in connection with the day-to-day operations and management of the Fund. Full portfolio holdings are disclosed to a Fund's custodians, independent registered accounting firm, financial printers, regulatory authorities, and stock exchanges and other listing organizations. Portfolio holdings are disclosed to a Fund's pricing service vendors and broker/dealers when requesting bids for, or price quotations on, securities, and to other persons (including independent contractors) who provide systems or software support in connection with Fund operations, including accounting, compliance support, and pricing. Portfolio holdings may also be disclosed to persons assisting a Fund in the voting of proxies or in connection with litigation relating to Fund portfolio holdings. In connection with managing the Funds, MFS or, if applicable, a sub-adviser, may use analytical systems provided by third parties who may have access to Fund portfolio holdings.
Non-public portfolio holdings may be disclosed in connection with other activities, such as to participants in in-kind purchases and redemptions of Fund shares, to service providers facilitating the distribution or analysis of portfolio holdings, once the information is public, and in other circumstances not described above. All such disclosures are subject to compliance with the applicable disclosure standards.
In addition, subject to such disclosure not being impermissible under applicable law or regulation, Fund representatives may disclose Fund portfolio holdings and related information, which may be based on non-public portfolio holdings, under the following circumstances (among others):
Fund representatives may provide oral or written information ("portfolio commentary") about a Fund, including, but not limited to, how the Fund's investments are divided among various sectors, industries, countries, value and growth stocks, small, mid, and large-cap stocks, among stocks, bonds, currencies and cash, types of bonds, bond maturities, bond coupons, and bond credit quality ratings. This portfolio commentary may also include information on how these various weightings and factors contributed to Fund performance. Fund representatives may also express their views orally or in writing on one or more of a Fund's portfolio holdings or may state that a Fund has recently purchased or sold one or more holdings.
Fund representatives may also provide oral or written information ("statistical information") about various financial characteristics of a Fund or its underlying portfolio securities including, but not limited to, alpha, beta, coefficient of determination, duration, maturity, information ratio, Sharpe ratio, earnings growth, payout ratio, price/book value, projected earnings growth, return on equity, standard deviation, tracking error, weighted average quality, market capitalization, percent debt to equity, price to cash flow, dividend yield or growth, default rate, portfolio turnover, and risk and style characteristics.
The portfolio commentary and statistical information may be provided to members of the press, shareholders in the Fund, persons considering investing in the Fund, or representatives of such shareholders or potential shareholders, such as fiduciaries of a 401(k) plan or a trust and their advisers, and the content and nature of the information provided to each of these persons may differ.
ONGOING ARRANGEMENTS TO MAKE NON-PUBLIC PORTFOLIO HOLDINGS AVAILABLE
With authorization from an Authorized Person or, as applicable, a Sub-Adviser Authorized Person, consistent with "Disclosure of Non-Public Portfolio Holdings" above, Fund representatives may disclose non-public Fund portfolio holdings to the recipients identified on Appendix G to this SAI Part II, or permit the recipients identified in Appendix G to this SAI Part II to have access to non-public Fund portfolio holdings, on an on-going basis.
This list of recipients in Appendix G to this SAI Part II is current as of May 31, 2007, and any additions, modifications, or deletions to this list that have occurred since May 31, 2007, are not reflected. The portfolio holdings of the Fund which are provided to these recipients, or to which these recipients have access, may be the Fund's current portfolio holdings. As a condition to receiving or being provided access to non-public Fund portfolio holdings, the recipients listed in Appendix G to this SAI Part II must agree, or otherwise have an independent duty, to maintain this information in confidence.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the New York Stock Exchange (the "Exchange") is open for trading.
(As of the date of this SAI, the Exchange is open for trading every weekday
except in an emergency and for the following holidays (or the days on which they
are observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day, and
Christmas Day.) This determination is made once each day as of the close of
regular trading on the Exchange (generally, 4 p.m., Eastern time) (the
"valuation time") 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 Fund shares outstanding for that class. In
accordance with regulations for regulated investment companies and except for
money market funds, changes in portfolio holdings and number of shares
outstanding are generally reflected in a Fund's net asset value the next
business day after such change.
MONEY MARKET FUNDS
Money market instruments are valued at amortized cost, which approximates market value. Amortized cost involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its current market value. Each money market fund's use of amortized cost is subject to the Fund's compliance with Rule 2a-7 under the Investment Company Act of 1940. The amortized cost value of an instrument can be different from the market value of an instrument.
The Board of Trustees for each money market fund has established procedures designed to stabilize its net asset value per share at $1.00 and has delegated to the Adviser the responsibility for the implementation and administration of such procedures. Under the procedures, the adviser is responsible for monitoring and notifying the Board of Trustees of circumstances where the net asset value calculated by using market valuations may deviate from the $1.00 per share calculated using amortized cost and might result in a material dilution or other unfair result to investors or existing shareholders. Under such circumstances, the Board may take such corrective action, if any, as it deems appropriate to eliminate or reduce, to the extent reasonably practicable, any such dilution or unfair results. Such corrective action could include selling portfolio instruments prior to maturity to realize capital gains or losses; shortening average portfolio maturity; withholding dividends; calculating net asset value by using available market quotations; and such other measures as the Trustees may deem appropriate.
NON-MONEY MARKET FUNDS
Open-end investment companies are generally valued at their net asset value per share. The underlying investments of open-end investment companies managed by the Adviser are valued as described below.
Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded. For securities held short for which there were no sales reported that day, the position is generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded.
Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by an independent pricing service.
Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value.
Exchange-traded options are generally valued at the last sale or official closing price as provided by an independent pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by an independent pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from an independent source.
Futures contracts are generally valued at last posted settlement price as provided by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by an independent pricing service on the market on which such futures contracts are primarily traded.
Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by an independent pricing service for proximate time periods.
Swaps are generally valued at valuations provided by an independent pricing service.
Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker/dealer bid quotation.
Values obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by an independent pricing service.
SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available certain programs designed to enable shareholders to add to or withdraw from their investment with applicable sales charges reduced or waived. These programs are generally described in the prospectus and additional details regarding certain of these programs are set forth below. These programs or waivers may be changed or discontinued by the Fund at any time without notice. Some of these programs and waivers may not be available to you if your shares are held through certain types of accounts, such as certain retirement accounts and 529 plans, or certain accounts that you maintain with your financial intermediary. You or your financial intermediary must inform MFSC of your intention to invest in the Fund under one of the programs below upon purchasing Fund shares. You can provide this information in your account application or through a separate document provided by your financial intermediary.
LETTER OF INTENT. Out of the shareholder's initial purchase (or subsequent purchases if necessary), 5% of the dollar amount specified in the Letter of Intent application shall be held in escrow by MFSC in the form of shares registered in the shareholder's name. All distributions on escrowed shares will be paid to the shareholder or to the shareholder's 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 minimum investment amount is not completed, MFSC will redeem an appropriate number of the escrowed shares in order to pay the higher sales charge level for the amount actually purchased. Shares remaining after any such redemption will be released by MFSC. By completing and signing the Account Application or separate Letter of Intent application, the shareholder irrevocably appoints MFSC his or her attorney to surrender for redemption any or all escrowed shares with full power of substitution in the premises.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). To initiate this service, shares having an aggregate value of at least $5,000 must be held on deposit by, or certificates for such shares must be deposited with, MFSC. MFSC may charge the account for services rendered and expenses incurred beyond those normally assumed by the Fund with respect to the redemption of shares. No charge is currently assessed against the account, but one could be instituted by MFSC on 60 days' notice in writing to the shareholder in the event that the Fund ceases to assume the cost of these services. The Fund may terminate any SWP for an account if the value of the account falls below $5,000 as a result of share redemptions (other than as a result of a SWP). Any SWP may be terminated at any time by either the shareholder or the Fund.
GROUP PURCHASES. A bona fide group and all its members may be treated at MFD's discretion as a single purchaser and, under the Right of Accumulation (but not the Letter of Intent), obtain quantity sales charge discounts on the purchase of Class A, Class A1, or 529A shares if the group (1) gives its endorsement or authorization to the investment program so that it may be used by the financial intermediary to facilitate solicitation of the membership, thus effecting economies of sales effort; (2) 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 financial intermediary, 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.
EXCHANGE PRIVILEGE
MONEY MARKET FUNDS
If you exchange your shares out of MFS Cash Reserve Fund, MFS Government Money Market Fund, or MFS Money Market Fund into Class A or Class 529A shares of any other MFS Fund, you will pay the initial sales charge, if applicable, if you have not already paid this charge on these shares. You will not pay the charge if:
o the shares exchanged from either Fund were acquired by an exchange from any other MFS Fund;
o the shares exchanged from either Fund were acquired by automatic investment of dividends from any other MFS Fund; or
o the shares being exchanged would have, at the time of purchase, been eligible for purchase at net asset value had you invested directly in the MFS Fund into which the exchange is being made.
MFS FIXED FUND. Class A, Class A1, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund held by certain qualified retirement plans may be exchanged for units of participation of the MFS Fixed Fund (the "Units"), and Units may be exchanged for Class A, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund (if the share purchase eligibility for these share classes is met). With respect to exchanges between Class C shares subject to a CDSC and Units, a shareholder will only be eligible to make the exchange if the CDSC would have been waived had the Class C shares been redeemed. With respect to exchanges between Class A and Class A1 shares and Units, shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares or Units will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged Fund and the original purchase date of the shares subject to the CDSC. In the event that a shareholder initially purchases Units and then exchanges into Class A shares subject to an initial sales charge of a MFS Fund, the initial sales charge shall be due upon such exchange, but will not be imposed with respect to any subsequent exchanges between such Class A and Class A1 shares and Units with respect to shares on which the initial sales charge has already been paid.
TELEPHONE EXCHANGES. No more than ten exchanges may be made in any one exchange request by telephone.
DESCRIPTION OF SHARES, VOTING RIGHTS, AND LIABILITIES
The Trust's Declaration of Trust, as amended or amended and restated from time
to time, permits the Trust's Board of Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) of each
series, 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, and to divide such shares into classes. The Board of Trustees
has reserved the right to create and issue additional series and classes of
shares and to classify or reclassify outstanding shares.
Each shareholder of the Fund is entitled to one vote for each dollar of net asset value (number of shares of the Fund owned times net asset value per share) of the Fund, on each matter on which the shareholder is entitled to vote. Each fractional dollar amount is entitled to a proportionate fractional vote. Except when a larger vote is required by applicable law, a majority of the voting power of the shares voted in person or by proxy on a matter will decide that matter and a plurality of the voting power of the shares voted in person or by proxy will elect a Trustee. Shareholders of all series of the Trust generally will vote together on all matters except when a particular matter affects only shareholders of a particular class or series or when applicable law requires shareholders to vote separately by series or class.
Except in limited circumstances, the Trustees may, without any shareholder vote, amend or otherwise supplement the Trust's Declaration of Trust. Each Trust except MFS Series Trust XII, or any series or class thereof, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets if authorized (either at a meeting or by written consent) by a Majority Shareholder Vote of the class, series, or trust, as applicable. MFS Series Trust XII, or any series or class of MFS Series Trust XII, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets without any shareholder vote to the extent permitted by law. Each Trust, or any series or class, may reincorporate or reorganize (but not with another operating entity) without any shareholder vote. The Trust, any series of the Trust, or any class of any series, may be terminated at any time by a vote of 1) a Majority Shareholder Vote, or 2) by the Trustees by written notice to the shareholders of that series or class.
The Trustees may cause a shareholder's shares to be redeemed for any reason under terms set by the Trustees, including, but not limited to, 1) to protect the tax status of a Fund, 2) the failure of a shareholder to provide a tax identification number if required to do so, 3) the failure of a shareholder to pay when due for the purchase of shares issued to the shareholder, 4) in order to eliminate accounts whose values are less than a minimum amount established by the Trustees, 5) the failure of a shareholder to meet or maintain the qualifications for ownership of a particular class of shares, and 6) to eliminate ownership of shares by a particular shareholder when the Trustees determine that the particular shareholder's ownership is not in the best interests of the other shareholders of the applicable Fund (for example, in the case of an alleged market timer). The exercise of the above powers is subject to any applicable provisions under the 1940 Act or the rules adopted thereunder.
Under the Declaration of Trust, the Fund may convert to a master/feeder structure or a fund of funds structure without shareholder approval. In a master/feeder structure, a Fund invests all of its assets in another investment company with similar investment objectives and policies. In a Fund of Funds structure, a Fund invests all or a portion of its assets in multiple investment companies.
The Trust is an entity 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 Trust also maintains insurance for the protection of the Trust and its shareholders and the Trustees, officers, employees, and agents of the Trust covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust, and that the Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust or other agreement with a Trustee protects a Trustee against any liability to which he or she would otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
The Trust's Declaration of Trust provides that shareholders may not bring suit on behalf of the fund without first requesting that the Trustees bring such suit unless there would be irreparable injury to the Fund or if a majority of the Trustees (or a majority of Trustees on any committee established to consider the merits of such action) have a personal financial interest in the action. Trustees are not considered to have a personal financial interest by virtue of being compensated for their services as Trustees or as trustees of Funds with the same or an affiliated investment adviser or distributor.
The Trust's Declaration of Trust provides that by becoming a shareholder of the Fund, each shareholder shall be expressly held to have assented to and agreed to be bound by the provisions of the Declaration of Trust.
PART II - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND
BACKGROUND
The Trustees and officers of the Trust, as of July 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(S) TRUSTEE/OFFICER DURING THE PAST FIVE YEARS
Robert J. Trustee April 2005; Massachusetts Financial
Manning(3) December 2004 - Services Company, Chief
(born 10/20/63) March 2005 Executive Officer,
(Advisory President, Chief
Trustee); Investment Officer and
February - Director
December 2004
(Trustee)
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Robert C. Pozen(3) Trustee April 2005; Massachusetts Financial
(born 8/8/46) December 2004 Services Company, Chairman
-March 2005 (since February 2004); MIT
(Advisory Sloan School (education),
Trustee); Senior Lecturer (since
February - 2006); Secretary of
December 2004 Economic Affairs, The
(Trustee) Commonwealth of
Massachusetts (January
2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to
December 2001); Fidelity
Management & Research
Company (investment
adviser), President (March
1997 to July 2001); Bell
Canada Enterprises
(telecommunications),
Director; Medtronic, Inc.
(medical technology),
Director; Telesat
(satellite
communications), Director
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INDEPENDENT TRUSTEES
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J. Atwood Ives Trustee and February 1992 Private investor; Eastern
Chair of Enterprises (diversified
(born 5/1/36) Trustees services company),
Chairman, Trustee and
Chief Executive Officer
(until November 2000)
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Robert E. Butler(4) Trustee January 2006 Consultant - regulatory
and compliance matters
(born 11/29/41) (since July 2002);
PricewaterhouseCoopers LLP
(professional services
firm), Partner (November
2000 until June 2002)
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Lawrence H. Cohn, Trustee August 1993 Brigham and Women's
M.D. Hospital, Chief of Cardiac
(born 3/11/37) Surgery (until 2005);
Harvard Medical School,
Professor of Cardiac
Surgery; Physician
Director of Medical Device
Technology for Partners
HealthCare
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David H. Gunning Trustee January 2004 Retired; Cleveland-Cliffs
Inc. (mining products and
(born 5/30/42) service provider), Vice
Chairman/Director (until
May 2007); Portman Limited
(mining), Director (since
2005); Encinitos Ventures
(private investment
company), Principal (1997
to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director
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William R. Gutow Trustee December 1993 Private investor and real
(born 9/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman; Atlantic
Coast Tan (tanning
salons), Vice Chairman
(since 2002)
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Michael Hegarty Trustee December 2004 Retired; AXA Financial
(financial services and
(born 12/21/44) insurance), Vice Chairman
and Chief Operating
Officer (until May 2001);
The Equitable Life
Assurance Society
(insurance), President and
Chief Operating Officer
(until May 2001)
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Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 6/23/35) (attorneys), Partner
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J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 9/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing
General Partner (since
1993); Cambridge
Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
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Laurie J. Thomsen Trustee March 2005 New Profit, Inc. (venture
(born 8/5/57) philanthropy), Partner
(since 2006); Private
investor; Prism Venture
Partners (venture
capital), Co-founder and
General Partner (until
June 2004); The Travelers
Companies (commercial
property liability
insurance), Director
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Robert W. Uek Trustee January 2006 Retired (since 1999);
(born 5/18/41) PricewaterhouseCoopers LLP
(professional services
firm), Partner (until
1999); Consultant to
investment company
industry (since 2000); TT
International Funds
(mutual fund complex),
Trustee (2000 until 2005);
Hillview Investment Trust
II Funds (mutual fund
complex), Trustee (2000
until 2005)
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Maria F. Dwyer(3) President November 2005 Massachusetts Financial
(born 12/1/58) Services Company,
Executive Vice President
and Chief Regulatory
Officer (since March 2004)
and Chief Compliance
Officer (since December
2006); Fidelity Management
& Research Company, Vice
President (prior to March
2004); Fidelity Group of
Funds, President and
Treasurer (prior to March
2004)
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Tracy Atkinson(3) Treasurer September 2005 Massachusetts Financial
Services Company, Senior
(born 12/30/64) Vice President (since
September 2004);
PricewaterhouseCoopers
LLP, Partner (prior to
September 2004)
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Christopher R. Assistant July 2005 Massachusetts Financial
Bohane(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 1/18/74) Clerk Counsel (since April
2003); Kirkpatrick &
Lockhart LLP (law firm),
Associate (prior to April
2003)
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Ethan D. Corey(3) Assistant July 2005 Massachusetts Financial
Secretary and Services Company, Special
(born 11/21/63) Assistant Counsel (since December
Clerk 2004); Dechert LLP (law
firm), Counsel (prior to
December 2004)
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David L. Assistant July 2005 Massachusetts Financial
DiLorenzo(3) Treasurer Services Company, Vice
President (since June
(born 8/10/68) 2005); JP Morgan Investor
Services, Vice President
(prior to June 2005)
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Mark D. Fischer(3) Assistant July 2005 Massachusetts Financial
Treasurer Services Company, Vice
(born 10/27/70) President (since May
2005); JP Morgan
Investment Management
Company, Vice President
(prior to May 2005)
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Brian E. Assistant May 2006 Massachusetts Financial
Langenfeld(3) Secretary and Services Company,
Assistant Assistant Vice President
(born 3/7/73) Clerk and Counsel (since May
2006); John Hancock
Advisers, LLC, Assistant
Vice President and Counsel
(May 2005 to April 2006);
John Hancock Advisers,
LLC, Attorney and
Assistant Secretary (prior
to May 2005)
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Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial
(born 11/13/57) Treasurer Services Company, Senior
Vice President
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Susan S. Newton(3) Assistant May 2005 Massachusetts Financial
Secretary and Services Company, Senior
(born 3/7/50) Assistant Vice President and
Clerk Associate General Counsel
(since April 2005); John
Hancock Advisers, LLC,
Senior Vice President,
Secretary and Chief Legal
Officer (prior to April
2005); John Hancock Group
of Funds, Senior Vice
President, Secretary and
Chief Legal Officer (prior
to April 2005)
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Susan A. Assistant July 2005 Massachusetts Financial
Pereira(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 11/5/70) Clerk Counsel (since June 2004);
Bingham McCutchen LLP (law
firm), Associate (prior to
June 2004)
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Mark N. Secretary and January 2006 Massachusetts Financial
Polebaum(3) Clerk Services Company,
Executive Vice President,
(born 5/1/52) General Counsel and
Secretary (since January
2006); Wilmer Cutler
Pickering Hale and Dorr
LLP (law firm), Partner
(prior to January 2006)
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Frank L. Tarantino Independent June 2004 Tarantino LLC (provider of
Chief compliance services),
(born 3/7/44) Compliance Principal (since June
Officer 2004); CRA Business
Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (prior to March
2003)
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James O. Yost(3) Assistant September 1990 Massachusetts Financial
(born 06/12/60) Treasurer Services Company, Senior
Vice President
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(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each
Trustee has served continuously since appointment unless indicated
otherwise.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of the trust within the meaning of the Investment
Company Act of 1940 (referred to as the 1940 Act), which is the principal
federal law governing investment companies like the fund, as a result of
position with MFS. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
(4) In 2004 and 2005, Mr. Butler provided consulting services to the
independent compliance consultant retained by MFS pursuant to its
settlement with the SEC concerning market timing and related matters. The
terms of that settlement required that compensation and expenses related to
the independent compliance consultant be borne exclusively by MFS and,
therefore, MFS paid Mr. Butler for the services he rendered to the
independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a
total of $351,119.29.
The Trust held a shareholders' meeting in 2005 to elect Trustees, and will hold a shareholders' meeting at least once every five years thereafter, to elect Trustees. Each Trustee (except Messrs. Butler and Uek) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of July 1, 2007, the Trustees served as board members of 97 funds within the MFS Family of Funds.
PART II - APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
MARCH 1, 2007
Massachusetts Financial Services Company, MFS Institutional Advisors, Inc. and MFS' other investment adviser subsidiaries (collectively, "MFS") have adopted proxy voting policies and procedures, as set forth below ("MFS Proxy Voting Policies and Procedures"), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the registered investment companies sponsored by MFS, other than the MFS Union Standard Equity Fund (the "MFS Funds"). References to "clients" in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.
The MFS Proxy Voting Policies and Procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
A. VOTING GUIDELINES
1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST
MFS' policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS' clients, and not in the interests of any other party or in MFS' corporate interests, including interests such as the distribution of MFS Fund shares, administration of 401(k) plans, and institutional relationships.
MFS periodically reviews matters that are presented for shareholder vote by either management or shareholders of public companies. Based on the overall principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote. In all cases, MFS will exercise its discretion in voting on these matters in accordance with this overall principle. In other words, the underlying guidelines are simply that - guidelines. Proxy items of significance are often considered on a case-by-case basis, in light of all relevant facts and circumstances, and in certain cases MFS may vote proxies in a manner different from these guidelines.
As a general matter, MFS maintains a consistent voting position on similar proxy proposals with respect to various issuers. In addition, MFS generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts. However, MFS recognizes that there are gradations in certain types of proposals that might result in different voting positions being taken with respect to different proxy statements. There also may be situations involving matters presented for shareholder vote that are not governed by the guidelines. Some items that otherwise would be acceptable will be voted against the proponent when it is seeking extremely broad flexibility without offering a valid explanation. MFS reserves the right to override the guidelines with respect to a particular shareholder vote when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients.
From time to time, MFS receives comments on these guidelines as well as regarding particular voting issues from its clients. These comments are carefully considered by MFS when it reviews these guidelines each year and revises them as appropriate.
These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its affiliates that are likely to arise in connection with the voting of proxies on behalf of MFS' clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and E below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Voting Committee is responsible for monitoring and reporting with respect to such potential material conflicts of interest.
2. MFS' POLICY ON SPECIFIC ISSUES
ELECTION OF DIRECTORS
MFS believes that good governance should be based on a board with at least a simple majority of directors who are "independent" of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of "independent" directors. While MFS generally supports the board's nominees in uncontested elections, we will withhold our vote for, or vote against, as applicable, a nominee to a board of a U.S. issuer if, as a result of such nominee being elected to the board, the board would be comprised of a majority of members who are not "independent" or, alternatively, the compensation, nominating or audit committees would include members who are not "independent."
MFS will also withhold its vote for, or vote against, as applicable, a nominee to a board if we can determine that he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason stated in the proxy materials. In addition, MFS will withhold its vote for, or vote against, as applicable, all nominees standing for re-election to a board if we can determine: (1) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (2) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. Responsive action would include the rescission of the "poison pill"(without a broad reservation to reinstate the "poison pill" in the event of a hostile tender offer), or assurance in the proxy materials that the terms of the "poison pill" would be put to a binding shareholder vote within the next five to seven years.
MFS will also withhold its vote for, or vote against, as applicable, a nominee (other than a nominee who serves as the issuer's Chief Executive Officer) standing for re-election if such nominee participated (as a director or committee member) in the approval of a senior executive compensation package MFS deems to be "excessive." In the event that MFS determines that an issuer has adopted an "excessive" executive compensation package, MFS will withhold its vote for, or vote against, as applicable, the re-election of the issuer's Chief Executive Officer as director regardless of whether the Chief Executive Officer participated in the approval of the package. MFS will determine whether a senior executive compensation package is excessive on a case by case basis. Examples of "excessive" executive compensation packages include packages that contain egregious employment contract terms or pension payouts, backdated stock options, overly generous hiring bonuses for chief executive officers or packages which include excessive perks.
MFS evaluates a contested election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management's track record, the qualifications of the nominees for both slates and an evaluation of what each side is offering shareholders.
MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company's bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) ("Majority Vote Proposals").
MFS considers voting against Majority Vote Proposals if the company has adopted, or has proposed to adopt in the proxy statement, formal corporate governance principles that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast.
MFS believes that a company's election policy should address the specific circumstances at that company. MFS considers whether a company's election policy articulates the following elements to address each director nominee who fails to receive an affirmative majority of votes cast in an election:
o Establish guidelines for the process by which the company determines the status of nominees who fail to receive an affirmative majority of votes cast and disclose the guidelines in the annual proxy statement;
o Guidelines should include a reasonable timetable for resolution of the nominee's status and a requirement that the resolution be disclosed together with the reasons for the resolution;
o Vest management of the process in the company's independent directors, other than the nominee in question; and
o Outline the range of remedies that the independent directors may consider concerning the nominee.
CLASSIFIED BOARDS
MFS opposes proposals to classify a board (e.g., a board in which only one-third of board members are elected each year). MFS supports proposals to declassify a board.
NON-SALARY COMPENSATION PROGRAMS
MFS votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give "free rides" on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted.
MFS also opposes stock option programs that allow the board or the compensation committee, without shareholder approval, to reprice underwater options or to automatically replenish shares (i.e., evergreen plans). MFS will consider on a case-by-case basis proposals to exchange existing options for newly issued options (taking into account such factors as whether there is a reasonable value-for-value exchange).
MFS opposes stock option programs and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or could result in excessive dilution to other shareholders. As a general guideline, MFS votes against restricted stock plans, stock option, non-employee director, omnibus stock plans and any other stock plan if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS may accept a higher percentage (up to 20%) in the case of startup or small companies which cannot afford to pay large salaries to executives, or in the case where MFS, based upon the issuer's public disclosures, believes that the issuer has been responsible with respect to its recent compensation practices, including the mix of the issuance of restricted stock and options.
EXPENSING OF STOCK OPTIONS
MFS supports shareholder proposals to expense stock options because we believe that the expensing of options presents a more accurate picture of the company's financial results to investors. We also believe that companies are likely to be more disciplined when granting options if the value of stock options were treated as an expense item on the company's income statements.
EXECUTIVE COMPENSATION
MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. Therefore, except as provided in paragraph 2 above with respect to "excessive compensation" and the election of directors, MFS opposes shareholder proposals that seek to set restrictions on executive compensation. MFS also opposes shareholder requests for disclosure on executive compensation beyond regulatory requirements because we believe that current regulatory requirements for disclosure of executive compensation are appropriate and that additional disclosure is often unwarranted and costly. Although we support linking executive stock option grants to a company's performance, MFS opposes shareholder proposals that mandate a link of performance-based options to a specific industry or peer group stock index. MFS believes that compensation committees should retain the flexibility to propose the appropriate index or other criteria by which performance-based options should be measured.
MFS supports reasonably crafted shareholder proposals that (i) require the issuer to adopt a policy to recover the portion of performance-based bonuses and awards paid to senior executives that were not earned based upon a significant negative restatement of earnings unless the company already has adopted a clearly satisfactory policy on the matter, or (ii) expressly prohibit any future backdating of stock options.
EMPLOYEE STOCK PURCHASE PLANS
MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution.
"GOLDEN PARACHUTES"
From time to time, shareholders of companies have submitted proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer's annual compensation that is not determined in MFS' judgment to be excessive.
ANTI-TAKEOVER MEASURES
In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from "poison pills" and "shark repellents" to super-majority requirements.
MFS will vote for proposals to rescind existing "poison pills" and
proposals that would require shareholder approval to adopt prospective "poison
pills." Nevertheless, MFS will consider supporting the adoption of a
prospective "poison pill" or the continuation of an existing "poison pill" if we
can determine that the following two conditions are met: (1) the "poison pill"
allows MFS clients to hold an aggregate position of up to 15% of a company's
total voting securities (and of any class of voting securities); and (2) either
(a) the "poison pill" has a term of not longer than five years, provided that
MFS will consider voting in favor of the "poison pill" if the term does not
exceed seven years and the "poison pill" is linked to a business strategy or
purpose that MFS believes is likely to result in greater value for shareholders;
or (b) the terms of the "poison pill" allow MFS clients the opportunity to
accept a fairly structured and attractively priced tender offer (e.g., a
"chewable poison pill" that automatically dissolves in the event of an all cash,
all shares tender offer at a premium price).
MFS will consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer.
REINCORPORATION AND REORGANIZATION PROPOSALS
When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. While MFS generally votes in favor of management proposals that it believes are in the best long-term economic interests of its clients, MFS may oppose such a measure if, for example, the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers.
ISSUANCE OF STOCK
There are many legitimate reasons for the issuance of stock. Nevertheless, as noted above under "Non-Salary Compensation Programs," when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g. by approximately 15% or more), MFS generally votes against the plan. In addition, MFS votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a "blank check") because the unexplained authorization could work as a potential anti-takeover device. MFS may also vote against the authorization or issuance of common or preferred stock if MFS determines that the requested authorization is not warranted.
REPURCHASE PROGRAMS
MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders.
CONFIDENTIAL VOTING
MFS votes in favor of proposals to ensure that shareholder voting results are kept confidential. For example, MFS supports proposals that would prevent management from having access to shareholder voting information that is compiled by an independent proxy tabulation firm.
CUMULATIVE VOTING
MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS' clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company's nominating committee, which (for U.S. listed companies) must be comprised solely of "independent" directors.
WRITTEN CONSENT AND SPECIAL MEETINGS
Because the shareholder right to act by written consent (without calling a formal meeting of shareholders) can be a powerful tool for shareholders, MFS generally opposes proposals that would prevent shareholders from taking action without a formal meeting or would take away a shareholder's right to call a special meeting of company shareholders.
INDEPENDENT AUDITORS
MFS believes that the appointment of auditors for U.S. issuers is best left to the board of directors of the company and therefore supports the ratification of the board's selection of an auditor for the company. Some shareholder groups have submitted proposals to limit the non-audit activities of a company's audit firm or prohibit any non-audit services by a company's auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company's auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company's auditor for specific pieces of non-audit work in the limited situations permitted under current law.
OTHER CORPORATE GOVERNANCE, CORPORATE RESPONSIBILITY AND SOCIAL ISSUES
There are many groups advocating social change or changes to corporate governance or corporate responsibility standards, and many have chosen the publicly-held corporation as a vehicle for advancing their agenda. Generally, MFS votes with management on such proposals unless MFS can determine that the benefit to shareholders will outweigh any costs or disruptions to the business if the proposal were adopted. Common among the shareholder proposals that MFS generally votes against are proposals requiring the company to use corporate resources to further a particular social objective outside the business of the company, to refrain from investing or conducting business in certain countries, to adhere to some list of goals or principles (e.g., environmental standards), to disclose political contributions made by the issuer, to separate the Chairman and Chief Executive Officer positions, or to promulgate special reports on various activities or proposals for which no discernible shareholder economic advantage is evident.
The laws of various states may regulate how the interests of certain clients subject to those laws (e.g., state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients.
FOREIGN ISSUERS
Many of the items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted in favor) for foreign issuers include the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; and (v) approval of share repurchase programs.
MFS generally supports the election of a director nominee standing for re-election in uncontested elections unless it can be determined that (1) he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason given in the proxy materials; (2) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (3) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. MFS will also withhold its vote for, or vote against, as applicable, a director nominee standing for re-election of an issuer that has adopted an excessive compensation package for its senior executives as described above in the section entitled "Voting Guidelines-MFS' Policy on Specific Issues-Election of Directors."
MFS generally supports the election of auditors, but may determine to vote against the election of a statutory auditor in certain markets if MFS reasonably believes that the statutory auditor is not truly independent. MFS will evaluate all other items on proxies for foreign companies in the context of the guidelines described above, but will generally vote against an item if there is not sufficient information disclosed in order to make an informed voting decision.
In accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting ("share blocking"). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior to the meeting (e.g., one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the "block" restriction lifted early (e.g., in some countries shares generally can be "unblocked" up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer's transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY VOTING COMMITTEE
The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The MFS Proxy Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable;
b. Determines whether any potential material conflicts of interest exist with respect to instances in which (i) MFS seeks to override these MFS Proxy Voting Policies and Procedures and (ii) votes on ballot items not clearly governed by these MFS Proxy Voting Policies and Procedures; and
c. Considers special proxy issues as they may arise from time to time.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its affiliates that could arise in connection with the voting of proxies on behalf of MFS' clients. Any significant attempt to influence MFS' voting on a particular proxy matter should be reported to the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, or (ii) matters presented for vote are not governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy Voting Committee, or delegees, will follow these procedures:
a. Compare the name of the issuer of such proxy against a list of significant current and potential (i) distributors of MFS Fund shares, (ii) retirement plans administered by MFS or its affiliate MFS Retirement Services, Inc. ("RSI"), and (iii) MFS institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee;
c. If the name of the issuer appears on the MFS Significant Client List, then the MFS Proxy Voting Committee will be apprised of that fact and each member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS' clients, and not in MFS' corporate interests; and
d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer's relationship to MFS, the analysis of the matters submitted for proxy vote, the votes as to be cast and the reasons why the MFS Proxy Voting Committee determined that the votes were cast in the best long-term economic interests of MFS' clients, and not in MFS' corporate interests. A copy of the foregoing documentation will be provided to MFS' Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS' distribution, institutional business units and RSI. The MFS Significant Client List will be reviewed and updated periodically, as appropriate.
3. GATHERING PROXIES
Most proxies received by MFS and its clients originate at Automatic Data Processing Corp. ("ADP") although a few proxies are transmitted to investors by corporate issuers through their custodians or depositories. ADP and issuers send proxies and related material directly to the record holders of the shares beneficially owned by MFS' clients, usually to the client's custodian or, less commonly, to the client itself. This material will include proxy cards, reflecting the shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy statements with the issuer's explanation of the items to be voted upon.
MFS, on behalf of itself and the Funds, has entered into an agreement with an independent proxy administration firm, Institutional Shareholder Services, Inc. (the "Proxy Administrator"), pursuant to which the Proxy Administrator performs various proxy vote related administrative services, such as vote processing and recordkeeping functions for MFS' Funds and institutional client accounts. The Proxy Administrator receives proxy statements and proxy cards directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator's system by an MFS holdings datafeed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for all upcoming shareholders' meetings are available on-line to certain MFS employees and the MFS Proxy Voting Committee.
4. ANALYZING PROXIES
Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator at the prior direction of MFS automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by the MFS Proxy Voting Committee. With respect to proxy matters that require the particular exercise of discretion or judgment, MFS considers and votes on those proxy matters. MFS receives research from ISS which it may take into account in deciding how to vote. In addition, MFS expects to rely on ISS to identify circumstances in which a board may have approved excessive executive compensation. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have little or no involvement in specific votes taken by MFS. This is designed to promote consistency in the application of MFS' voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g., corporate actions, such as mergers and acquisitions), a representative of the MFS Proxy Voting Committee may consult with or seek recommendations from portfolio managers or analysts.(1) However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted.
(1) From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst is not available to provide a recommendation on a merger or acquisition proposal. If such a recommendation cannot be obtained prior to the cut-off date of the shareholder meeting, certain members of the MFS Proxy Voting Committee may determine to abstain from voting.
As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients. Any such override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies.
5. VOTING PROXIES
In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy Voting Committee to monitor the proxy voting process. When proxy materials for clients are received, they are forwarded to the Proxy Administrator and are input into the Proxy Administrator's system. Through an interface with the portfolio holdings database of MFS, the Proxy Administrator matches a list of all MFS Funds and clients who hold shares of a company's stock and the number of shares held on the record date with the Proxy Administrator's listing of any upcoming shareholder's meeting of that company.
When the Proxy Administrator's system "tickler" shows that the voting cut-off date of a shareholders' meeting is approaching, a Proxy Administrator representative checks that the vote for MFS Funds and clients holding that security has been recorded in the computer system. If a proxy card has not been received from the client's custodian, the Proxy Administrator calls the custodian requesting that the materials be forwarded immediately. If it is not possible to receive the proxy card from the custodian in time to be voted at the meeting, MFS may instruct the custodian to cast the vote in the manner specified and to mail the proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy cards completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator's system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company's proxy issues, are retained as required by applicable law.
E. REPORTS
MFS FUNDS
MFS will report the results of its voting to the Board of Trustees,
Board of Directors and Board of Managers of the MFS Funds. These reports will
include: (i) a summary of how votes were cast; (ii) a review of situations where
MFS did not vote in accordance with the guidelines and the rationale therefore;
(iii) a review of the procedures used by MFS to identify material conflicts of
interest; and (iv) a review of these policies and the guidelines and, as
necessary or appropriate, any proposed modifications thereto to reflect new
developments in corporate governance and other issues. Based on these reviews,
the Trustees, Directors and Managers of the MFS Funds will consider possible
modifications to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party other than the client or its representatives (unless required by applicable law) because we consider that information to be confidential and proprietary to the client.
MFS UNION STANDARD EQUITY FUND
INSTITUTIONAL SHAREHOLDERS SERVICES TAFT-HARTLEY ADVISORY SERVICES
PROXY VOTING GUIDELINES AND PROCEDURES
The Taft-Hartley Advisory Services Voting Policy is based upon the AFL-CIO Proxy Voting Guidelines, which comply with all the fiduciary standards delineated by the U.S. Department of Labor.
INTRODUCTION
Taft-Hartley client accounts are governed by the Employee Retirement Income Security Act (ERISA). ERISA sets forth the tenets under which pension fund assets must be managed and invested. Proxy voting rights have been declared by the Department of Labor to be valuable plan assets and therefore must be exercised in accordance with the fiduciary duties of loyalty and prudence. The duty of loyalty requires that the voting fiduciary exercise proxy voting authority solely in the economic interest of participants and plan beneficiaries. The duty of prudence requires that decisions be made based on financial criteria and that a clear process exists for evaluating proxy issues.
The Taft-Hartley Advisory Services voting policy was carefully crafted to meet those requirements by promoting long-term shareholder value, emphasizing the "economic best interests" of plan participants and beneficiaries. Taft-Hartley Advisory Services will assess the short-term and long-term impact of a vote and will promote a position that is consistent with the long-term economic best interests of plan members embodied in the principle of a "worker-owner view of value."
Our guidelines address a broad range of issues, including election of directors, executive compensation, proxy contests, auditor ratification, and tender offer defenses - all significant voting items that affect long-term shareholder value. In addition, these guidelines delve deeper into workplace issues that may have an impact on corporate performance, including:
o Corporate policies that affect job security and wage levels;
o Corporate policies that affect local economic development and stability;
o Corporate responsibility to employees and communities; and
o Workplace safety and health issues.
All votes will be reviewed on a case-by-case basis, and no issues will be considered strictly routine. Each issue will be considered in the context of the company under review. In other words, proxy voting guidelines are just that - guidelines. When company-specific factors are taken into account, every proxy voting decision becomes a case-by-case decision. Keeping in mind the concept that no issue is considered "routine", outlined in the following pages are general voting parameters for various types of proxy voting issues (when there are no company-specific reasons for voting to the contrary).
I) BOARD OF DIRECTORS PROPOSALS
Electing directors is the single most important stock ownership right that shareholders can exercise. The board of directors is responsible for holding management accountable to performance standards on behalf of the shareholders. Taft-Hartley Advisory Services holds directors to a high standard when voting on their election, qualifications, and compensation.
Votes on entire board of directors take into account factors that include:
o Company performance relative to its peers;
o Lack of independence of the full board and key board committees (fully
independent audit, compensation, and nominating committees);
o Board diversity;
o Executive compensation-related (excessive salaries/bonuses/pensions, stock
option repricing, misallocation of corporate funds, etc.);
o Failure of board to respond to majority shareholder votes;
o Poor long-term corporate performance record relative to peer, S&P 500 or
Russell 3000 Indices.
Votes on individual director nominees are made on a case-by-case basis, taking into account factors that include:
o Poor attendance;
o Lack of a board that is at least two-thirds (67 percent) independent;
Independence of the key board committees (audit, compensation, and
nominating);
o Performance of the key board committees;
o Failure to establish key board committees; and
o Interlocking and excessive directorships.
NON-INDEPENDENT CHAIRMAN: A principal function of the board is to monitor management, and a fundamental responsibility of the chairman is to monitor the company's CEO. This duty is obviously compromised when the chairman is the CEO. Approximately 60 percent of companies in both the S&P 500 and Russell 3000 have joint chairman and CEO positions. A McKinsey survey of board members at 500 U.S. companies found that nearly 70 percent of directors polled said a CEO should not run the board. As executive compensation is heavily correlated to the managerial power relationship in the boardroom, the separation of the CEO and chairman positions is a critical step in curtailing excessive pay. Indeed, a number of academic studies have demonstrated that executive compensation is twenty to forty percent higher if the CEO is also the chairman of the board. We WITHHOLD votes from non-independent directors who serve as board chairs, and vote FOR proposals calling for non-executive directors who are not former CEOs or senior-level executives to serve as chairman.
INDEPENDENT DIRECTORS: Taft-Hartley Advisory Services believes that a board independent of management is of critical value to safeguard a company and its shareholders. Board independence helps ensure that directors carry out their duties in an objective manner and without manager interference to select, monitor, and compensate management. We will cast votes in a manner consistent with supporting and reinforcing this philosophy. Independence is evaluated upon factors including: past or current employment with the company or its subsidiaries; the provision of consulting services; familial relationships; board interlocks; and service with a non-profit that receives contributions from the company. We vote FOR proposals that request that the board comprise of a two-thirds majority of independent directors, and/or its audit, compensation, and nominating committees be comprised wholly of independent directors. We WITHHOLD votes from non-independent director nominees on boards that are not at least two-thirds (67 percent) independent.
BOARD STRUCTURE: Taft-Hartley Advisory Services supports the principle that all directors should be accountable to shareholder vote on an annual basis. A classified board is a board divided into separate classes (typically three), with only one class of nominees coming up to vote at the annual meeting each year. As a result, shareholders are only able to vote a single director approximately once every three years. A classified board makes it difficult to change control of the board through a proxy contest because typically only one-third of the seats will be at stake. The ultimate result is that classified boards can entrench management and preclude most takeover bids or proxy contests. Good corporate governance practice supports annually elected boards. We vote AGAINST classified boards when the issue comes up for vote.
BOARD AND COMMITTEE SIZE: While there is no hard and fast rule among institutional investors as to what may be an optimal size board, Taft-Hartley Advisory Services believes there is an acceptable range which companies should strive to meet and not exceed. A board that is too large may function inefficiently. Conversely, a board that is too small may allow the CEO to exert disproportionate influence or may stretch the time requirements of individual directors too thin. Given that the preponderance of boards in the U.S. range between five and fifteen directors, we believe this is a useful benchmark for evaluating such proposals. We vote AGAINST any proposal seeking to amend the company's board size to fewer than five seats or more than fifteen seats. On a CASE-BY-CASE basis, we consider WITHHOLDS or other action at companies that have fewer than five directors and more than 15 directors on their board.
FINANCIAL PERFORMANCE TEST FOR BOARDS: Taft-Hartley Advisory Services believes that long-term financial performance should be considered when determining vote recommendations with regard to directors in uncontested elections. When evaluating whether to withhold votes against director nominees, we will look at the company's response to the ongoing performance issues, and consider several factors, including performance improvement in the current year, changes in management or board composition, recent transactions at the company, overall governance practices, particularly any recent changes, and the financial health of the company.
PROPOSALS ON BOARD INCLUSIVENESS: Taft-Hartley Advisory Services votes FOR shareholder proposals asking a company to make efforts to seek more women and minority group members for service on the board. A more diverse group of directors benefits shareholders and the company.
MAJORITY THRESHOLD VOTING REQUIREMENT FOR DIRECTOR ELECTIONS: Taft-Hartley fiduciaries believe shareholders should have a greater voice in regard to the election of directors and view majority threshold voting as a viable alternative to the current deficiencies of the plurality system in the U.S. Shareholders have expressed strong support for resolutions on majority threshold voting. Taft-Hartley Advisory Services supports proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors, provided the proposal includes a carve-out for a plurality voting standard in contested director elections.
CUMULATIVE VOTING: Under a cumulative voting scheme, shareholders are permitted to have one vote per share for each director to be elected and may apportion these votes among the director candidates in any manner they wish. This voting method allows minority shareholders to influence the outcome of director contests by "cumulating" their votes for one nominee, thereby creating a measure of independence from management control. Taft-Hartley Advisory Services votes FOR proposals to allow cumulative voting and votes AGAINST proposals to eliminate it.
POISON PILLS: Shareholder rights plans, more commonly known as poison pills, are warrants issued to shareholders allowing them to purchase shares from the company at a price far below market value when a certain ownership threshold has been reached, thereby effectively preventing a takeover. Poison pills can entrench management and give the board veto power over takeover bids, thereby altering the balance of power between shareholders and management. While we evaluate poison pills on a case-by-case basis depending on a company's particular set of circumstances, Taft-Hartley Advisory Services generally votes FOR proposals to submit a company's poison pill to shareholder vote and/or eliminate or redeem poison pills. We WITHHOLD votes from boards where a dead-hand poison pill provision is in place. From a shareholder perspective, there is no justification for a dead-hand provision.
II) CAPITAL STRUCTURE
INCREASE AUTHORIZED COMMON STOCK: Corporations seek shareholder approval to increase their supply of common stock for a variety of business reasons. We vote FOR proposals to increase authorized common stock when management has provided a specific justification for the increase, evaluating proposals on a case-by-case basis. We believe that an increase of up to 50 percent is enough to allow a company to meet its capital needs. We vote AGAINST proposals to increase an authorization by more than 50 percent unless management provides compelling reasons for the increase.
DUAL CLASS STRUCTURES: Taft-Hartley Advisory Services does not support dual share class structures. Incumbent management can use a dual class structure to gain unequal voting rights. A separate class of shares with superior voting rights can allow management to concentrate its power and insulate itself from the majority of its shareholders. An additional drawback is the added cost and complication of maintaining the two class system. We will vote FOR a one share, one vote capital structure, and we will vote AGAINST the creation or continuation of dual class structures.
III) RATIFYING AUDITORS
Ratifying auditors is no longer a routine procedure. Accounting scandals at companies such as Enron and WorldCom underscore the need to ensure auditor independence in the face of selling consulting services to audit clients. A study by Richard Frankel, Marilyn Johnson, and Karen Nelson found that the ratio of non-audit fees to total fees paid is negatively associated with stock market returns on the filing date, indicating that investors associate non-audit fees "with lower quality audits and, by implication, lower quality earnings." This study also found that companies that pay high non-audit fees are more likely to engage in earnings management.
Auditors are the backbone upon which a company's financial health is measured, and auditor independence is essential for rendering objective opinions upon which investors then rely. When an auditor is paid more in consulting fees than for auditing, its relationship with the company is left open to conflicts of interest. Because accounting scandals evaporate shareholder value, any proposal to ratify auditors is examined for potential conflicts of interest, with particular attention to the fees paid to the auditor, as well as whether the ratification of auditors has been put up for shareholder vote. Failure by a company to present its selection of auditors for shareholder ratification should be discouraged as it undermines good governance and disenfranchises shareholders.
We vote AGAINST ratification of a company's auditor if it receives more than one-quarter of its total fees for consulting and WITHHOLD votes from Audit Committee members when auditor ratification is not included on the proxy ballot and/or when consulting fees exceed audit fees. We support shareholder proposals to ensure auditor independence and effect mandatory auditor ratification.
IV) MERGERS, ACQUISITIONS, AND TRANSACTIONS
Taft-Hartley Advisory Services votes for corporate transactions that take the high road to competitiveness and company growth. Taft-Hartley Advisory Services believes that structuring merging companies to build long-term relationships with a stable and quality work force and preserving good jobs creates long-term company value. We oppose corporate transactions which indiscriminately layoff workers and shed valuable competitive resources.
Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis, taking into account the following factors:
o Impact on shareholder value;
o Changes in corporate governance and their impact on shareholder rights;
o Fairness opinion (or lack thereof);
o Offer price (cost vs. premium);
o Form and mix of payment (i.e. stock, cash, debt, etc.);
o Change-in-control payments to executive officers;
o Perspective of ownership (target vs. acquirer) in the deal;
o Fundamental value drivers behind the deal;
o Anticipated financial and operating benefits realizable through
combined synergies;
o Financial viability of the combined companies as a single entity;
o What are the potential legal or environmental liability risks associated
with the target firm?;
o Impact on community stakeholders and employees in both workforces;
o How will the merger adversely affect employee benefits like pensions and
health care?
REINCORPORATION: Taft-Hartley Advisory Services reviews proposals to change a company's state of incorporation on a case-by-case basis. We vote FOR proposals to reincorporate in another state when the company has provided satisfactory business reasons and there is no significant reduction in shareholder rights. We vote AGAINST proposals to reincorporate that reduce shareholder rights. In cases of offshore reincorporations to tax havens, among other factors, we evaluate the effect upon any and all legal recourse of shareholders in a new jurisdiction, potential harm to company brands and image, and any actual, qualified economic benefit.
V) EXECUTIVE COMPENSATION
STOCK OPTION PLANS: Taft-Hartley Advisory Services supports compensating executives at a reasonable rate and believes that executive compensation should be strongly correlated to performance. Stock option and other forms of compensation should be performance-based with an eye toward improving shareholder value. Well-designed stock option plans align the interests of executives and shareholders by providing that executives benefit when stock prices rise as the company-- and shareholders-- prosper together.
Many plans sponsored by management provide goals so easily attained that executives can realize massive rewards even though shareholder value is not necessarily created. Stock options that are awarded selectively and excessively can dilute shareholders' share value and voting power. In general, Taft-Hartley Advisory Services supports plans that are offered at fair terms to executives who satisfy well-defined performance goals. We evaluate option plans on a case-by-case basis, taking into consideration factors including: offer price, dilution to outstanding share value, dilution to share voting power, stock option expensing, annual burn rate, executive concentration ratios, pay-for-performance and the presence of any repricing provisions. We support plans that retain tax deductibility through the use of performance goals and oppose plans whose award size exceeds the tax deduction limit.
Taft-Hartley Advisory Services votes FOR option plans that provide legitimately challenging performance targets that truly motivate executives in the pursuit of excellent performance. Likewise, we vote AGAINST plans that offer unreasonable benefits to executives that are not available to any other shareholders.
POOR COMPENSATION PRACTICES: Poor disclosure, the absence or non-transparency of disclosure and poor plan design of compensation payouts lead to excessive executive compensation practices that are detrimental to shareholders. Poorly designed plans or those lacking in transparency can be reflective of a poorly performing compensation committee or board. Taft-Hartley Advisory Services will consider WITHHOLDING votes from compensation committee members and/or the CEO on a CASE-BY-CASE basis if the company has poor compensation practices. In addition, we may consider recommending a WITHHOLD from the entire board if the whole board was involved in and contributed to egregious compensation.
PROPOSALS TO LIMIT EXECUTIVE AND DIRECTOR PAY: Taft-Hartley Advisory Services votes FOR shareholder proposals that seek additional disclosure of executive and director pay information. We vote FOR shareholder proposals that seek to eliminate outside directors' retirement benefits. We review on a case-by-case basis all other shareholder proposals that seek to limit executive and director pay. This includes shareholder proposals that seek to link executive compensation to customer, employee, or stakeholder satisfaction.
GOLDEN PARACHUTES: golden parachutes are designed to protect the senior level employees of a corporation in the event of a change-in-control. Under most golden parachute agreements, senior level management employees receive a lump sum pay-out triggered by a change-in-control at usually two to three times base salary. These severance agreements grant extremely generous benefits to well-paid executives and most often offer no value to shareholders. Taft-Hartley Advisory Services votes FOR shareholder proposals to have all golden parachute agreements submitted for shareholder ratification, and we generally vote AGAINST all proposals to ratify golden parachutes.
OPTIONS BACKDATING: Options backdating has serious implications and has resulted in financial restatements, delisting of companies, and/or the termination of executives or directors. When options backdating has taken place, Taft-Hartley Advisory Services may consider WITHHOLDING votes from the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. We adopt a CASE-BY-CASE approach to the options backdating issue to differentiate companies that had sloppy administration vs. those that had committed fraud, as well as those companies that have since taken corrective action. Instances in which companies have committed fraud are more disconcerting, and Taft-Hartley Advisory Services will look to them to adopt formal policies to ensure that such practices will not re-occur in the future.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS): Taft-Hartley Advisory Services generally votes FOR ESOPs which allow a company's employees to acquire stock in the company at a slight discount. Such plans help link employees' self-interest to the interests of the shareholders, thereby benefiting the company, its customers, and shareholders and creating long-term company value.
VI) SOCIAL AND ENVIRONMENTAL ISSUES Increasingly, shareholders are presenting proposals related to company environmental practices, workplace practices, social issues and sustainability goals. Taft-Hartley Advisory Services provides specific narrative explanations for votes on these types of shareholder proposals. Taft-Hartley Advisory Services evaluates shareholder proposals on a case-by-case basis to determine if they are in the best economic interests of the plan participants and beneficiaries. Taft-Hartley Advisory Services' clients select investment strategies and criteria for their portfolios. Taft-Hartley Advisory Services views its responsibility to protect plan beneficiary economic interests through the use of the proxy. To meet this obligation, Taft-Hartley Advisory Services votes consistent with the economic best interests of the participants and beneficiaries to create "high road" shareholder and economic value.
In most cases, Taft-Hartley Advisory Services supports proposals that request management to report to shareholders information and practices that would help in evaluating the company's operations. In order to be able to intelligently monitor their investments, shareholders often need information best provided by the company itself. Taft-Hartley Advisory Services supports proposals that seek management compliance with shareholder interests to ensure that shareholders are fully informed about actions harmful to society with special attention to the company's legal and ethical obligations, impact on company profitability, and the potential negative publicity for disreputable practices.
CERES PRINCIPLES: The CERES Principles, formulated by the Coalition of Environmentally Responsible Economies, require signing companies to address environmental issues, including protection of the biosphere, sustainable use of natural resources, reduction and disposal of wastes, energy conservation, and employee and community risk reduction. Evidence suggests that environmentally conscious companies may realize long-term savings by implementing programs to pollute less and conserve resources while realizing good public relations and new marketing opportunities. Moreover, the reports that are required of signing companies provide shareholders with more information concerning topics they may deem relevant to their company's financial well-being.
Many companies have voluntarily adopted these principles and proven that environmental sensitivity makes good business sense. Taft-Hartley Advisory Services supports proposals that improve a company's public image, reduce exposure to liabilities, and establish standards so that environmentally responsible companies and markets are not at a competitive financial disadvantage. Taft-Hartley Advisory Services votes FOR the adoption of the CERES Principles and FOR reporting to shareholders on environmental issues.
CORPORATE CONDUCT, HUMAN RIGHTS, AND LABOR CODES: Taft-Hartley Advisory Services generally supports proposals that call for the adoption and/or enforcement of clear principles or codes of conduct relating to countries in which there are systematic violations of human rights. These conditions include the use of slave, child, or prison labor, undemocratically elected governments, widespread reports by human rights advocates, fervent pro-democracy protests, and/or economic sanctions and boycotts.
Many proposals refer to the seven core conventions, commonly referred to as the "Declaration on Fundamental Principles and Rights At Work," ratified by the International Labor Organization (ILO). The seven conventions fall under four broad categories: i) Right to organize and bargain collectively; ii) Non-discrimination in employment; iii) Abolition of forced labor; and iv) End of child labor. Each of the 180 member nations of the ILO body are bound to respect and promote these rights to the best of their abilities. Taft-Hartley Advisory Services supports the principles and codes of conduct relating to company investment in countries with patterns of human rights abuses (Northern Ireland, Columbia, Burma, former Soviet Union, and China). Taft-Hartley Advisory Services votes FOR proposals to implement and report on ILO codes of conduct.
PART II - APPENDIX C
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which the initial sales charge (ISC) and/or the CDSC is waived for the MFS funds' share classes. Some of the following information will not apply to certain funds, depending on which classes of shares are offered by the funds. In order to qualify for a sales charge waiver, you must advise MFS that you are eligible for the waiver at the time of purchase and/or redemption. The funds, MFS, and their affiliates reserve the right to eliminate, modify, and add waivers at any time at their discretion.
In addition, transfers, rollovers or other transactions from one account to the same class of the same fund of another account otherwise subject to a CDSC or an ISC will not be charged a CDSC or ISC so long as each account is held in your name or for your benefit (either individually or collectively) by MFSC or an affiliate. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the fund in the first account and the original purchase date of the shares subject to the CDSC.
As used in this Appendix C, the term "ESP" includes employer sponsored plans, the term "SRO" includes salary reduction only plans, and the term "ERISA" refers to the Employment Retirement Income Security Act of 1974, as amended.
In this appendix, all references to Class A Shares shall apply to Class A1 Shares and all references to Class B Shares shall apply to Class B1 Shares.
RETIREMENT PLANS:
-----------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
-----------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS A CLASS A CLASS B CLASS C
ISC CDSC CDSC CDSC
-----------------------------------------------------------------------------------------------------
1. WAIVERS FOR SERVICED PLANS
-----------------------------------------------------------------------------------------------------
o To the extent that redemption proceeds are used V V V
to pay expenses (or certain participant expenses)
of the 401(a) or ESP Plan (e.g., participant
account fees).
-----------------------------------------------------------------------------------------------------
o Shares purchased or redeemed representing V V V V
transfers from, or transfers to, plan investments
other than the MFS funds.
-----------------------------------------------------------------------------------------------------
o Shares acquired pursuant to repayments by V V V V
retirement plan participants of loans from 401(a)
or ESP Plans.
-----------------------------------------------------------------------------------------------------
o By a retirement plan which established an account V
with MFSC on or after July 1, 1996, but before
January 1, 2003 (provided that the plan
establishment paperwork is received by MFSC in good
order on or before December 31, 2002).
-----------------------------------------------------------------------------------------------------
o Transfers from a single account maintained for a V V V
401(a) Plan to multiple accounts maintained by MFSC
on behalf of individual participants of such Plan.
-----------------------------------------------------------------------------------------------------
o All Serviced Plans. V V
-----------------------------------------------------------------------------------------------------
o Transfers due to the eligibility of a Serviced V V V V
Plan to move its investment into a new share class
under certain eligibility criteria established from
time to time by MFD (sales charges waived may vary
depending upon the criteria established by MFD).
-----------------------------------------------------------------------------------------------------
o Transfer or rollover to MFS Prototype IRA from a V V V V
Serviced Plan.
-----------------------------------------------------------------------------------------------------
o Reinvestment of Redemption Proceeds from Class B V V
Shares:
o Shares acquired by a retirement plan whose
account application was received by MFD on or
prior to March 30, 2001 where the purchase
represents the immediate reinvestment of
proceeds from the plan's redemption of its
Class B shares of the MFS funds and is equal to
or exceeds $500,000, either alone or in
aggregate with the current market value of the
plan's existing Class A shares; or
o Shares acquired by a retirement plan whose
account application was received by MFD on or
after April 2, 2001 and before December 31,
2002 where the purchase represents the
immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the
MFS funds and is equal to or exceeds
$1,000,000, either alone or in aggregate with
current market value of the plan's existing
Class A shares.
-----------------------------------------------------------------------------------------------------
2. WAIVERS FOR NON- SERVICED PLANS ("TA PLANS")
-----------------------------------------------------------------------------------------------------
A. 401(A) PLANS AND ESP PLANS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan and/or sponsoring V V
organization demonstrates to the satisfaction of,
and certifies to, MFSC that the retirement plan (or
multiple plans maintained by the same plan sponsor)
has, at the time of certification or will have
pursuant to a purchase order placed with the
certification, a market value of $500,000 or more
(applies only when the certification was received
by MFSC on or prior to March 30, 2001) or
$1,000,000 or more (applies only when the
certification is received by MFSC on or after April
2, 2001), invested in shares of any class or
classes of the MFS funds and aggregate assets of at
least $10 million; provided, however, that the CDSC
will not be waived (i.e., it will be imposed) (a)
with respect to plans which establish an account
with MFSC on or after November 1, 1997, in the
event that the plan makes a complete redemption of
all of its shares in the MFS Family of funds, or
(b) with respect to plans which establish an
account with MFSC prior to November 1, 1997, in the
event that there is a change in law or regulations
which result in a material adverse change to the
tax advantaged nature of the plan, or in the event
that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated
under ERISA or is liquidated or dissolved; or (iii)
is acquired by, merged into, or consolidated with
any other entity.
-----------------------------------------------------------------------------------------------------
o Investment in Class A shares by certain V(1)
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1997 and December 31, 1999;
o The plan records are maintained on a pooled
basis by MFSC; and
o The sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of
purchase, the employer has at least 200
eligible employees and the plan has aggregate
assets of at least $2,000,000.
-----------------------------------------------------------------------------------------------------
3. WAIVERS FOR BOTH SERVICED PLANS AND TA PLANS
-----------------------------------------------------------------------------------------------------
A. BENEFIT RESPONSIVE WAIVERS
-----------------------------------------------------------------------------------------------------
o Distributions made from an IRA or a 403(b) SRO V V V
pursuant to Section 72(t) of the Internal Revenue
Code of 1986, as amended.
-----------------------------------------------------------------------------------------------------
o Death, disability or retirement of 401(a) or ESP V V V
Plan participant, or death or disability of IRA
owner, SRO Plan Participant or SAR-SEP Plan
Participant.
-----------------------------------------------------------------------------------------------------
o Eligible participant distributions, such as V V V
distributions due to death, disability, financial
hardship, retirement and termination of employment
from Serviced Plans and nonqualified deferred
compensation plans (excluding, however, a
termination of a plan).
-----------------------------------------------------------------------------------------------------
o Loan from 401(a) or ESP Plan. V V V
-----------------------------------------------------------------------------------------------------
o Financial hardship (as defined in Treasury V V V
Regulation Section 1.401(k)-l(d)(2), as amended
from time to time) for 401(a) Plans and ESP Plans.
-----------------------------------------------------------------------------------------------------
o Termination of employment of 401(a) or ESP Plan V V V
participant (excluding, however, a termination of
the Plan).
-----------------------------------------------------------------------------------------------------
o Tax-free return of excess 401(a) Plan, ESP Plan V V V
or IRA contributions.
-----------------------------------------------------------------------------------------------------
o Distributions from a 401(a) or ESP Plan that has V V V
invested its assets in one or more of the MFS funds
for more than 10 years from the later to occur of
(i) January 1, 1993 or (ii) the date such 401(a) or
ESP Plan first invests its assets in one or more of
the MFS funds. The sales charges will be waived in
the case of a redemption of all of the 401(a) or
ESP Plan's shares in all MFS funds (i.e., all the
assets of the 401(a) or ESP Plan invested in the
MFS funds are withdrawn), unless immediately prior
to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS funds
(excluding the reinvestment of distributions)
during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets
in the MFS funds, in which case the sales charges
will not be waived.
-----------------------------------------------------------------------------------------------------
o Distributions made on or after the IRA owner, ESP V
participant, SRO Plan participant or 401(a) Plan
participant has attained the age of 591/2 years old.
-----------------------------------------------------------------------------------------------------
o Certain involuntary redemptions and redemptions V V V
in connection with certain automatic withdrawals
from a 401(a) Plan.
-----------------------------------------------------------------------------------------------------
o Distributions made on or after the IRA owner or V V V
the 401(a), ESP, SRO or SAR-SEP Plan participant,
as applicable, has attained the age of 701/2 years
old, but only with respect to the minimum
distribution under Code rules.
-----------------------------------------------------------------------------------------------------
o Investments in Class A shares by certain V(1)
retirement plans subject to ERISA, if, prior to
July 1, 1996,
o The plan had established an account with MFSC;
and
o The sponsoring organization had demonstrated to
the satisfaction of MFD that either:
o The employer had at least 25 employees; or
o The total purchases by the retirement plan of
Class A shares of the MFS funds would be in the
amount of at least $250,000 within a reasonable
period of time, as determined by MFD in its
sole discretion.
-----------------------------------------------------------------------------------------------------
o Investments in Class A shares by certain V(1 )
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1996 and March 30, 2001;
o The plan has, at the time of purchase, either
alone or in aggregate with other plans
maintained by the same plan sponsor, a market
value of $500,000 or more invested in shares of
any class or classes of the MFS funds; and
o The retirement plans will qualify under this
category only if the plans or their sponsoring
organization informs MFSC prior to the
purchases that the plans have a market value of
$500,000 or more invested in shares of any
class or classes of the MFS funds; MFSC has no
obligation independently to determine whether
such plans qualify under this category.
-----------------------------------------------------------------------------------------------------
B. CERTAIN TRANSFERS OF REGISTRATION
-----------------------------------------------------------------------------------------------------
o Transfers to an IRA rollover account where any V V V
sales charges with respect to the shares being
reregistered would have been waived had they been
redeemed.
-----------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan is, at that time, a V V
party to a retirement plan recordkeeping or
administrative services agreement with MFD or one
of its affiliates pursuant to which certain of
those services are provided by Benefit Services
Corporation or any successor service provider
designated by MFD.
-----------------------------------------------------------------------------------------------------
o Where the retirement plan has established an V V
account with MFSC on or after January 1, 2000, and
is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement
with MFD or one of its affiliates pursuant to which
such services are provided with respect to at least
$10 million in plan assets.
-----------------------------------------------------------------------------------------------------
o Shares acquired by retirement plans or trust V V
accounts whose financial intermediaries have
entered into an administrative services agreement
with MFD or one of its affiliates to perform
certain administrative services, subject to certain
operational and minimum size requirements specified
from time to time by MFD or one or more of its
affiliates.
-----------------------------------------------------------------------------------------------------
1 Purchases of Class A shares are not subject to an initial sales charge; however, a
CDSC of 1% will be deducted from redemption proceeds if the redemption is made within
12 months of purchase.
|
WAIVERS FOR 529 TUITION PROGRAMS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS 529A CLASS 529B CLASS 529C
ISC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. CERTAIN SPONSORED PLANS
---------------------------------------------------------------------------------------------------------
o Shares acquired on behalf of a group, association or V V V
employer sponsored plan, pursuant to guidelines created by
MFD from time to time.
---------------------------------------------------------------------------------------------------------
B. INVESTMENT PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS
A, CLASS B AND CLASS C SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases of Class V V V
529A shares, and the CDSC imposed on certain redemptions
of Class A, Class B and Class C shares, are waived where
Class 529A, Class 529B and Class 529C shares are acquired
following the reinvestment of the proceeds of a redemption
of Class A, Class B and Class C shares, respectively, of
the same fund; provided however, that any applicable CDSC
liability on the Class B or Class C shares redeemed will
carry over to the Class 529B or Class 529C shares acquired
and for purposes of calculating the CDSC, the length of
time you have owned your Class 529B or Class 529C shares
will be measured from the date of original purchase of the
Class B or Class C shares redeemed.
---------------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by 529 tuition programs whose sponsors V
or administrators have entered into an administrative
services agreement with MFD or one of its affiliates to
perform certain administrative or investment advisory
services subject to certain operational and minimum size
requirements specified from time to time by MFD or one or
more of its affiliates.
---------------------------------------------------------------------------------------------------------
D. QUALIFIED HIGHER EDUCATION EXPENSES
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the redemption proceeds are used V V
to pay for qualified higher education expenses, which may
include tuition, fees, books, supplies, equipment and room
and board (see the program description for further
information on qualified higher education expenses);
however the CDSC will not be waived for redemptions where
the proceeds are transferred or rolled over to another
tuition program.
---------------------------------------------------------------------------------------------------------
E. SCHOLARSHIP
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the account beneficiary has V V
received a scholarship, up to the amount of the
scholarship.
---------------------------------------------------------------------------------------------------------
F. DEATH OF 529 PLAN BENEFICIARY
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the death of the 529 plan V V
account beneficiary if the shares were held solely for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
GENERAL WAIVERS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
CLASS A/529A CLASS A CLASS B/529B CLASS C/529C
WAIVER CATEGORY ISC CDSC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. DIVIDEND REINVESTMENT
---------------------------------------------------------------------------------------------------------
o Shares acquired through dividend or capital V V V V
gain reinvestment.
---------------------------------------------------------------------------------------------------------
o Shares acquired by automatic reinvestment of V V V V
distributions of dividends and capital gains of
any fund in the MFS funds pursuant to the
Distribution Investment Program.
---------------------------------------------------------------------------------------------------------
B. AFFILIATES OF A MFS FUND/CERTAIN FINANCIAL
ADVISERS
---------------------------------------------------------------------------------------------------------
o Shares acquired by officers, eligible V V V V
directors, employees (including former
employees) and agents of MFS, Sun Life, or any
of their subsidiary companies.
---------------------------------------------------------------------------------------------------------
o Shares acquired by trustees and retired V V V V
trustees of any investment company for which
MFD serves as distributor.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees, directors, V V V V
partners, officers and trustees of any
subadviser to any MFS fund.
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain family members of V V V V
any such individual identified above and their
spouses (or legal equivalent under applicable
state law), and certain trusts, pension,
profit-sharing or other retirement plans for
the sole benefit of such persons, provided the
shares are not resold except to the MFS fund
which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees or registered V V V V
representatives (including former employees) of
financial intermediaries or an employee's
spouse (or legal equivalent under applicable
state law) or employee's children under the age
of 21. For employees or registered
representatives of financial intermediaries who
established an account with MFS prior to May 1,
2006, shares acquired by certain family
members of employees or registered
representatives of financial intermediaries and
their spouses (or legal equivalent under
applicable state law), and certain trusts,
pension, profit-sharing or other retirement
plans for the sole benefit of such persons,
provided the shares are not resold except to
the MFS Fund which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by institutional clients of V V V V
MFS or MFS Institutional Advisors, Inc.
---------------------------------------------------------------------------------------------------------
C. INVOLUNTARY REDEMPTIONS
---------------------------------------------------------------------------------------------------------
o Shares redeemed at a MFS fund's direction due V V V
to the small size of a shareholder's account.
---------------------------------------------------------------------------------------------------------
D. BANK TRUST DEPARTMENTS AND LAW FIRMS
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain bank trust V V
departments or law firms acting as trustee or
manager for trust accounts which have entered
into an administrative services agreement with
MFD and are acquiring such shares for the
benefit of their trust account clients.
---------------------------------------------------------------------------------------------------------
E. INVESTMENT OF PROCEEDS FROM CERTAIN
REDEMPTIONS OF CLASS I SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases V V
of Class A or Class 529A shares and the
contingent deferred sales charge imposed on
certain redemptions of Class A shares, are
waived with respect to Class A or Class 529A
shares acquired of any of the MFS funds through
the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS
funds.
---------------------------------------------------------------------------------------------------------
F. SYSTEMATIC WITHDRAWALS
---------------------------------------------------------------------------------------------------------
o Systematic withdrawals with respect to up to V V
10% per year of the account value (with respect
to Class B and Class 529B shares, determined at
the time of your first withdrawal under the
plan(s) or January 1, 2007, whichever is later
and reset annually thereafter and with respect
to Class C and Class 529 C shares, determined
at the time the plan is established).
---------------------------------------------------------------------------------------------------------
G. DEATH OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on the account of the death V V V
of the account owner (e.g., shares redeemed by
the estate or any transferee of the shares from
the estate) if the shares were held solely in
the deceased individual's name, or for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
H. DISABILITY OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the disability V V
of the account owner if shares are held either
solely or jointly in the disabled individual's
name in a living trust for the benefit of the
disabled individual (in which case a disability
certification form is required to be submitted
to MFSC), or shares redeemed on account of the
disability of the 529 account beneficiary.
---------------------------------------------------------------------------------------------------------
I. WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by investments through V V
certain dealers (including registered
investment advisers and financial planners)
which have established certain operational
arrangements with MFD which include a
requirement that such shares be sold for the
sole benefit of clients participating in a
"wrap" account, mutual fund "supermarket"
account or a similar program under which such
clients pay a fee to such dealer.
---------------------------------------------------------------------------------------------------------
J. INSURANCE COMPANY SEPARATE ACCOUNTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by insurance company separate V V
accounts.
---------------------------------------------------------------------------------------------------------
K. NO COMMISSIONS PAID
---------------------------------------------------------------------------------------------------------
o Shares redeemed where MFD has not paid an up
front commission with respect to the sale of
the shares, provided that such arrangement V V V
meets certain conditions established by MFD
from time to time.
---------------------------------------------------------------------------------------------------------
L. MISCELLANEOUS
---------------------------------------------------------------------------------------------------------
o In connection with settlements reached V
between certain broker/dealers and the NASD,
SEC, and/or other regulatory bodies regarding
sales of Class B and Class C shares in excess
of certain dollar thresholds, the funds will,
at times, permit shareholders who are clients
of these firms to redeem Class B and Class C
shares of the fund and concurrently purchase
Class A shares without paying an initial sales
charge.
---------------------------------------------------------------------------------------------------------
|
PART II - APPENDIX D
FINANCIAL INTERMEDIARY COMPENSATION
Financial intermediaries receive various forms of compensation in connection
with the sale of shares of a Fund and/or the servicing of shareholder accounts.
Financial intermediaries may receive such compensation (i) in the form of
upfront commissions and ongoing asset-based compensation paid by MFD based on
sales charges received and expected to be received by MFD from shareholders, and
Rule 12b-1 ("Distribution Plan") distribution and service payments received by
MFD from the Funds, (ii) in the form of 529 administrative services payments,
retirement plan administrative and service payments, and shareholder servicing
payments paid by MFD and/or one or more of its affiliates (for purposes of this
section only, collectively, "MFD") based on the receipt of such payments by MFD
from the Funds, and (iii) in the form of payments paid from MFD's own additional
resources. In addition, financial intermediaries may benefit from payments made
to other entities for consulting, research, or analytical services.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. The amount of compensation that MFD pays to a financial intermediary can be significant. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular Fund or share class or to recommend MFS Funds instead of other funds that do not pay such compensation or that pay lower amounts of compensation. For calendar year 2006, gross sales of MFS Funds through financial intermediaries who received such compensation from MFD represented 74% of total gross sales of MFS Funds.
Financial intermediaries may charge you additional fees and/or commissions. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries may categorize and disclose these arrangements differently than MFD does. Financial intermediaries that sell Fund shares may also act as a broker or dealer in connection with a MFS Fund's purchase or sale of portfolio securities. However, the Funds and MFS do not consider financial intermediaries' sale of shares of a MFS Fund as a factor when choosing brokers or dealers to effect portfolio transactions for the MFS Funds.
COMMISSIONS AND DISTRIBUTION PLAN PAYMENTS
Class A, Class A1, Class 529A, and Class J Shares - General Provisions
For purchases of Class A, Class A1, Class 529A and Class J shares subject to an initial sales charge, MFD generally pays a portion of the initial sales charge to financial intermediaries as an upfront commission of up to the following amounts:
EQUITY/ASSET ALLOCATION/TOTAL RETURN FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 5.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 4.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
SHORT-TERM BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 2.25%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 2.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 1.75%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 1.50%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.25%
-------------------------------------------------------------------------------
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The difference between the total amount invested and the sum of (a) the net proceeds to the Funds and (b) the financial intermediary commission, is the amount of the initial sales charge retained by MFD. Because of rounding in the computation of offering price, the portion of the sales charge retained by MFD may vary and the total sales charge may be more or less than the sales charge calculated using the sales charge expressed as a percentage of the offering price or as a percentage of the net amount invested as listed in the Prospectus. From time to time, MFD may pay financial intermediaries up to 100% of the applicable initial sales charge of Class A, Class A1, Class 529A and Class J shares of certain specified Funds sold by financial intermediaries during a specified sales period. In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares. Also, at the discretion of MFD, MFD may pay certain financial intermediaries some or all of the Distribution Plan distribution fee payments of up to 0.10% annually of the average daily net assets of the class with respect to such shares.
Class 529A-Specific Provisions
Except as noted below, for purchases of Class 529A shares not subject to an initial sales charge on or after April 1, 2007, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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On the first $10,000,000 plus 0.50%
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Over $10,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class 529A shares not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class 529A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares not subject to an initial sales charge, MFD may pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
--------------------------------------------------------------------------------
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On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares by employer sponsored or payroll deduction 529 plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
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In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class A and Class A1-Specific Provisions Effective For Purchases on or After April 1, 2007
Except as noted below, for purchases of Class A and Class A1 shares not subject to an initial sales charge on or after April 1, 2007, by retirement plans (other than Serviced Plans and plans for which Heritage Trust serves as a trustee) that are held by MFSC at the plan or omnibus level ("Investment-Only Retirement Plans"), MFD will generally pay financial intermediaries no upfront commission, but financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases of Class A and Class A1 shares by Investment-Only Retirement Plans not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
Except as noted below, for purchases of Class A and Class A1 shares on or after April 1, 2007, by accounts other than Investment-Only Retirement Plans and Serviced Plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $10,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $10,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 (or with respect to purchases pursuant to a letter of intent signed prior to April 1, 2007) of Class A and Class A1 shares not subject to an initial sales charge other than by Serviced Plans, MFD may pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
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|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established prior to April 1, 2001 (including sales to plans for which account establishment paperwork was received in good order by MFD on or prior to March 31, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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On the first $2,000,000 plus 1.00%
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Over $2,000,000 to $3,000,000 plus 0.80%
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Over $3,000,000 to $50,000,000 plus 0.50%
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Over $50,000,000 0.25%
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Except for Serviced Plans described below, for purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's new investment in Class A and Class A1 shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over a 12-month period (commencing from the date of the first such purchase).
In the case of Serviced Plans whose account establishment paperwork was received in good order after December 31, 1999, purchases prior to April 1, 2007 will be aggregated as described above but the cumulative purchase amount will not be re-set after the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established on or after April 1, 2001 (including, sales to plans for which account establishment paperwork was received in good order by MFD on or after April 1, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class A shares and Class A1, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase except for purchases by Serviced Plans that trade through Princeton Retirement Group for which financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class B, Class B1 and Class 529B Shares
Except as noted below, for purchases of Class B, Class B1 and Class 529B shares, MFD will generally pay an upfront commission to financial intermediaries of up to 3.75% of the amount purchased through such financial intermediaries. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B, Class B1 and Class 529B shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan for which account establishment paperwork was received in good order by MFD between July 1, 1996 and December 31, 1998, MFD will generally pay an upfront commission to financial intermediaries equal to 2.75% of the amount of Class B and Class B1 shares purchased through such financial intermediary. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B and Class B1 shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan which established its account with MFSC between January 1, 1999, and December 31, 2002 (i.e., plan establishment paperwork is received by MFSC in good order by December 31, 2002) and certain other retirement plans as determined by MFD from time to time, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee). This commission structure is not available with respect to a plan with a pre-existing account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper Plus product.
Class C and Class 529C Shares
Except as noted below, for purchases of Class C and Class 529C shares, MFD will generally pay an upfront commission to financial intermediaries of up to 1% of the amount of Class C and Class 529C shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan distribution fee payment of up to 0.75% and some or all of the Distribution Plan service fee payment of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class C shares by Serviced Plans established between January 1, 2003 and March 31, 2005 (i.e., plan establishment paperwork is received by MFSC in good order on or after January 1, 2003), MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee).
For purchases of Class C shares by an Alliance Plan, MFD will pay upfront commissions or asset-based compensation to financial intermediaries under either option discussed above, at the financial intermediary's discretion.
Class R, Class R1, Class R2, Class R3 and Class R4 Shares
Except as noted below, for purchases of the following R share classes, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to the following rates annually of the average daily net assets of the Funds attributable to plan assets (of which up to 0.25% consists of the Distribution Plan service fee), as follows:
------------------------------------------------------------------------------- Class Annual Rate ------------------------------------------------------------------------------- Class R1 0.75% ------------------------------------------------------------------------------- Class R, Class R2, Class R3 0.50% ------------------------------------------------------------------------------- Class R4 0.25% ------------------------------------------------------------------------------- |
In addition, MFD may pay financial intermediaries who sell Class R4 shares an upfront commission of up to 0.25% of up to $25 million of a Serviced Plan's initial investment. MFD generally will not pay financial intermediaries receiving this upfront commission an upfront commission with respect to any subsequent sale of Class R4 shares (subject to MFD waiving this limitation from time to time).
For purchases of Class R shares prior to April 1, 2007 by a Serviced Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class R shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class R shares prior to April 1, 2007 by an Alliance Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to 0.60% of the amount of Class R shares purchased through such financial intermediary.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
529 ADMINISTRATIVE SERVICES FEES, RETIREMENT PLAN ADMINISTRATIVE AND SERVICES FEES, AND SHAREHOLDER SERVICING PAYMENTS
Financial intermediaries may receive all or a portion of the following payments: 529 administrative services fees as described in "Management of the Fund - Program Manager"; retirement plan administrative and service fees as described in "Management of the Fund - Administrator"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
OTHER MFD PAYMENTS
Financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS Funds, to cooperate with MFD's promotional efforts, and/or in recognition of their marketing, administrative services, and/or processing support. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary, and the quality of the overall relationship with the financial intermediary.
MFD may make marketing support and/or administrative services payments to financial intermediaries that sell Fund shares or provide services to MFD, the Funds or shareholders of the Funds through the financial intermediary's retail distribution channel and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition to the opportunity to participate in a financial intermediary's retail distribution channel or program, payments may include one or more of the following: business planning assistance; educating financial intermediary personnel about the various MFS Funds; assistance with Fund shareholder financial planning; placement on the financial intermediary's preferred or recommended fund list; access to sales representatives and management representatives of the financial intermediary; administrative and account maintenance services.; participant or shareholder record-keeping; reporting or transaction processing; program administration; fund/investment selection and monitoring; enrollment; and education. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
MFD may make payments to certain financial intermediaries that sell Fund shares to help offset the financial intermediaries' costs associated with client account maintenance support, statement preparation, and transaction processing. The types of payments that MFD may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a financial intermediary, payment of networking fees of up to $6 per shareholder account maintained on certain mutual fund trading systems, or one-time payments for ancillary services such as setting up funds on a financial intermediary's mutual fund trading system.
NASD Member Broker/Dealers Receiving Such Payments from MFD's Own Additional Resources
Set forth below is a list of the member firms of the NASD to which MFD expects as of June 4, 2007 to make such payments from its own additional resources with respect to the Funds. Payments may also be made to affiliates of these firms. Any additions, modifications, or deletions to the broker/dealers identified in this list that have occurred since June 4, 2007 are not reflected. In addition to member firms of the NASD, MFD also makes such payments to other financial intermediaries that sell or provide services to the Funds and shareholders, such as banks, insurance companies, and plan administrators. These firms are not included in this list and may include affiliates of MFD. You should ask your financial intermediary if it receives such payments from MFD.
INTERMEDIARY FIRM NAME: INTERMEDIARY FIRM NAME: 401(K) Investment Services, Inc. Linsco/Private Ledger Corp. AG Edwards & Sons, Inc. Merrill Lynch, Pierce, Fenner & Smith Inc. ADP Broker-Dealer, Inc. Metlife Securities Inc. AIG Financial Advisors, Inc. Mid-Atlantic Securities, Inc. Ameriprise Financial Services, Inc. Morgan Stanley DW Inc. American General Securities Incorporated MSCS Financial Services, LLC Bear, Stearns Securities Corp Multi Financial Services, Inc. Becker & Suffern, LTD. Northwestern Mutual Investment Services Charles Schwab & Co., Inc. Paychex Securities Corporation Chase Investment Services Corp. Piper Jaffray & Co. Citigroup Global Markets Inc. Primevest Financial Services, Inc. Clark Securities, Inc. Princor Financial Services Corporation Commonwealth Financial Network Prudential Investment Management Services LLC CUNA Brokerage Services, Inc. Raymond James & Associates, Inc. Fidelity Brokerage Services LLC Raymond James Financial Services, Inc. Financial Network Investment Corp. RBC Dain Rauscher Inc. H.D. Vest Investment Services State Street Global Markets, LLC Hewitt Financial Services LLC SunTrust Investment Services, Inc. ICMA - RC Services, LLC UBS Financial Services Inc. IFMG Securities, Inc. Wachovia Securities, LLC ING Financial Partners, Inc. Wells Fargo Investments LLC Legg Mason Investor Services, LLC |
From time to time, MFD, from MFD's own additional resources, may make additional payments to financial intermediaries that sell or provide services in connection with the sale of MFS Fund shares or the servicing of shareholder accounts. Such payments by MFD may include payment or reimbursement to, or on behalf of, financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and events, and other sponsored events, and travel expenses, including lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting, retention, and due diligence trips. Other compensation may be offered, including goodwill payments relating to servicing, to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. MFD makes payments for entertainment events it deems appropriate, subject to MFD's policies and applicable law. These payments may vary depending upon the nature of the event.
PART II - APPENDIX E
INVESTMENT STRATEGIES AND RISKS
In addition to the principal investment strategies and the principal risks described in the prospectus, your Fund may employ other investment practices and may be subject to other risks, which are described below. Because the following is a combined description of the investment strategies and risks for all MFS Funds, certain matters described herein may not apply to your Fund.
ASSET-BACKED SECURITIES. Asset-backed securities are securities that represent a participation in, or are secured by and payable from, pools of underlying assets such as debt securities, bank loans, motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (i.e., credit card) agreements and other receivables. These underlying assets are securitized through the use of trusts and special purpose entities. Payment of interest and repayment of principal on asset-backed securities may be largely dependent upon the cash flows generated by the underlying assets backing the securities and, in certain cases, may be supported by letters of credit, surety bonds, or other credit enhancements.
Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate, as a result of the pass-through of prepayments of principal on the underlying assets. The rate of principal payments on asset-backed securities is related to the rate of principal payments on the underlying asset pool and related to the priority of payment of the security with respect to the asset pool. The occurrence of prepayments is a function of several factors, such as the level of interest rates, general economic conditions, the location, and age of the underlying obligations, asset default and recovery rates, and other social and demographic conditions. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, asset-backed securities may have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
The credit quality of asset-backed securities depends primarily on the quality of the underlying assets, the level of credit enhancement, if any, provided for the securities, and the credit quality of the credit-support provider, if any. The value of asset-backed securities may be affected by the various factors described above and other factors, such as changes in interest rates, the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets, or the entities providing the credit enhancement. Because asset-backed securities may not have the benefit of a security interest in the underlying assets that is comparable to a mortgage, asset-backed securities present certain additional risks that are not present with mortgage-backed securities.
BORROWING. If the Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage and may cause a Fund to liquidate investments when it would not otherwise do so. Money borrowed will be subject to interest charges and may be subject to other fees or requirements which would increase the cost of borrowing above the stated interest rate.
COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, or other securities that may be converted into or exchanged for (by the holder or by the issuer) shares of stock (or cash or other securities of equivalent value) of the same or a different issuer at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at prices above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
COUNTRY LOCATION. The issuer of a security or other investment is generally
deemed to be economically tied to a particular country if: (a) the security or
other investment is issued or guaranteed by the government of that country or
any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; (e) the issuer has 50% or more of its assets in that
country; (f) the issuer is included in an index which is representative of that
country; or (g) the issuer is exposed to the economic fortunes and risks of that
country.
DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs, EDRs, or GDRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and may be offered privately in the United States and are generally designed for use in securities markets outside the U.S. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders.
With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and financial information to the depositary receipt holders at the underlying issuer's request.
Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
EMERGING MARKETS. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign markets. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; the risk that a judgment against a foreign government may be unenforceable; and greater price volatility, less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, depository receipts for those securities, securities of investment companies, and other similar interests in an issuer.
FOREIGN CURRENCIES. Foreign securities may be denominated in foreign currencies and international currency units and foreign currencies may be purchased directly. Accordingly, the weakening of these currencies and units against the U.S. dollar would result in a decline in the value of securities denominated in that currency or the value of the currency itself.
While holding currencies permits an investor to take advantage of favorable movements in the applicable exchange rate, this strategy also exposes the investor to risk of loss if exchange rates move in a direction adverse to the investor's position. Such losses could reduce any profits or increase any losses sustained by the investor from the sale or redemption of securities and could reduce the dollar value of interest or dividend payments received.
Some foreign countries have managed currencies, which are not free floating against the U.S. dollar. Managed currencies can experience a steep devaluation relative to the U.S. dollar.
In addition, there is risk that certain foreign countries may restrict the free conversion of their currencies into other currencies. Further, certain currencies may not be internationally traded.
Foreign currency transactions can be made on a spot (i.e., cash) or forward basis (i.e., by entering into forward contracts to purchase or sell foreign currencies). Although foreign exchange dealers generally do not charge a fee for such conversions, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency at one rate, while offering a lesser rate of exchange should the counterparty desire to resell that currency to the dealer. Forward contracts are customized transactions that require a specific amount of a currency to be delivered at a specific exchange rate on a specific date or range of dates in the future. Forward contracts are generally traded in an interbank market directly between currency traders (usually large commercial banks) and their customers. The parties to a forward contract may agree to offset or terminate the contract before its maturity, or may hold the contract to maturity and complete the contemplated currency exchange.
A "settlement hedge" or "transaction hedge" attempts to protect against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. Forward contracts to purchase or sell a foreign currency may also be used in anticipation of future purchases or sales of securities denominated in foreign currency, even if the specific investments have not yet been selected.
Forward contracts can be used to hedge against a decline in the value of existing investments denominated in foreign currency. For example, if an investor owned securities denominated in pounds sterling, the investor could enter into a forward contract to sell pounds sterling in return for U.S. dollars to hedge against possible declines in the pound's value. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. An investor could also hedge the position by selling another currency expected to perform similarly to the pound sterling. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Forward contracts can also be used to shift investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if a Fund had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases.
Swap agreements, indexed securities, hybrid securities and options and futures contracts relating to foreign currencies can be used for the same purposes.
Successful use of currency management strategies will depend on MFS' skill in analyzing currency values. Currency management strategies may increase the volatility of a Fund's returns and could result in significant losses to a Fund if currencies do not perform as MFS anticipates. For example, if a currency's value rose at a time when MFS had hedged a Fund by selling that currency in exchange for dollars, a Fund would not participate in the currency's appreciation. If MFS hedges currency exposure through proxy hedges, a Fund could realize currency losses from both the hedge and the security position if the two currencies do not move in tandem. Similarly, if MFS increases a Fund's exposure to a foreign currency and that currency's value declines, a Fund will realize a loss. There is no assurance that MFS' use of currency management strategies will be advantageous to a Fund or that it will hedge at appropriate times.
FOREIGN MARKETS. Foreign securities and foreign currencies, as well as any securities issued by U.S. entities with substantial foreign operations, may involve significant risks in addition to the risks inherent in U.S. investments. Foreign investments involve risks relating to local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars, or other government intervention. The debt instruments of foreign governments and their agencies and instrumentalities may or may not be supported by the full faith and credit of the foreign government. Additionally, governmental issuers of foreign debt securities may be unwilling to pay interest and repay principal when due and may require that the conditions for payment be renegotiated. In addition, the value of securities denominated in foreign currencies and of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar.
Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading, settlement and custodial practices (including those involving securities settlement where Fund assets may be released prior to receipt of payment) are often less developed than those in U.S. markets, and may result in increased risk or substantial delays in the event of a failed trade or the insolvency of, or breach of duty by, a foreign broker-dealer, securities depository, or foreign subcustodian. In addition, the costs associated with foreign investments, including withholding taxes, brokerage commissions, and custodial costs, are generally higher than with U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers. Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated. Regulatory enforcement may be influenced by economic or political concerns, and investors may have difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions.
FUTURES CONTRACTS. A futures contract is a standardized agreement between two parties to buy or sell in the future a specific quantity of an asset, currency, interest rate, index, instrument or other indicator at a specific price and time. The value of a futures contract typically fluctuates in correlation with the increase or decrease in the value of the underlying indicator. The buyer of a futures contract enters into an agreement to purchase the underlying indicator on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying indicator on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying indicator or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. In the case of physically settled futures, it may not be possible to liquidate or close out the futures contract at any particular time or at an acceptable price. Other financial futures contracts (such as those relating to interest rates, foreign currencies and securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying indicator unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market."
The risk of loss in trading futures contracts can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. Thus, a purchase or sale of a futures contract may result in unlimited losses. In the event of adverse price movements, an investor would continue to be required to make daily cash payments to maintain its required margin. In addition, on the settlement date, an investor may be required to make delivery of the indicators underlying the futures positions it holds.
An investor could suffer losses if it is unable to close out a futures contract because of an illiquid secondary market. Futures contracts may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures position, and an investor would remain obligated to meet margin requirements until the position is closed. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment.
An investor could lose margin payments it has deposited with its futures commission merchant (FCM), if, for example, the FCM breaches its agreement with the investor or becomes insolvent or goes into bankruptcy. In that event, the investor may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the investor.
If MFS attempts to use a futures contract as a hedge against, or as a substitute for, a portfolio investment, the futures position may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Pursuant to a claim of exemption filed with the Commodity Futures Trading Commission (CFTC) on behalf of the MFS Funds that are permitted by their investment objectives and policies to use futures and options on futures contracts, each such MFS Fund is not deemed to be a "commodity pool" or "commodity pool operator" under the Commodity Exchange Act and is not subject to registration or regulation as such under the Commodity Exchange Act.
HYBRID INSTRUMENTS. Hybrid instruments are generally considered derivatives and combine the elements of swaps, futures contracts, or options with those of debt, preferred equity or a depository instrument. A hybrid instrument may be a debt instrument, preferred stock, warrant, convertible security, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, commodities, indexes, economic factors or other measures, including interest rates, currency exchange rates, or commodities or securities indices, or other indicators (collectively, "indicators").
The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, swaps, options, futures and currencies. An investment in a hybrid instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published benchmark. The risks of a particular hybrid instrument will depend upon the terms of the instrument, but may include the possibility of significant changes in the benchmark(s) or the prices of the underlying indicators to which the instrument is linked. Such risks generally depend upon factors unrelated to the operations or credit quality of the issuer of the hybrid instrument, which may not be foreseen by the purchaser, such as economic and political events, the supply and demand of the underlying indicators and interest rate movements. Hybrid instruments may be highly volatile.
Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular hybrid instrument, changes in a benchmark, underlying asset or indicator may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument. Also, the prices of the hybrid instrument and the benchmark, underlying asset or indicator may not move in the same direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, hybrid instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain). The latter scenario may result if "leverage" is used to structure the hybrid instrument. Leverage risk occurs when the hybrid instrument is structured so that a given change in a benchmark or underlying indicator is multiplied to produce a greater value change in the hybrid instrument, thereby magnifying the risk of loss as well as the potential for gain.
If MFS attempts to use a hybrid instrument as a hedge against, or as a substitute for, a portfolio investment, the hybrid instrument may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving hybrid instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Hybrid instruments may also carry liquidity risk since the instruments are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt instruments. Under certain conditions, the redemption value of such an investment could be zero. In addition, because the purchase and sale of hybrid investments could take place in an over-the-counter market without the guarantee of a central clearing organization, or in a transaction between the Fund and the issuer of the hybrid instrument, hybrid instruments are subject to the creditworthiness of the issuer of the hybrid instrument, and their values may decline substantially if the issuer's creditworthiness deteriorates. Hybrid instruments also may not be subject to regulation by the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.
INFLATION-INDEXED BONDS. Inflation-indexed bonds are debt instruments whose principal value is adjusted periodically according to a rate of inflation (usually a consumer price index). Two structures are most common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the inflation accruals as part of a semiannual coupon.
U.S. Treasury Inflation Protected Securities (TIPS) currently are issued with maturities of five, ten, or thirty years, although it is possible that securities with other maturities will be issued in the future. The principal amount of TIPS adjusts for inflation, although the inflation-adjusted principal is not paid until maturity. Semi-annual coupon payments are determined as a fixed percentage of the inflation-adjusted principal at the time the payment is made.
If the rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. At maturity, TIPS are redeemed at the greater of their inflation-adjusted principal or at the par amount at original issue. If an inflation-indexed bond does not provide a guarantee of principal at maturity, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. For example, if inflation were to rise at a faster rate than nominal interest rates, real interest rates would likely decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates would likely rise, leading to a decrease in value of inflation-indexed bonds.
While these securities, if held to maturity, are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If nominal interest rates rise due to reasons other than inflation (for example, due to an expansion of non-inflationary economic activity), investors in these securities may not be protected to the extent that the increase in rates is not reflected in the bond's inflation measure.
The inflation adjustment of TIPS is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of price changes in the cost of living, made up of components such as housing, food, transportation, and energy. There can be no assurance that the CPI-U will accurately measure the real rate of inflation in the prices of goods and services.
INVERSE FLOATING RATE OBLIGATIONS. Inverse floating rate obligations have variable interest rates that typically move in the opposite direction from movements in prevailing interest rates, most often short-term rates. Accordingly, the value of inverse floating rate obligations or other obligations or certificates structured to have similar features generally moves in the opposite direction as interest rates. The value of an inverse floating rate instrument can be considerably more volatile than the value of other debt instruments of comparable maturity and quality. Inverse floating rate obligations incorporate varying degrees of leverage. Generally, greater leverage results in greater price volatility for any given change in interest rates. Inverse floating rate obligations may be subject to legal or contractual restrictions on resale and therefore may be less liquid than other types of securities.
LENDING OF PORTFOLIO SECURITIES. Portfolio securities will be lent to qualified investors such as member firms of the New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the Federal Reserve System, and would be required to be secured by collateral in cash, an irrevocable letter of credit, or U.S. Government securities maintained on a current basis at an amount at least equal to the market value of the securities loaned. When one party lends portfolio securities to another party, the lender has the right to call the loan and obtain the securities loaned at any time on customary industry settlement notice (which will not usually exceed five business days). For the duration of a loan, the borrower pays the lender an amount equal to any interest or dividends received on the securities loaned. The lender also receives a fee from the borrower or compensation from the investment of the collateral, less a fee paid to the borrower (if the collateral is in the form of cash). The lender does not, however, have the right to vote any securities having voting rights during the existence of the loan, but it can 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. A Fund's performance will continue to reflect changes in the value of the securities loaned and will also reflect the receipt of interest, through investment of cash collateral by the Fund or a fee. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, the lender could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If the lender is not able to recover the securities loaned, the lender may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased.
LOANS AND OTHER DIRECT INDEBTEDNESS. Loans and other direct indebtedness are interests in amounts owed by corporations, governmental or other borrowers to lenders or lending syndicates (loans and loan participations), to suppliers of goods and services (trade claims and other receivables), or to other parties. Some loans may be unsecured in part or in full. Loans may be in default at the time of purchase. Loans that are fully secured should protect the purchaser to a greater extent than unsecured loans in the event of nonpayment of scheduled interest or principal. However, there can be no assurance that the liquidation of collateral acquired in connection with the default of a secured loan would satisfy the borrower's obligation, or that such collateral could be liquidated.
Loans generally are made to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs or other corporate activities. Such loans typically are originated, negotiated and structured by a syndicate of lenders represented by an agent lender that has negotiated and structured the loan and that is responsible for collecting interest and principal payments and other amounts due on behalf of all of the lenders in the syndicate, and for enforcing the lenders' rights against the borrower. Typically, the agent is given broad discretion in monitoring the borrower's performance and is obligated to use the same care it would use in the management of its own property. Upon an event of default, the agent typically will enforce the loan agreement after instruction from the lenders. The borrower compensates the agent for these services. This compensation may include special fees paid when the loan is structured or funded and other fees paid on a continuing basis. The typical practice of an agent or a lender to rely exclusively or primarily on reports from the borrower involves a risk of fraud by the borrower.
If an agent becomes insolvent, or has a receiver, conservator or similar official appointed for it by an appropriate authority, or if it becomes a debtor in a bankruptcy proceeding, the agent's appointment may be terminated, and a successor agent typically may be appointed by the lenders. If an appropriate authority determines that assets held by the agent for the benefit of lenders or purchasers of loans are subject to the claims of the agent's general or secured creditors, then such lenders or purchasers might incur certain costs and delays in realizing payment on a loan or suffer a loss of principal and/or interest. Furthermore, in the event of the borrower's bankruptcy or insolvency, the borrower's obligation to repay a loan may be subject to certain defenses that the borrower can assert as a result of improper conduct by the agent.
Loans may be acquired by participating directly in a lending syndicate as a lender. Alternatively, loans or an interest in loans may be acquired by novation, by assignment or by participation from members of the lending syndicate or from other participants. In a novation or an assignment, the acquirer assumes all of the rights of the lender in the loan or of the participant in the participants' portion of the loan and, in the case of a novation or an assignment from a member of the lending syndicate, becomes a party of record with respect to the loan. In a participation, the acquirer purchases a portion of the lender's or the participants' interest in the loan, but has no direct contractual relationship with the borrower. An investment in a loan by participation gives rise to several risks. The acquirer must rely on another party not only for the enforcement of the acquirer's rights against the borrower, but also for the receipt and processing of principal, interest or other payments due under the loan and may be subject to the credit risk of the other party in addition to the borrower. The acquirer may be subject to delays, expenses, and risks that are greater than those that would be involved if the acquirer could enforce its rights directly against the borrower. In addition, under the terms of a participation agreement, the acquirer may be regarded as a creditor of the seller of the participation interest (rather than of the borrower), so that the acquirer also may be subject to the risk that such seller could become insolvent. A participation agreement also may limit the rights of the acquirer to vote on changes that may be made to the underlying loan agreement, such as waiving a breach of a covenant.
Direct indebtedness includes trade or other claims against companies, which generally represent monies owed by such companies to suppliers of goods or services. Such claims may be purchased when such companies are in default.
The ability to receive payments of principal and interest on loans and other direct indebtedness will depend primarily on the financial condition of the borrower. Because an acquirer may be required to rely on another party to collect and to pass on to it amounts payable with respect to the loan or other direct indebtedness and to enforce the acquirer's rights under the loan or other direct indebtedness, an insolvency, bankruptcy or reorganization of such other party may delay or prevent the acquirer from receiving such amounts. The highly leveraged nature of many loans and other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions.
Revolving credit facilities and other standby financing commitments obligate the purchaser to fund additional cash on a certain date or on demand. A revolving credit facility differs from other types of financing commitments in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit facility. These commitments may have the effect of requiring a purchaser to increase its investment in a company at a time when the purchaser 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).
Floating rate loans generally are subject to legal or contractual restrictions on resale. Floating rate loans currently are not listed on any securities exchange or automatic quotation system. As a result, no active market may exist for some floating rate loans, and to the extent a secondary market exists for other floating rate loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Additionally, the supply of floating rate loans may be limited from time to time due to a lack of sellers in the market for existing floating rate loans or to the number of new floating rate loans currently being issued. As a result, the floating rate loans available for purchase may be of lower quality or may have a higher price.
With respect to its management of investments in bank loans, MFS will normally seek to avoid receiving material, non-public information ("MNPI") about the issuers of bank loans being considered for acquisition by the Fund or held in the Fund's portfolio. In many instances, borrowers may offer to furnish MNPI to prospective investors, and to holders, of the issuer's loans. MFS' decision not to receive MNPI may place MFS at a disadvantage relative to other investors in loans (which could have an adverse effect on the price the Fund pays or receives when buying or selling loans). Also, in instances where holders of loans are asked to grant amendments, waivers or consent, MFS' ability to assess their significance or desirability may be adversely affected. For these and other reasons, it is possible that MFS' decision not to receive MNPI under normal circumstances could adversely affect the Fund's investment performance.
Notwithstanding its intention generally not to receive MNPI with respect to its management of investments in loans, MFS may from time to time come into possession of MNPI about the issuers of loans that may be held in the Fund's portfolio. Possession of such information may in some instances occur despite MFS' efforts to avoid such possession, but in other instances MFS may choose to receive such information (for example, in connection with participation in a creditors' committee with respect to a financially distressed issuer). As, and to the extent, required by applicable law, MFS' ability to trade in these loans for the account of the Fund could potentially be limited by its possession of such information. Such limitations on MFS' ability to trade could have an adverse effect on the Fund by, for example, preventing the Fund from selling a loan that is experiencing a material decline in value. In some instances, these trading restrictions could continue in effect for a substantial period of time.
LOWER QUALITY DEBT INSTRUMENTS. Lower quality debt instruments are considered speculative with respect to the issuer's continuing ability to meet principal and interest payments and, while generally expected to provide greater income than investments in higher quality debt instruments, will involve greater risk of principal and income (including the possibility of default or bankruptcy of the issuers of such instruments) and may involve greater volatility of price (especially during periods of economic uncertainty or change) than higher quality debt instruments. In addition, because yields vary over time, no specific level of income can ever be assured. These lower quality debt instruments generally tend to reflect economic changes (and the outlook for economic growth), short-term corporate and industry developments and the market's perception of their credit quality to a greater extent than higher quality debt instruments, which react primarily to fluctuations in the general level of interest rates (although these lower quality debt instruments are also affected by changes in interest rates). In the past, economic downturns or an increase in interest rates have, under certain circumstances, resulted in a higher incidence of default by the issuers of these instruments and may do so in the future, especially in the case of highly leveraged issuers. The prices for these instruments may be affected by legislative and regulatory developments. The market for these lower quality debt instruments may be less liquid than the market for investment grade debt instruments. Furthermore, the liquidity of these lower quality debt instruments may be affected by the market's perception of their credit quality.
Instruments in the lowest tier of investment-grade debt instruments, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade securities.
See Appendix H for a description of bond ratings.
MONEY MARKET INSTRUMENTS. Money market instruments, or short-term debt instruments, consist of obligations such as commercial paper, bank obligations (e.g., certificates of deposit and bankers' acceptances), repurchase agreements, and various government obligations, such as Treasury bills. Money market instruments may be structured to be, or may employ a trust or other form so that they are, eligible investments for money market funds. For example, put features can be used to modify the maturity of a security or interest rate adjustment features can be used to enhance price stability. If a structure fails to function as intended, adverse tax or investment consequences may result. Neither the Internal Revenue Service (IRS) nor any other regulatory authority has ruled definitively on certain legal issues presented by certain structured securities. Future tax or other regulatory determinations could adversely affect the value, liquidity, or tax treatment of the income received from these securities. Commercial paper is a money market instrument issued by banks or companies to raise money for short-term purposes. Unlike some other debt obligations, commercial paper is typically unsecured. Commercial paper may be issued as an asset-backed security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that represent direct or indirect participation in, or are collateralized by and payable from, mortgage loans secured by real property or instruments derived from such loans. Mortgage-backed securities include various types of securities such as pass-throughs, stripped mortgage-backed securities, and collateralized mortgage obligations. There are a wide variety of mortgage types underlying these securities, including mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
Generally, mortgage-backed securities represent interests in pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association (GNMA), by government-related organizations, such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), as well as by private issuers, such as commercial banks, savings and loan institutions and mortgage bankers. Government mortgage-backed securities are backed by the full faith and credit of the United States as to payment of principal and interest. GNMA, the principal U.S. guarantor of these securities, is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Government-related mortgage-backed securities are not backed by the full faith and credit of the United States. Issuers of government-related mortgage-backed securities include FNMA and FHLMC. FNMA is a congressionally chartered corporation owned entirely by private stockholders, and is subject to general regulation by the Secretary of Housing and Urban Development. Private mortgage-backed securities may be less liquid than government or government-related mortgage-backed securities.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. FHLMC is a stockholder-owned government-sponsored enterprise established by Congress. Participation certificates representing interests in mortgages from FHLMC's national portfolio are guaranteed as to the timely payment of interest and principal by FHLMC. Private mortgage-backed securities represent interest in pass-through pools consisting principally of conventional residential mortgage loans created by non-government issuers, such as commercial banks and savings and loan associations and private mortgage insurance companies. Private, government, or government-related entities may create mortgage loan pools offering pass-through investments in addition to those described above. Interests in pools of mortgage-related securities differ from other forms of debt instruments, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities typically provide a monthly payment which consists of both interest and principal payments. In effect, these payments generally are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs incurred.
Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. Prepayments of principal by mortgagors or mortgage foreclosures shorten the term of the mortgage pool underlying the mortgage-backed security. The occurrence of prepayments is a function of several factors, including interest rates, general economic conditions, the location of the mortgaged property, the age of the mortgage or other underlying obligations, and other social and demographic conditions. Because prepayment rates of individual mortgage pools vary widely, the average life of a particular pool is difficult to predict. A Fund's ability to maintain positions in mortgage-backed securities is affected by the reductions in the principal amount of such securities resulting from prepayments. The values of mortgage-backed securities vary with changes in market interest rates generally and the differentials in yields among various kinds of U.S. government securities, mortgage-backed securities, and asset-backed securities. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgages supporting a mortgage-backed security. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase thereby shortening the average life of such a pool. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, mortgage-backed securities typically have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
Collateralized mortgage obligations (CMOs) are mortgage-backed securities that are collateralized by whole loan mortgages or mortgage pass-through securities. The bonds issued in a CMO transaction are divided into groups, and each group of bonds is referred to as a "tranche." Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the CMO bondholders. The bonds issued under a traditional CMO structure are retired sequentially as opposed to the pro-rata return of principal found in traditional pass-through obligations. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds. Under a CMO structure, the repayment of principal among the different tranches is prioritized in accordance with the terms of the particular CMO issuance. The "fastest-pay" tranches of bonds, as specified in the prospectus for the issuance, would initially receive all principal payments. When those tranches of bonds are retired, the next tranche, or tranches, in the sequence, as specified in the prospectus, receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate, and long final maturities, as well as varied expected average lives and risk characteristics. In recent years, new types of CMO tranches have evolved. These include floating rate CMOs, parallel pay CMOs planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these new structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-backed securities.
A primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) will affect the yield, average life, and price of CMOs. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other securities.
Stripped mortgage-backed securities (SMBSs) are derivative multi-class mortgage-backed securities. SMBSs may be issued by agencies or instrumentalities of the U.S. 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 entities formed or sponsored by any of the foregoing. SMBSs may be less liquid than other types of mortgage-backed securities.
SMBSs are usually structured with two classes that receive different proportions of the interest and principal distributions on 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 price and yield-to-maturity on an IO class 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 a Fund's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to recoup some or all of its initial investment in these securities, even if the security is in one of the highest rating categories. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. In mortgage "dollar roll" transactions, the investor sells mortgage-backed securities for delivery in the future and simultaneously contracts to repurchase substantially similar securities on a specified future date. During the roll period, the investor foregoes principal and interest paid on the mortgage-backed securities. The lost interest is compensated by the difference between the current sales price and the lower price for the future purchase (often referred to as the "drop") as well as by the interest earned on, and gains from, the investment of the cash proceeds of the initial sale. A commitment fee may also be received for participation in such transaction.
If the income and capital gains from the investment of the cash from the initial sale do not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will result in a lower return than would have been realized without the use of the dollar rolls. Dollar roll transactions involve the risk that the market value of the securities that are required to be purchased in the future may decline below the agreed upon repurchase price of those securities. If the party to whom the securities are sold becomes insolvent, the right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the investor's ability to correctly predict interest rates and prepayments.
A dollar roll can be viewed as a borrowing. If a Fund makes additional investments while a dollar roll is outstanding, this may be considered a form of leverage.
MUNICIPAL INSTRUMENTS. Debt instruments issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies or instrumentalities, are known as "municipal instruments." Generally, interest received on municipal instruments is exempt from federal income tax. The tax-exempt nature of the interest on a municipal instrument is generally the subject of a bond counsel opinion delivered in connection with the issuance of the instrument. There is no assurance that the IRS will agree with bond counsel's opinion that such interest is tax-exempt or that the interest payments on such municipal instruments will continue to be tax exempt for the life of the municipal instrument. Issuers or other parties generally enter into covenants requiring continuing compliance with federal tax requirements to preserve the tax-free status of interest payments over the life of the municipal instrument. If at any time the covenants are not complied with, or if the IRS otherwise determines that the issuer did not comply with relevant tax requirements, interest payments from a municipal instrument could become federally taxable, possibly retroactively to the date the municipal instrument was issued and an investor may need to file an amended income tax return. Certain types of structured securities are designed so that tax exempt interest from municipal instruments held by the underlying entity will pass through to the holders of the structured security. There is no assurance that the IRS will agree that such interest is tax exempt.
The value of municipal instruments can be affected by changes in their actual or perceived credit quality. The credit quality of municipal instruments can be affected by, among other things, the financial condition of the issuer or guarantor, the issuer's future borrowing plans and sources of revenue, the economic feasibility of the revenue bond project or general borrowing purpose, political or economic developments in the region where the instrument is issued and the liquidity of the security. Municipal instruments generally trade in the over-the-counter market.
General obligation bonds are backed by the issuer's pledge of its full faith and credit and taxing power for the repayment of principal and the payment of interest. Issuers of general obligation bonds include states, counties, cities, towns, and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads, and water and sewer systems. The rate of taxes that can be levied for the payment of debt service on these bonds may be limited. Additionally, there may be limits as to the rate or amount of special assessments or taxes that can be levied to meet these obligations.
Some general obligation bonds are backed by both a pledge of a specific revenue source, such as a special assessment or tax and an issuer's pledge of its full faith and credit and taxing power. Debt service from these general obligation bonds is typically paid first from the specific revenue source and second, if the specific revenue source is insufficient, from the general taxing power.
Revenue bonds are generally backed by the net revenues derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source, such as a state's or local government's proportionate share of the payments from the Tobacco Master Settlement Agreement. Revenue bonds are issued to finance a wide variety of capital projects. Examples include electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Industrial development bonds, a type of revenue bond, are issued by or on behalf of public authorities to raise money to finance various privately operated facilities for a variety of purposes, including economic development, solid waste disposal, transportation, and pollution control. Although the principal security for revenue bonds is typically the revenues of the specific facility, project, company or system, many revenue bonds are secured by additional collateral in the form of a mortgage on the real estate comprising a specific facility, project or system, a lien on receivables and personal property, as well as the pledge of various reserve funds available to fund debt service, working capital, capital expenditures or other needs. Net revenues and other security pledged may be insufficient to pay principal and interest due which will cause the price of the bonds to decline. In some cases, revenue bonds issued by an authority are backed by a revenue stream unrelated to the issuer, such as a hotel occupancy tax, a sales tax, or a special assessment. In these cases, the ability of the authority to pay debt service is solely dependent on the revenue stream generated by the special tax. Furthermore, the taxes supporting such issues may be subject to legal limitations as to rate or amount.
Municipal insurance policies typically insure, subject to the satisfaction of the policy conditions, timely and scheduled payment of all principal and interest due on the underlying municipal instruments. The insurance may be obtained by either (i) the issuer at the time the municipal instrument is issued, commonly referred to as primary market insurance or (ii) another party after the municipal instrument has been issued, commonly referred to as secondary market insurance. The financial strength of the companies issuing the bond insurance can vary.
In general, municipal insurance does not insure any risk other than nonpayment.
Municipal insurance does not insure against market fluctuations which affect the
price of a security. In addition, a municipal insurance policy will not insure
(i) the payment of regularly scheduled debt service payments until maturity if
an issuer redeems the municipal bonds prior to maturity in accordance with the
call provisions of the municipal instrument; (ii) over the loss of prepayment or
other acceleration payment which at any time may become due in respect of any
instrument, (except for a mandatory sinking fund redemption; (iii) the payment
of a prepayment or acceleration premium; or (iv) nonpayment of principal or
interest caused by negligence or bankruptcy of the paying agent. A municipal
insurance policy often reserves to the insurer the exclusive right to accelerate
the instruments upon a payment default.
Because a significant portion of the municipal instruments issued and outstanding are insured by a small number of insurance companies, an event involving one or more of these insurance companies could have a significant adverse effect on the value of the securities insured by that insurance company and on the municipal market as a whole.
Education. In general, there are two types of education-related bonds: (i) those issued to finance projects for public and private colleges and universities, charter schools and private schools, and (ii) those representing pooled interests in student loans. Bonds issued to supply educational institutions with funding are subject to many risks, including the risks of unanticipated revenue decline, primarily the result of decreasing student enrollment, decreasing state and federal funding, or a change in general economic conditions. Additionally, higher than anticipated costs associated with salaries, utilities, insurance or other general expenses could impair the ability of a borrower to make annual debt service payments. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which may be supported by reserves or other forms of credit enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous factors, including the rate of student loan defaults, seasoning of the loan portfolio, and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Electric Utilities. The electric utilities industry has been experiencing increased competitive pressures. Federal and state legislation in recent years has been moving the industry toward opening transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel, (b) the availability and cost of capital, (c) the effects of conservation on energy demand, (d) the effects of rapidly changing environmental, safety, and licensing requirements, and other federal, state, and local regulations, (e) timely and sufficient rate increases thereby assisting utilities in recovering increasing energy costs, and (f) opposition to nuclear power.
Health Care. The health care industry is subject to regulatory action by a number of governmental agencies, including federal, state, and local governmental agencies. A major source of revenues for the health care industry is payments from the Medicare and Medicaid programs. As a result, the industry is sensitive to legislative changes and reductions in governmental spending for such programs. A second major source of revenues for the health care industry is payments from private insurance companies and health maintenance organizations. As such, any changes to and reductions in reimbursement rates from these entities for services provided could be detrimental to the revenues of the providers. Numerous other factors may affect the industry, such as general and local economic conditions; demand for services; expenses (including for example, labor, malpractice insurance premiums and pharmaceutical products); and competition among health care providers. In the future, the following factors may adversely affect health care facility operations: adoption of legislation proposing a national health insurance program; other state or local health care reform measures; medical and technological advances which dramatically alter the need for health services or the way in which such services are delivered; changes in medical coverage which alter the traditional fee-for-service revenue stream; and efforts by employers, insurers, and governmental agencies to reduce the costs of health insurance and health care services.
Housing. Housing revenue bonds typically are issued by a state, county, or local housing authority and are secured by the revenues of mortgages originated by the authority using the proceeds of the bond issue. These bonds may be used to make mortgage loans for single-family housing, multi-family housing, or a combination of the two. Because of the impossibility of precisely predicting demand for mortgages from the proceeds of such an issue, there is a risk that the proceeds of the issue will be in excess of demand, which would result in early retirement of the bonds by the issuer. Moreover, such housing revenue bonds depend for their repayment upon the cash flow from the underlying mortgages, which cannot be precisely predicted when the bonds are issued. Any difference in the actual cash flow from such mortgages from the assumed cash flow could have an adverse impact upon the ability of the issuer to make scheduled payments of principal and interest on the bonds, or could result in early retirement of the bonds. Additionally, such bonds depend in part for scheduled payments of principal and interest upon reserve funds established from the proceeds of the bonds, assuming certain rates of return on investment of such reserve funds. If the assumed rates of return are not realized because of changes in interest rate levels or for other reasons, the actual cash flow for scheduled payments of principal and interest on the bonds may be inadequate. The financing of multi-family housing projects is affected by a variety of factors which may impact the borrower's ability to pay debt service and may impair the value of the collateral securing the bonds, if any. These factors include 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. Some authorities provide additional security for the bonds in the form of insurance, subsidies, additional collateral, or state pledges (without obligation) to make up deficiencies.
Transportation. Transportation debt may be issued to finance the construction of airports, toll roads, highways, or other transit facilities. Airport bonds are dependent on the economic conditions of the airport's service area and may be affected by the business strategies and fortunes of specific airlines. They may also be subject to competition from other airports and modes of transportation. Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs, transportation taxes and fees, and availability of fuel also affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public transportation.
Tobacco Settlement Revenue Bonds. Tobacco settlement revenue bonds are secured by a single source of revenue --a state or jurisdiction's proportionate share of periodic payments made by tobacco companies under the Master Settlement Agreement (the "MSA") entered into by participating cigarette manufacturers, 46 states, and other jurisdictions in November of 1998 in settlement of certain smoking-related litigation. Annual payments on the bonds are dependent on the receipt by the issuer of future settlement payments under the MSA. These annual payments are subject to numerous adjustments. The actual amount of future settlement payments depends on annual domestic cigarette shipments, inflation, market share gains by non-participating cigarette manufacturers, and other factors. MSA adjustments may cause bonds to be repaid faster or slower than originally projected. Tobacco bonds are subject to additional risks, including the risk that cigarette consumption declines, that a tobacco company defaults on its obligation to make payments to the state or that the MSA or state legislation enacted pursuant to the MSA is void or unenforceable.
Water and Sewer. Water and sewer revenue bonds are generally secured by the fees charged to each user of the service. The issuers of water and sewer revenue bonds generally enjoy a monopoly status and latitude in their ability to raise rates. However, lack of water supply due to insufficient rain, run-off, or snow pack can be a concern and has led to past defaults. Further, public resistance to rate increases, declining numbers of customers in a particular locale, costly environmental litigation, and Federal environmental mandates are challenges faced by issuers of water and sewer bonds.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations and participations in municipal leases are undivided interests in a portion of an obligation in the form of a lease or installment purchase or conditional sales contract which is issued by a state, local government, or a municipal financing corporation to acquire land, equipment, and/or facilities (collectively hereinafter referred to as "lease obligations"). Generally lease obligations do not constitute general obligations of the municipality for which the municipality's taxing power is pledged. Instead, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate, and make the payments due under the lease obligation. As a result of this structure, municipal lease obligations are generally not subject to state constitutional debt limitations or other statutory requirements that may apply to other municipal securities.
Lease obligations may contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. If the municipality does not appropriate in its budget enough to cover the payments on the lease obligation, the lessor may have the right to repossess and relet the property to another party. Depending on the property subject to the lease, the value of the property may not be sufficient to cover the debt.
In addition to the risk of "non-appropriation," municipal lease securities may not have as highly liquid a market as conventional municipal bonds. Furthermore, municipal lease obligations have the same risk characteristics as Municipal Instruments do generally.
OPTIONS. An option is a contract which conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific amount or value of a particular underlying interest at a specific price (called the "exercise" or "strike" price) at one or more specific times before the option expires. The underlying interest of an option contract can be a security, currency, index, future, swap or other type of financial instrument. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option purchaser is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date.
Options can be traded either through established exchanges ("exchange traded options") or privately negotiated transactions (over-the-counter or "OTC options"). Exchange traded options are standardized with respect to, among other things, the underlying interest, expiration date, contract size and strike price. The terms of OTC options are generally negotiated by the parties to the option contract which allows the parties greater flexibility in customizing the agreement, but OTC options are generally less liquid than exchange traded options.
All option contracts involve credit risk if the counterparty to the option contract fails to perform. Credit risk is low in exchange traded options because the performance of the contract by the counterparty is backed by the clearing agency for the exchange on which the options are traded. The credit risk in OTC options is dependent on the credit worthiness of the individual counterparty to the contract and may be greater than the credit risk associated with exchange traded options.
When purchasing a put option, the purchaser obtains the right (but not the obligation) to sell a specific amount or value of a particular interest to the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical put option can expect to realize a gain if the price of the underlying interest falls. However, if the underlying interest's price does not fall enough to offset the cost of purchasing the option, the purchaser of a put option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The purchaser of a put option may terminate its position by allowing the option to expire, exercising the option or closing out its position in the secondary market at the option's current price, if a liquid secondary markets exists. If the option is allowed to expire, the purchaser will lose the entire premium. If the option is exercised, the purchaser would complete the sale of the underlying interest to the option writer at the strike price.
When purchasing a call option, the purchaser obtains the right (but not the obligation) to purchase a specified amount or value of a particular interest from the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical call option can expect to realize a gain if the price of the underlying interest rises. However, if the underlying interest's price does not rise enough to offset the cost of purchasing the option, the buyer of a call option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The writer of a put or call option takes the opposite side of the transaction from the option's purchaser. In return for receipt of the premium, the writer assumes the obligation to buy or sell (depending on whether the option is a put or a call) a specified amount or value of a particular interest at the strike price if the purchaser of the option chooses to exercise it.
Generally, an option writer sells options with the goal of obtaining the premium paid by the option purchaser. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" when the option is exercised. A call option is in-the-money if the value of the underlying interest exceeds the strike price of the option. A put option is in-the-money if the strike price of the option exceeds the value of the underlying interest. Generally, any profit realized by an option purchaser represents a loss for the option writer. The writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option in the same manner as if the writer were entering into a futures contract.
The writer of a put option may seek to terminate a position in the put option before exercise by closing out the option in the secondary market at its current price. If the secondary market is not liquid for a put option, however, the writer must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes.
A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put) of the underlying interest when the option is exercised. A cash-settled option gives its owner the right to receive a cash payment based on the difference between a determined value of the underlying interest at the time the option is exercised and the fixed exercise price of the option. In the case of physically settled options, it may not be possible to terminate the position at any particular time or at an acceptable price. A cash-settled call conveys the right to receive a cash payment if the determined value of the underlying interest at exercise exceeds the exercise price of the option, and a cash-settled put conveys the right to receive a cash payment if the determined value of the underlying interest at exercise is less than the exercise price of the option.
Combination option positions are positions in more than one option at the same time. A spread involves being both the buyer and writer of the same type of option on the same underlying interest but different exercise prices and/or expiration dates. A straddle consists of purchasing or writing both a put and a call on the same underlying interest with the same exercise price and expiration date.
The principal factors affecting the market value of a put or call option include supply and demand, interest rates, the current market price of the underlying interest in relation to the exercise price of the option, the volatility of the underlying interest and the remaining period to the expiration date.
If a trading market in particular options were to become unavailable, investors in those options would be unable to close out their positions until trading resumes, and option writers may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. Exchanges or other facilities on which options are traded may establish limitations on options trading, may order the liquidation of positions in excess of these limitations, or may impose other sanctions that could adversely affect parties to an options transaction.
Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a Fund.
PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer and is therefore subject to the same risks as other equity securities. Preferred stock has precedence over common stock in the event the issuer is liquidated or declares bankruptcy, but is junior to the interests of the debt instruments of the issuer. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. The value of preferred stock is sensitive to changes in interest rates and to changes in the issuer's credit quality.
REAL ESTATE RELATED INVESTMENTS. Investment in real estate related investments are subject to similar risks to those associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning or applicable tax law; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; and changes in interest rates.
Real estate investment trusts ("REITs") are pooled investment vehicles that invest primarily in income producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs, or a combination of equity and mortgage REITs. Equity REITs invest most of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest most of their assets in real estate mortgages and derive income from interest payments. An investor will indirectly bear its proportionate share of any expenses (such as operating expenses and advisory fees) paid by REITs in which it invests in addition to the expenses paid by the investor.
Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skills of the REIT's manager and generally are not diversified. Equity and mortgage REITs are also subject to heavy cash flow dependency, borrower default, and self-liquidation.
Mortgage REITs are also subject to different combinations of prepayment, extension, interest rate and other market risks. The real estate mortgages underlying mortgage REITs are generally subject to a faster rate of principal repayments in a declining interest rate environment and to a slower rate of principal repayments in an increasing interest rate environment.
In addition, a REIT may be unable to obtain financing to satisfy income and gain distributions required by federal tax law, may fail to qualify for the federal tax exemption for distributed income, or may be adversely affected by changes in federal tax law, for example, by limiting their permissible businesses or investments.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a buyer would acquire a security for a relatively short period of time (usually not more than a week) subject to the obligation of the seller to repurchase and the buyer to resell such security at a fixed time and price (representing the buyer's cost plus interest). The buyer bears the risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the buyer is delayed or prevented from exercising its rights to dispose of the collateral. This risk includes the risk of procedural costs or delays in addition to a loss on the securities if their value should fall below their repurchase price.
RESTRICTED SECURITIES. Restricted securities are securities that are subject to legal restrictions on their re-sale. Difficulty in selling securities may result in a loss or be costly to an investor. Restricted securities generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, the holder of a registered security may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the holder might obtain a less favorable price than prevailed when it decided to seek registration of the security.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, an investor sells securities and receives cash proceeds, subject to its agreement to repurchase the securities at a later date for a fixed price reflecting a market rate of interest. There is a risk that the counter party to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the investor. Unless the appreciation and income on assets purchased with proceeds from reverse repurchase agreements exceed the costs associated with them, the investor's performance is lower than it otherwise would have been. A reverse repurchase agreement can be viewed as a borrowing. If a Fund makes additional investments while a reverse repurchase agreement is outstanding, this may be considered a form of leverage.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment companies include shares of closed-end investment companies, unit investment trusts, exchange-traded funds, and open-end investment companies, represent interests in professionally managed portfolios that may invest in any type of interest. Investing in other investment companies involves substantially the same risks as investing directly in the underlying interests, but involve additional expenses at the investment company-level, such as a proportionate share of portfolio management fees and operating expenses. Certain types of investment companies, such as closed-end investment companies and exchange-traded funds, trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value (NAV) per share. The extent to which a Fund can invest in securities of other investment companies is limited by the Investment Company Act of 1940.
SHORT SALES. A seller may make short sales that are made "against the box" and also those that are not made "against the box." A short sale that is not made "against the box" is a transaction in which a party sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the seller must borrow the security to make delivery to the buyer. The seller then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. It may not be possible to liquidate or close out the short sale at any particular time or at an acceptable price. The price at such time may be more or less than the price at which the security was sold by the seller. Until the security is replaced, the seller is required to repay the lender any dividends or interest which accrue during the period of the loan. To borrow the security, the seller also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. The seller also will incur transaction costs in effecting short sales.
The seller will incur a loss as a result of the short sale if the price of the security or index increases between the date of the short sale and the date on which the seller replaces the borrowed security. Such loss may be unlimited. The seller will realize a gain if the price of the security declines between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends or interest the seller may be required to pay in connection with a short sale.
A seller may also make short sales "against the box," i.e., when a security identical to one owned by the seller is borrowed and sold short. If the seller enters into a short sale against the box, it is required to hold securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) while the short sale is outstanding. The seller will incur transaction costs, including interest, in connection with opening, maintaining, and closing short sales against the box and will forgo an opportunity for capital appreciation in the security.
SOVEREIGN DEBT OBLIGATIONS. Sovereign debt obligations are issued or guaranteed by foreign governments or their agencies, including debt of developing countries. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of developing countries may involve a high degree of risk, and may be in default or present the risk of default. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and pay interest when due, and may require renegotiation or rescheduling of debt payments. In addition, prospects for repayment of principal and payment of interest may depend on political as well as economic factors. Although some sovereign debt, such as Brady Bonds, is collateralized by U.S. Government securities, repayment of principal and payment of interest is not guaranteed by the U.S. Government.
SWAPS AND RELATED DERIVATIVES. A swap is an agreement between two parties pursuant to which each party agrees to make one or more payments to the other, based on different interest rates, currency exchange rates, security or commodity prices, the prices or rates of other types of financial instruments, assets, the levels of specified indices, or other indicators. Swaps can be closed out by physical delivery of the underlying indicator(s) or payment of the cash settlement on settlement date, depending on the terms of the particular agreement. For example, in a typical credit default swap on a specific security, in the event of a credit event one party agrees to pay par on the security while the other party agrees to deliver the security. In the case of physically settled swaps, it may not be possible to close out the swap at any particular time or at an acceptable price. For example, in a typical interest rate swap, one party agrees to pay a fixed rate of interest determined by reference to a specified interest rate or index multiplied by a specified amount (the "notional amount"), while the other party agrees to pay an amount equal to a floating rate of interest determined by reference to an interest rate or index which is reset periodically and multiplied by the same notional amount. On each payment date, the obligations of parties are netted against each other, with only the net amount paid by one party to the other.
Swap agreements are typically individually negotiated and structured to provide exposure to a variety of different types of investments or market factors. Swap agreements may be entered into for hedging or non-hedging purposes. Swap agreements can take many different forms and are known by a variety of names and other types of swap agreements may be available.
Other types of over-the-counter derivatives, such as "caps," "floors," "collars" and options on swaps, or "swaptions," may be entered into for the same types of hedging or non-hedging purposes as swaps. A "cap" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the amount by which a specified fixed or floating rate or other indicator exceeds another rate or indicator (multiplied by a notional amount). A "floor" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the excess, if any, of a specified rate or other indicator over a different rate or indicator (multiplied by a notional amount). A "collar" transaction is a combination of a cap and a floor in which one party pays the floating amount on the cap and the other party pays the floating amount on the floor. A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into the underlying swap on the agreed-upon terms.
The most significant factor in the performance of swaps, caps, floors, and collars is the change in the underlying price, rate, index level or other indicator that determines the amount of payments to be made under the arrangement.
If MFS attempts to use a swap or related investment as a hedge against, or as a substitute for, a portfolio investment, the swap or related derivative may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving swaps and related derivatives can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Swaps and related derivatives may also be subject to liquidity risk since the derivatives are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such derivatives in the secondary market may be smaller than that for more traditional debt instruments. The swaps market is largely unregulated. It is possible that developments in the swaps market, including potential government regulations, could adversely affect an investor's ability to terminate its existing swap agreements or to realize amounts received under such agreements.
In addition, because the purchase and sale of swap and related derivatives takes place in an over-the-counter market, swaps and related derivatives are subject to the creditworthiness of the counterparty to the swap or related derivative, and their values may decline substantially if the counterparty's creditworthiness deteriorates. If the counterparty defaults, the other party's risk of loss consists of the net amount of payments that the non-defaulting party is contractually entitled to receive. The counterparties may be able to eliminate or reduce their exposure under these arrangements by assignment or other disposition or by entering into an offsetting agreement with the same or another counterparty.
TEMPORARY DEFENSIVE POSITIONS. In response to market, economic, political, or other conditions, MFS may depart from its investment strategies for a Fund by temporarily investing for defensive purposes. MFS may invest a large portion or all of a Fund's assets in cash (including foreign currency) or cash equivalents, including, but not limited to, obligations of banks (including certificates of deposit, bankers' acceptances, time deposits and repurchase agreements), commercial paper, short-term notes, U.S. Government Securities and related repurchase agreements.
TENDER OPTION BONDS. Tender option bonds, also known as put bonds or puttable securities, give the bondholder the right to require the issuer or a specified third party acting as agent for the issuer to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. These securities may be floating or variable rate securities. The issuer or third party agent may be unable to purchase the bonds on the purchase date due to a variety of circumstances, which may result in a loss of value of the bonds.
WARRANTS. Warrants are instruments which entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued or delivered as anticipated. If a Fund makes additional investments while a delayed delivery purchase is outstanding, this may result in a form of leverage.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities are debt instruments that provide for periodic adjustments in the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that may change with changes to the level of prevailing interest rates or the issuer's credit quality. There is a risk that the current interest rate on variable and floating rate securities may not accurately reflect current market interest rates or adequately compensate the holder for the current creditworthiness of the issuer. Some variable or floating rate securities are structured with liquidity features such as (1) put options or tender options that permit holders (sometimes subject to conditions) to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries or (2) auction rate features, remarketing provisions, or other maturity-shortening devices designed to enable the issuer to refinance or redeem outstanding debt securities (market-dependent liquidity features). The market-dependent liquidity features may not operate as intended as a result of the issuer's declining creditworthiness, adverse market conditions, or other factors or the inability or unwillingness of a participating broker-dealer to make a secondary market for such securities. As a result, variable or floating rate securities that include market-dependent liquidity features may lose value and the holders of such securities may be required to retain them for an extended period of time or until maturity.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS. Zero coupon and deferred interest bonds are debt instruments which are issued at a discount from face value. The discount approximates the total amount of interest the instruments 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 instrument 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. Bonds on which the interest is payable in kind are known as "PIK bonds." PIK bonds are debt instruments which provide that the issuer may, at its option, pay interest on such instruments in cash or in the form of additional debt instruments. Such instruments 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 instruments may experience greater volatility in market value than debt instruments which make regular payments of interest.
PART II - APPENDIX F
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions which cannot be changed without the approval of a Majority Shareholder Vote.
As fundamental investment restrictions, the Fund may not:
(1) borrow money except to the extent such borrowing is not prohibited by the Investment Company Act of 1940, as amended (the "1940 Act") and exemptive orders granted under such Act;
(2) underwrite securities issued by other persons, except that all or any portion of the assets of the Fund may be invested in one or more investment companies, to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act, and except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933, as amended, in selling a portfolio security;
(3) issue any senior securities except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; for purposes of this restriction, collateral arrangements with respect to any type of swap, option, Forward Contracts and Futures Contracts and collateral arrangements with respect to initial and variation margin are not deemed to be the issuance of a senior security;
(4) make loans except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; and
(5) purchase or sell real estate (excluding securities secured by real estate or interests therein and securities of companies, such as real estate investment trusts, which deal in real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (excluding currencies and any type of option, Futures Contracts and Forward Contracts) in the ordinary course of its business; the Fund reserves the freedom of action to hold and to sell real estate, mineral leases, commodities or commodity contracts (including currencies and any type of option, Futures Contracts and Forward Contracts) acquired as a result of the ownership of securities.
* * * * * *
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that this restriction shall not apply to securities or obligations issued or guaranteed by banks or bank holding companies, finance companies or utility companies.
FOR THE MFS FLOATING RATE HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry. For purposes of this restriction, loan participations will be considered investments in the industry of the underlying borrower, rather than that of the seller of the loan participation.
FOR THE MFS HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund may invest up to 40% of the value of its assets in each of the electric utility and telephone industries.
FOR THE MFS UTILITIES FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the utilities industry.
FOR THE MFS TECHNOLOGY FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the securities of issuers principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements.
FOR ALL OTHER FUNDS:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry.
* * * * * *
In addition, the Funds have adopted the following non-fundamental policies, which may be changed without shareholder approval.
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 10% of the Fund's net assets (taken at market value) would be invested in such securities; repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities; securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 10% limitation.
FOR ALL OTHER FUNDS:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 15% of the Fund's net assets (taken at market value) would be invested in such securities. Repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities. Securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 15% limitation.
* * * * * *
FOR ALL FUNDS:
Except for investment restriction no. 1 and the Fund's non-fundamental policy on investing in illiquid securities, these investment restrictions are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy. In the event the investments exceed the percentage specified in the Fund's non-fundamental policy on illiquid investments, the Fund will reduce the percentage of its assets invested in illiquid investments in due course, taking into account the best interests of shareholders.
For purposes of investment restriction no. 6, investments in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and tax-exempt obligations issued or guaranteed by a U.S. territory or possession, a state or local government, or a political subdivision of any of the foregoing, are not considered an investment in any particular industry.
For purposes of investment restriction no. 6, investments in other investment companies are not considered an investment in any particular industry and portfolio securities held by an underlying fund in which the Fund may invest are not considered to be securities purchased by the Fund.
For purposes of investment restriction no. 6 for MFS Technology Fund, MFS considers an issuer to be principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements if at least 50% of any issuer's assets, income, sales, or profits are committed to, or derived from, such activities, or a third party has given the issuer an industry or sector classification consistent with such activities.
FOR MFS LIFETIME RETIREMENT INCOME FUND, MFS LIFETIME 2010 FUND, MFS LIFETIME 2020 FUND, MFS LIFETIME 2030 FUND, MFS LIFETIME 2040 FUND, MFS INTERNATIONAL DIVERSIFICATION FUND, MFS AGGRESSIVE GROWTH ALLOCATION FUND, MFS CONSERVATIVE ALLOCATION FUND, MFS GROWTH ALLOCATION FUND AND MFS MODERATE ALLOCATION FUND:
In accordance with the Fund's investment program as set forth in its Prospectus, the Fund may invest more than 25% of its assets in any one underlying fund. Although the Fund does not have a policy to concentrate its investments in a particular industry, 25% or more of the Fund's total assets may be indirectly exposed to a particular industry or group of related industries through its investment in one or more underlying funds.
PART II - APPENDIX G
RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS NAME OF RECIPIENT PURPOSE OF DISCLOSURE MSCI BARRA, Inc. Analytical Tool Bloomberg L.P. Analytical Tool Board of Trustees Fund Governance Bowne Typesetting and Printing Services CDS/Computer Software Vendor Checkfree Software Vendor eA Data Automation Services, LLC Data Formatting and Organization Service Eagle Investment Systems Corp. Accounting System Ernst & Young LLP Independent Registered Public Accounting Firm FactSet Research Systems Inc. Analytical Tool GainsKeeper, Inc. Accounting System GFP Acquisition Company, Inc. D.B.A. GCom2 Solutions Software Vendor G.H. Dean Co. Typesetting and Printing Services Institutional Shareholder Services Inc. Proxy Service Provider Investor Tools Perform Analytical Tool ITG, Inc. Analytical Tool JPMorgan Chase Bank Fund Custodian Lipper Inc. Publication Preparation The MacGregor Group Software Vendor Massachusetts Financial Services Co. Fund Management MFS Fund Distributors, Inc. Fund Distribution OMGEO LLC Software Vendor Plexus Analytical Tool Radianz Software Vendor Ropes & Gray LLP Legal Counsel Saloman Analytics Inc. Analytical Tool Siemens Business Services, Inc. IT Client Services and Desktop Architecture Sir Speedy Printing/Copying Services Standard & Poor's Securities Evaluations Services Fund Pricing State Street Bank and Trust Company Custodian Sun Capital Advisers LLC* Fund Management Wilshire Analytics/Axiom Analytical Tool Valley Forge Capital Advisors, Inc.** Fund Management * Sun Capital Advisers LLC receives non-public portfolio holdings disclosure regarding the portion of the MFS Diversified Income Fund for which it serves as sub-adviser. ** Valley Forge Capital Advisors, Inc., receives non-public portfolio holdings disclosure regarding the MFS Sector Rotational Fund for which it serves as sub-adviser. |
This list is current as of May 31, 2007, and any additions, modifications or deletions to the list that have occurred since May 31, 2007 are not reflected.
PART II - APPENDIX H
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of various debt instruments. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE
Moody's long-term obligation ratings are opinions of the relative credit risk of fixed income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.
AAA: Obligations rated "Aaa" are judged to be of the highest quality, with minimal credit risk.
AA: Obligations rated "Aa" are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated "A" are considered upper-medium grade and are subject to low credit risk.
BAA: Obligations rated "Baa" are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
BA: Obligations rated "Ba" are judged to have speculative elements and are subject to substantial credit risk.
B: Obligations rated "B" are considered speculative and are subject to high credit risk.
CAA: Obligations rated "Caa" are judged to be of poor standing and are subject to very high credit risk.
CA: Obligations rated "Ca" are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations rated "C" are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's applies numerical modifiers "1", "2" and "3" to each generic rating classification from "Aa" through "Caa." The modifier "1" indicates that the obligation ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
Issue credit ratings are based, in varying degrees, on the following considerations: (1) likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, AND C: Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the applicable rating category.
N.R.: Not rated.
FITCH RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR).
Investment Grade
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. "A" ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. "BB" ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC: Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.
CC: Default of some kind appears probable.
C: Default is imminent.
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation, or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated "D" upon a default. Defaulted and distressed obligations typically are rated along the continuum of "C" to "B" ratings categories, depending upon their recovery prospects and other relevant characteristics.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
The modifiers "+" or "-`' may be appended to a rating to denote relative status within major ratings categories. Such suffixes are not added to the "AAA" Long-term ratings category, to categories below "CCC," or to Short-term ratings other than "F1." (The +/- modifiers are only used to denote issues within the "CCC" category, whereas issuers are only rated "CCC" without the use of modifiers.)
INVESTMENT ADVISER
MFS Investment Management
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 55824, Boston, MA 02205-5824
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street, Boston, MA 02116 MFS-PART2-SAI-7/07
Class A Shares
Class B Shares
Class C Shares
Class I Shares
MFS INTERNATIONAL GROWTH FUND
PROSPECTUS OCTOBER 1, 2007
The Prospectus describes the MFS International Growth Fund. The investment objective of the fund is to seek capital appreciation.
RISK RETURN SUMMARY 1 EXPENSE SUMMARY 8 CERTAIN INVESTMENT POLICIES AND RISKS 10 MANAGEMENT OF THE FUND 11 DESCRIPTION OF SHARE CLASSES 15 HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES 24 OTHER INFORMATION 33 FINANCIAL HIGHLIGHTS 37 The Securities and Exchange Commission has not approved or disapproved the fund's shares or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. |
RISK RETURN SUMMARY
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS (Massachusetts Financial Services Company, the fund's investment adviser) normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
PRINCIPAL INVESTMENT TYPES
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, and depository receipts for those securities.
DERIVATIVES: Derivatives are financial instruments whose value is based on the value of one or more indicators, such as a security, asset, currency, interest rate, credit rating or index. Derivatives often involve a counterparty to the transaction.
Derivatives include futures, forward contracts, options, structured notes, inverse floating rate instruments, swaps, caps, floors, and collars.
PRINCIPAL RISKS
As with any mutual fund, you could lose money on your investment in the fund. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The principal risks of investing in the fund are:
STOCK MARKET RISK: The price of an equity security fluctuates in response to issuer, market, economic, industry, political, and regulatory developments. Prices can decrease significantly in response to these developments, and these developments can affect a single issuer, issuers within a broad market sector, industry or geographic region, or the market in general. Different parts of the market and different types of securities can react differently to these developments. For example, the stocks of growth companies can react differently from the stocks of value companies, and the stocks of large cap companies can react differently from the stocks of small cap companies. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events, can have a dramatic adverse effect on stock markets.
COMPANY RISK: Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of an investment. The price of securities of smaller, less well-known companies can be more volatile than the price of securities of larger companies or the market in general.
GROWTH COMPANY RISK: The stocks of growth companies can be more sensitive to the company's earnings and more volatile than the market in general.
FOREIGN RISK: Investments in securities of foreign companies, securities of companies with significant foreign exposure, and foreign currencies can involve additional risks relating to market, economic, political, or regulatory conditions and developments. Political, social, and economic instability, the imposition of currency or capital controls, or the expropriation or nationalization of assets in a particular country can cause dramatic declines in that country's economy. Less stringent regulatory, accounting, and disclosure requirements for issuers and markets are more common in certain foreign countries. Enforcing legal rights can be difficult, costly, and slow in certain foreign countries, and can be particularly difficult against foreign governments. Additional risks of foreign investments include trading, settlement, custodial, and other operational risks, and withholding and other taxes. These factors can make foreign investments, especially those in emerging markets, more volatile and less liquid than U.S. investments. In addition, foreign markets can react differently to market, economic, political, or regulatory developments than the U.S. market.
EMERGING MARKETS RISK: Emerging markets investments can involve additional and greater risks than the risks associated with investments in developed foreign markets securities. Emerging markets typically have less economic development, market structure and depth and regulatory oversight than developed countries. Emerging markets can also be subject to greater political, social, and economic instability. These factors can make emerging market investments more volatile and less liquid than investments in developed markets.
CURRENCY RISK: A decline in the value of a foreign currency relative to the U.S. dollar reduces the value of the foreign currency and investments denominated in that currency. In addition, the use of foreign exchange contracts to reduce foreign currency exposure can eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. The value of foreign currencies relative to the U.S. dollar fluctuates in response to, among other factors, interest rate changes, intervention (or failure to intervene) by U.S. or foreign governments, central banks, or supranational entities such as the International Monetary Fund, the imposition of currency controls, and other political or regulatory developments in the U.S. or abroad. Foreign currency values can decrease significantly both in the short term and over the long term in response to these and other developments.
GEOGRAPHIC CONCENTRATION RISK: Because MFS may invest a relatively large percentage of the fund's assets in issuers located in a single country, a small number of countries, or a particular geographic region, the fund's performance could be closely tied to the market, currency, economic, political, or regulatory conditions and developments in those countries or that region, and could be more volatile than the performance of more geographically-diversified funds.
DERIVATIVES RISK: Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicator(s). Gains or losses from derivatives can be substantially greater than the derivatives' original cost, and therefore, can involve leverage. Derivatives can be complex instruments and can involve analysis that differs from that required for other investment types used by the fund. If the value of a derivative does not correlate well with the particular market or other asset class the derivative is intended to provide exposure to, the derivative may not have the effect anticipated. Derivatives can also reduce the opportunity for gain or result in losses by offsetting positive returns in other investments. Derivatives can be less liquid than other types of investments.
INVESTMENT SELECTION RISK: The MFS analysis of an investment can be incorrect and its selection of investments can lead to an investment focus that results in the fund underperforming other funds with similar investment strategies and/or underperforming the markets in which the fund invests.
COUNTERPARTY AND THIRD PARTY RISK: Transactions involving a counterparty other than the issuer of the instrument, or a third party responsible for servicing the instrument, are subject to the credit risk of the counterparty or third party,
and to the counterparty's or third party's ability to perform in accordance with the terms of the transaction.
LIQUIDITY RISK: Certain investments and types of investments are subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. As a result, it may not be possible to sell the investment at any particular time or at an acceptable price.
LEVERAGING RISK: Certain transactions, including when-issued, delayed-delivery, and forward commitment purchases, loans of portfolio securities, and the use of some derivatives, can result in leverage. Leverage involves investment exposure in an amount exceeding the initial investment. In transactions involving leverage, a relatively small market movement or change in other underlying indicator can lead to significantly larger losses to the fund. Leverage can cause increased volatility by magnifying gains or losses on underlying investments.
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of the risks of investing in the fund by showing changes in the fund's performance over time. The performance table also shows:
- how the fund's performance over time compares with that of a broad measure of market performance and one or more other performance measures, and
- returns before the deduction of taxes and returns after the deduction of certain taxes for Class A shares.
The chart and table provide past performance information. The fund's past performance (before and after taxes) does not necessarily indicate how the fund will perform in the future. The performance information in the chart and table is based upon calendar year periods, while the performance information presented under the caption "Financial Highlights" and in the fund's shareholder reports is based upon the fund's fiscal year. Therefore, these performance results may differ.
BAR CHART. The bar chart shows changes over time in the annual total return of Class A shares for the past ten calendar years, and assumes the reinvestment of distributions. The chart and related notes do not take into account any sales charges (loads) that you may be required to pay upon purchase or redemption of the fund's shares. If these sales charges were included, they would reduce these returns. The return of the fund's other classes of shares will differ from the Class A share returns shown in the bar chart, depending upon the expenses of those classes.
CALENDAR YEAR GAIN OR LOSS(%) 1997 2.22% 1998 (0.34)% 1999 32.48% 2000 (11.37)% 2001 (17.28)% 2002 (12.13)% 2003 36.03% 2004 17.54% 2005 13.95% 2006 25.72% |
The total return for the six-month period ended June 30, 2007 was 11.77%. During the periods shown in the bar chart, the highest quarterly return was 26.61% (for the calendar quarter ended December 31, 1999) and the lowest quarterly return was (17.46)% (for the calendar quarter ended September 30, 1998).
PERFORMANCE TABLE. This table shows how the average annual total returns of each class of the fund, before the deduction of taxes ("Returns Before Taxes"), compare to a broad measure of market performance and one or more other performance measures, and assumes the deduction of the maximum applicable sales loads (initial sales charge and/or contingent deferred sales charge (CDSC), as applicable), and the reinvestment of distributions. In addition, for Class A shares, this table shows Class A average annual total returns:
- after the deduction of taxes on distributions made on Class A shares, such as capital gains and income distributions ("Class A Shares' Return After Taxes on Distributions"), and
- after the deduction of taxes on both distributions made on Class A shares and on redemption of Class A shares, assuming that the shares are redeemed at the end of the periods for which returns are shown ("Class A Shares' Return After Taxes on Distributions and Sale of Class A Shares").
Average Annual Total Returns (for the periods ended December 31, 2006)
SHARE CLASS 1 YEAR 5 YEAR 10 YEAR ---------------------------------------------------------------------------------------- RETURNS BEFORE TAXES ---------------------------------------------------------------------------------------- B Shares, With CDSC (Declining Over Six Years From 4% to 0%) 20.91% 14.12% 6.55% C Shares, With CDSC (1% for 12 Months) 23.94% 14.34% 6.55% I Shares, at Net Asset Value 26.15% 15.98% 8.04% A Shares, With Initial Sales Charge (5.75%) 18.49% 13.66% 6.50% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, With Initial Sales Charge (5.75%) 16.29% 13.17% 5.90% A Shares' Returns After Taxes on Distributions and Sale of Class A Shares With Initial Sales Charge (5.75%) 13.07% 11.82% 5.40% BENCHMARK COMPARISON (RETURNS BEFORE TAXES) MSCI All Country World (ex-US) Growth Index#*+ 23.96% 14.34% 6.20% MSCI EAFE (Europe, Australasia, Far East) Growth Index#**+ 22.69% 12.63% 5.35% |
# Effective March 30, 2007, the MSCI All Country World (ex-US) Growth Index replaced the MSCI EAFE (Europe, Australia, Far East) Growth Index because the adviser believes the MSCI All Country World (ex-US) Growth Index better reflects the fund's investment policies and objectives.
* The Morgan Stanley Capital International (MSCI) All Country World (ex-US) Growth Index is a market capitalization index that is designed to measure equity market performance for growth securities in the global developed and emerging markets, excluding the U.S.
** The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Growth Index is a market capitalization index that is designed to measure equity market performance for growth securities in the developed markets, excluding the U.S. and Canada.
+ Source: FactSet Research Systems Inc.
All performance results reflect any applicable fee and expense waivers in effect during the periods shown; without these, the results would have been lower.
After-tax returns are calculated using the historical highest individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your own tax situation, and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns are shown for only one of the fund's classes of shares, and after-tax returns for the fund's other classes of shares will vary from the returns shown.
The fund commenced investment operations October 24, 1995, with the offering of Class A and Class B shares, and subsequently offered Class C shares on July 1, 1996 and Class I shares on January 2, 1997.
Performance for Class I shares includes the performance of the fund's Class A shares for periods prior to their offering. Blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class
specific operating expenses (such as Rule 12b-1 fees). Compared to performance these share classes would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance for share classes with higher operating expenses than those of the share class to which they are blended, and lower performance for share classes with lower operating expenses than those of the share class to which they are blended.
Prior to November 30, 1998, Foreign & Colonial Management Ltd. ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), managed certain assets of the fund. MFS assumed all portfolio management responsibilities from FCM and FCEM for the fund on November 30, 1998. Performance information for periods prior to November 30, 1998 reflects this former sub-investment advisory relationship.
EXPENSE SUMMARY
EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy, redeem, and hold shares of the fund. The annual fund operating expenses are based on expenses incurred during the fund's most recently completed fiscal year adjusted to reflect annualized expenses. The fund's annual operating expenses may vary in future years.
Shareholder Fees (fees paid directly from your investment)
SHARE CLASS A B C I ---------------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 5.75% N/A N/A N/A Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or See Below(#) 4.00% 1.00% N/A redemption proceeds, whichever is less) |
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
SHARE CLASS A B C I
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Management Fees 0.90% 0.90% 0.90% 0.90%
Distribution and/or Service (12b-1) Fees(1) 0.35% 1.00% 1.00% N/A
Other Expenses(2) 0.28% 0.28% 0.28% 0.28%
----- ----- ----- -----
Total Annual Fund Operating Expenses(2) 1.53% 2.18% 2.18% 1.18%
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# A contingent deferred sales charge (referred to as a CDSC) of 1% may be deducted from your redemption proceeds if you buy $1 million or more of Class A shares or if you are investing through a retirement plan and your Class A purchase meets certain requirements and you redeem your investment within 12 months of your purchase.
(1) The fund's Rule 12b-1 plan permits it to pay distribution and/or service fees to support the sale and distribution of the fund's Class A, Class B, and Class C shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "Distribution and Service Fees."
(2) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Net Expenses" would be: Class A shares 1.53%; Class B shares 2.18%; Class C shares 2.18%; and Class I shares 1.18%. "Other Expenses" also include the estimated payment of a portion of the transfer-agent-related expenses of the MFS funds that invest in the fund ("MFS Funds-of-Funds"). See "Management of the Fund - Special Servicing Agreement."
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you redeem your shares at the end of the time periods (unless otherwise indicated);
- Your investment has a 5% return each year and dividends and other distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10 ------------------------------------------------------------------------- A Shares $772 $1,031 $1,361 $2,294 B Shares(1) Assuming redemption at end of period $621 $ 982 $1,370 $2,349 Assuming no redemption $221 $ 682 $1,170 $2,349 C Shares Assuming redemption at end of period $321 $ 682 $1,170 $2,513 Assuming no redemption $221 $ 682 $1,170 $2,513 I Shares $120 $ 375 $ 649 $1,432 |
(1) Class B shares convert to Class A shares approximately eight years after purchase; therefore, years nine and ten reflect Class A expenses.
CERTAIN INVESTMENT POLICIES AND RISKS
TURNOVER
MFS may engage in active and frequent trading in pursuing the fund's principal investment strategies. Frequent trading increases transaction costs, which may reduce the fund's return. Frequent trading can also result in the realization of a higher percentage of short-term capital gains and a lower percentage of long-term capital gains as compared to a fund that trades less frequently. Because short-term capital gains are distributed as ordinary income, this would generally increase your tax liability unless you hold your shares through a tax-deferred or exempt vehicle.
TEMPORARY DEFENSIVE POLICY
In response to market, economic, political, or other conditions, MFS may depart from the fund's principal investment strategies by temporarily investing for defensive purposes. When MFS invests defensively, different factors could affect the fund's performance and the fund may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Information about investment strategies and investment types not described in the Prospectus and the risks associated with those investment strategies and investment types are described in the fund's Statement of Additional Information ("SAI").
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS"), located at 500 Boylston Street, Boston, Massachusetts, serves as the investment adviser for the fund. Subject to the supervision of the Board of Trustees, MFS is responsible for managing the fund's investments, executing transactions and providing related administrative services and facilities under an Investment Advisory Agreement between the fund and MFS.
For the fiscal year ended May 31, 2007, the fund paid MFS an effective management fee equal to 0.90% of the fund's average daily net assets.
The management fee set forth in the Investment Advisory Agreement is a rate of 0.90% annually of the first $1 billion of the fund's average daily net assets; 0.80% annually of the next $1 billion of the fund's average daily net assets; and 0.70% annually in excess of $2 billion of the fund's average daily net assets.
MFS has agreed in writing to bear the Fund's expenses such that "Total Annual Fund Operating Expenses," do not exceed 1.80% annually for Class A shares, 2.45% annually for each of Class B and Class C shares, and 1.45% annually for Class I shares. This written agreement excludes taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, and will continue until modified by the Fund's Board of Trustees.
A discussion regarding the basis for the Board of Trustees' approval of the Investment Advisory Agreement is available in the fund's most recent semi-annual report for the six-month period that ends November 30.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $202 billion as of June 30, 2007.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of the MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, and inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries with respect to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The
lawsuits assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940, the Employee Retirement Income Security Act of 1974 (ERISA), as well as fiduciary duties and other violations of common law. The lawsuits variously have been commenced as class actions or individual actions on behalf of investors who purchased, held, or redeemed shares of the MFS funds during specified periods, as ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT
LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER),
NO. 1:04-MD-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS funds include RIGGS V. MFS ET AL., CASE NO. 04-CV-01162-JFM
(direct), HAMMERSLOUGH V. MFS ET AL., CASE NO. 04-MD-01620 (derivative), ANITA
WALKER V. MFS ET AL., CASE NO. 1:04-CV-01758 (ERISA), and REAVES V. MFS SERIES
TRUST I, ET AL., CASE NO. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District of
Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., ET AL., NO. 04CV10584 (GAO)
(a consolidated action, first filed on March 25, 2004) and MARCUS DUMOND, ET AL.
V. MASSACHUSETTS FINANCIAL SERVS. CO., ET AL., NO. 04CV11458 (GAO) (filed on May
4, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages,
punitive damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. Insofar as any of the actions is appropriately
brought derivatively on behalf of any of the MFS funds, any recovery will inure
to the benefit of the MFS funds. Several claims of the various lawsuits have
been dismissed; MFS and the other named defendants continue to defend the
various lawsuits.
DISCLOSURE OF PORTFOLIO HOLDINGS. The MFS funds have established a policy with respect to the disclosure of fund portfolio holdings. A description of this policy is provided in the SAI. In addition, by clicking on a fund name under "Select a fund" on the MFS Web site (mfs.com), the following information is generally available to you:
INFORMATION APPROXIMATE DATE OF POSTING TO WEB SITE -------------------------------------------------------------------------------------------------- Fund's top 10 securities holdings as of each month's end 14 days after month end Fund's full securities holdings as of each month's end 24 days after month end |
If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for funds that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the funds or MFS may suspend the posting of this information or modify the elements of this web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
PORTFOLIO MANAGER(S)
Information regarding the portfolio manager(s) of the fund is set forth below. Further information regarding the portfolio manager(s), including other accounts managed, compensation, ownership of fund shares, and possible conflicts of interest, is available in the fund's SAI. The portfolio manager is primarily responsible for the day-to-day management of the fund.
PORTFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
-----------------------------------------------------------------------------------------------------
Barry Dargan Portfolio Manager 2001 Investment Officer of MFS; employed in the investment
management area of MFS since 1996.
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ADMINISTRATOR
MFS provides the fund with certain financial, legal, and other administrative services under a Master Administrative Services Agreement between the fund and MFS. Under the Agreement, MFS is paid an annual fee for providing these services.
DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of the fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. MFSC may receive a fee based on the costs it incurs in providing these services plus a target profit margin, including payments made to affiliated and unaffiliated service providers that provide certain sub-accounting and other shareholder services (shareholder servicing payments) and out-of-pocket expenses.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund-of-Funds and the fund, the fund may pay a portion of the transfer agent-related expenses of each MFS Fund-of-Funds, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of benefits realized or expected to be realized by the fund from the investment in the fund by the MFS Fund-of-Funds.
DESCRIPTION OF SHARE CLASSES
The fund offers Class A, Class B, Class C, and Class I shares through this prospectus. The fund also offers an additional class of shares, Class W shares. Class W shares are made available to fee-based wrap programs through a separate prospectus provided to investors eligible to purchase them.
Shareholders of another class of the fund may request that their shares be converted into Class W shares of the fund, if they satisfy the eligibility requirements for Class W shares. Conversions to Class W shares may not be available if your account is not held through a financial intermediary sponsor of a fee-based wrap program that has entered into an agreement with MFD to offer Class W shares to clients of the fee-based wrap program. If your account is held through a financial intermediary of a fee-based wrap program, please contact your financial intermediary sponsor of the fee-based wrap program to determine if Class W shares are available to you and to learn about other rules that may apply.
If a shareholder of another class of the fund converts to Class W shares of the fund, the transaction will be based on the respective net asset value of each class as of the trade date for the conversion. Consequently, the converting shareholder may receive fewer shares or more shares than originally owned, depending on that day's net asset values. The total value of the initially held shares, however, will equal the total value of the converted shares. A conversion between share classes in the same fund is a nontaxable event.
Class I shares generally are available only to the following eligible investors:
- certain retirement plans established for the benefit of employees and former employees of MFS or its affiliates;
- funds distributed by MFD that invest primarily in shares of MFS funds;
- retirement plans, endowments or foundations that: (i) have, at the time of purchase of Class I shares, aggregate assets of at least $100 million; and (ii) invest at least $10 million in Class I shares of the fund and other MFS funds;
- bank trust departments or law firms acting as trustee or manager for trust accounts which, on behalf of their clients (i) initially invest at least $100,000 in Class I shares of the fund, or (ii) have, at the time of purchase of Class I shares, aggregate assets of at least $10 million invested in Class I shares of the fund and other MFS funds; and
- certain retirement plans offered, administered, or sponsored by insurance companies, as permitted by MFD based on their overall relationship with MFS.
In addition, MFD may accept, in its sole discretion, investments in Class I shares from purchasers not listed above or that do not meet these qualification requirements.
SALES CHARGES AND WAIVERS OR REDUCTIONS
You may be subject to an initial sales charge when you purchase Class A, or a CDSC when you redeem Class A, Class B, or Class C shares. These sales charges are paid to MFD.
In the circumstances described below, you may qualify for a sales charge waiver or reduction for purchases or redemptions of Class A, Class B, or Class C shares. In addition, other sales charge waivers or reductions may apply to certain transactions by retirement plans, section 529 tuition programs, and certain other groups (e.g., affiliated persons of MFS) and with respect to certain types of investment programs (e.g., certain wrap accounts or fund supermarket investments). Details regarding the types of investment programs and categories of investors eligible for these waivers or reductions are provided in the SAI, which is available to you free of charge, and on the fund's Web site at mfs.com. Some of these programs and waivers or reductions may not be available to you if your shares are held through certain types of accounts, such as retirement accounts and 529 plans, or certain accounts that you may have with your financial intermediary. Waivers or reductions may be eliminated, modified, and added at any time without providing advance notice.
CLASS A SHARES. You may purchase Class A shares at the offering price (which includes the applicable initial sales charge). In some cases, you may purchase Class A shares without an initial sales charge; in these cases, you will generally be subject to a 1% CDSC upon redemption within 12 months of your purchase.
The amount of the initial sales charge you pay when you buy Class A shares differs depending upon the amount you invest, as follows:
GROSS PURCHASE AMOUNT
AMOUNT OF PURCHASE (OFFERING PRICE*) NET AMOUNT INVESTED
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Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1,000,000 2.00% 2.04%
$1,000,000 or more None** None**
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* Offering price is calculated by dividing the net asset value of a share by the difference between 1 and the initial sales charge percentage. Because the offering price is rounded to two decimal places, actual sales charges you pay may be more or less than those calculated using these percentages.
** A 1% CDSC will generally apply to such purchases.
You pay no initial sales charge when you invest $1 million or more in Class A shares (or, with respect to certain retirement plans, if MFD determines in its sole discretion that the total purchases by the retirement plan (or by multiple plans maintained by the same plan sponsor) will equal or exceed within a reasonable period of time a specified threshold determined by MFD). However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS B SHARES. You may purchase Class B shares at net asset value without an initial sales charge, but if you redeem your shares within the first six years after purchase, you may be subject to a CDSC (declining from 4% during the first year to 0% after six years).
The CDSC is imposed according to the following schedule:
YEAR OF REDEMPTION AFTER PURCHASE 1st 2nd 3rd 4th 5th 6th 7th
CONTINGENT DEFERRED SALES CHARGE 4% 4% 3% 3% 2% 1% 0%
If you hold Class B shares for approximately eight years, they will convert to Class A shares of the fund. All Class B shares you acquire through the reinvestment of dividends and distributions will be held in a separate sub-account. Each time any Class B shares in your account convert to Class A shares, a proportionate number of the Class B shares in the sub-account will also convert to Class A shares.
CLASS C SHARES. You may purchase Class C shares at net asset value without an initial sales charge. However, a CDSC of 1% will generally be deducted from your redemption proceeds if you redeem within 12 months of your purchase.
CLASS I SHARES. Eligible investors may purchase Class I shares at net asset value without an initial sales charge or a CDSC upon redemption.
SALES CHARGE WAIVERS OR REDUCTIONS. Below is a summary of certain investor programs whereby the applicable sales charge may be waived or reduced. You or your financial intermediary must inform MFSC upon purchasing fund shares of your intention to invest in a fund under one of the programs below. You can provide this information in your account application or through a separate document provided by your financial intermediary.
INVESTMENTS ELIGIBLE FOR:
-----------------------------------------
WAIVED INITIAL REDUCED INITIAL WAIVED
PROGRAM SALES CHARGE SALES CHARGE CDSC
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Letter of Intent X
Right of Accumulation X
Automatic Exchange Plan X*
Exchange Privilege X*
Systematic Withdrawal Plan X**
Distribution Reinvestment X
Distribution Investment Program X
Other Sales Charge Waivers X X
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* Investments under the Automatic Exchange Plan or certain other exchanges under the Exchange Privilege may be subject to a sales charge in certain cases.
** Not available for Class A shares and limited for Class B and Class C shares.
- LETTER OF INTENT (LOI). You may pay a reduced or no initial sales charge on purchases of Class A shares if you intend to invest a specific dollar amount, based on the gross amount of your investment (including the amount of any sales charge paid), including investments through any linked accounts in any class of any MFS fund (and the MFS Fixed Fund, a bank collective investment trust) within a 13-month period (36 months for a $1 million commitment). Distributions reinvested in additional shares of the fund or distributions from other MFS funds automatically invested in shares of the fund will not apply toward the satisfaction of the LOI.
For each purchase you make under the LOI you will pay the initial sales charge rate applicable to the total amount you intended to purchase. If, however, you do not purchase the intended amount within the relevant time period, your account will be adjusted by redemption of the amount of shares needed to pay the higher initial sales charge level for the amount actually purchased.
To establish a LOI, you may complete the Letter of Intent section of your account application or service application. In order to benefit from the LOI, you or your financial intermediary must inform MFSC that the LOI is in effect each time shares of a fund are purchased.
- RIGHT OF ACCUMULATION (ROA). Under the ROA, you may pay a reduced or no initial sales charge on purchases of Class A shares by aggregating the total dollar amount of your investment with your existing investments or any linked accounts in any class of any MFS fund (and the MFS Fixed Fund), based on the current maximum public offering price of the funds. For example, you will pay a sales charge on your current purchase at the rate applicable to the total value of all eligible accounts based on the sales charge schedule above.
- LINKING ACCOUNTS FOR LOI AND ROA. For purposes of obtaining reduced sales charges under the LOI and ROA, you may combine the value of your current purchase of shares of an MFS fund with the value of existing accounts held with the MFS funds (or the MFS Fixed Fund) by you, your spouse (or legal equivalent under applicable state law), and your children under the age of 21.
Eligible accounts that you may link under a LOI and ROA may include:
- Individual accounts;
- Joint accounts;
- Trust accounts of which you, your spouse (or legal equivalent under applicable state law), or child under the age of 21 is the grantor;
- MFS 529 College Savings Plan accounts;
- Certain single-participant retirement plan accounts;
- Certain Individual Retirement Accounts;
- Uniform Gifts/Transfers to Minor Acts accounts; and
- Accounts held in the name of your financial intermediary on your behalf, except accounts investing in Class W shares of certain MFS funds.
In order to link such accounts under a LOI or ROA, the broker/dealer at the time of your current purchase must be the broker/dealer (or the clearing broker/dealer for your broker/dealer so long as your account is not aggregated by the clearing broker/dealer with other accounts) for any additional accounts to be linked. MFS fund shares held as follows cannot be combined with your current purchase for purposes of a LOI or ROA:
- Shares held indirectly through financial intermediaries other than the broker/dealer for your current purchase (for example, shares held in a different broker/dealer's brokerage account or with a bank, an insurance company separate account or an investment adviser); or
- Shares held directly in a MFS fund account on which the broker/dealer is different than the broker/dealer for your current purchase.
It is your responsibility to inform the broker/dealer for each current purchase of any accounts held with the MFS funds that you believe are eligible to be linked under a LOI or a ROA. If you have not designated a broker/dealer, you should inform MFSC directly of any accounts held with the MFS funds that you believe are eligible to be linked under a
LOI or a ROA. You should provide your financial intermediary (including MFSC if you have not designated a broker/dealer) with certain supporting information at the time of each purchase regarding accounts held with the MFS funds that are eligible to be combined for purposes of a LOI or ROA. Such information may include shareholder identification numbers or applicable account numbers or account statements. You should request that your financial intermediary provide this information to the funds or their agents when placing each purchase order.
SPECIAL NOTE FOR LOI OR ROA ELIGIBLE ACCOUNTS LINKED PRIOR TO MAY 1, 2006. Any LOI or ROA eligible accounts linked prior to May 1, 2006, will remain linked to the extent the broker/dealer information for such accounts is not modified. In the event you change the broker/dealer for any such account, your accounts will no longer be eligible to be linked under a LOI or ROA. In addition, you will not be able to link additional accounts to the extent they do not meet the criteria discussed above.
- AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $2,000 in the fund, you may participate in the automatic exchange plan, a dollar-cost averaging program. This plan permits you to make automatic periodic exchanges from your account in the fund for shares of the same class of other MFS funds. Exchanges will generally be made at net asset value without any sales charges. If you exchange shares out of the MFS Money Market Fund or MFS Government Money Market Fund, or if you exchange Class A shares out of the MFS Cash Reserve Fund into Class A shares of any other MFS fund, you will pay an initial sales charge if you have not already paid this charge on these shares.
- SYSTEMATIC WITHDRAWAL PLAN. If you have an account balance of at least $5,000 in your account in the fund, you may elect to receive (or designate someone else to receive) regular periodic payments (of at least $50 if by check) through an automatic redemption of Class A, Class B, Class C, or Class I. For Class B and Class C shares, you may incur a CDSC when Class B or Class C shares are redeemed under the plan (or plans if more than one plan is established) if amounts greater than 10% of the value of your account are withdrawn under the plan(s) in any one year (with respect to Class B shares, determined at the time of your first withdrawal under the plan(s) or January 1, 2007, whichever is later and reset annually thereafter and with respect to Class C shares, determined at the time the plan is established). For Class A shares, you may incur a CDSC when Class A shares are redeemed under this plan.
- DISTRIBUTION REINVESTMENT. You may automatically reinvest dividend and capital gain distributions in the same fund without paying an initial sales charge.
- DISTRIBUTION INVESTMENT PROGRAM. You may automatically reinvest dividend and capital gain distributions into the same class of another MFS fund without paying a CDSC or an initial sales charge.
CALCULATION OF CDSC. As discussed above, certain investments in Class A, Class B, and Class C shares are subject to a CDSC. For purposes of calculating the CDSC, purchases made on any day during a calendar month will age one month on the last day of that month, and on the last day of each subsequent month. For example, a 1% CDSC on Class A shares purchased on August 10 will expire at the close of business on July 31 of the following calendar year, and a redemption of those shares made on or after August 1 of the following calendar year will not be subject to the CDSC.
Shares acquired through reinvestment of distributions are not subject to a CDSC. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. For purposes of determining the CDSC, if you sell only some of your shares, shares not subject to a CDSC are sold first, followed by shares held the longest.
DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"). Under the Distribution Plan, the fund pays distribution and service fees to MFD to support the sale and distribution of Class A, Class B, and Class C shares, as well as shareholder servicing and account maintenance activities. The fund has not adopted a Rule 12b-1 plan with respect to its Class I shares. These distribution and service fees equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
MAXIMUM MAXIMUM MAXIMUM TOTAL
DISTRIBUTION SERVICE DISTRIBUTION AND
CLASS FEE FEE SERVICE FEE
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Class A 0.10% 0.25% 0.35%
Class B 0.75% 0.25% 1.00%
Class C 0.75% 0.25% 1.00%
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These fees are paid out of fund assets of the applicable class of shares. Because these fees are an ongoing expense of the fund, they increase the cost of your investment over time and may cost you more than other types of sales charges.
FINANCIAL INTERMEDIARY COMPENSATION
The term "financial intermediary" includes any broker/dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administrator, insurance company, and any other institutions having a selling, administration, or any similar agreement with MFD, MFS, or one of its affiliates.
Financial intermediaries receive various forms of compensation in connection with the sale of shares of a fund and/or the servicing of shareholder accounts. Financial intermediaries may receive such compensation (i) in the form of up front commissions and ongoing asset-based compensation paid by MFD based on sales charges received and expected to be received by MFD from shareholders and Distribution Plan distribution and service payments received by MFD from the fund, (ii) in the form of shareholder servicing payments paid by MFD and/or one or more of its affiliates (for purposes of this section only, collectively, "MFD") based on the receipt of such payments by MFD from the fund, and (iii) in the form of payments paid by MFD from MFD's own additional resources.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories and such payments can be significant to the financial intermediary. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular fund or share class.
Financial intermediaries may receive up front commissions of up to the following percentage amounts for sales of the following share classes:
UP FRONT COMMISSION AS A
SHARE CLASS PERCENTAGE OF OFFERING PRICE
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Class A 5.75%
Class B 3.75%
Class C 1.00%
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Financial intermediaries may also receive all or a portion of the following payments: Distribution Plan distribution and service fees as described in "Description of Share Classes - Distribution and Service Fees"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
In addition, financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS funds, to cooperate with MFD's promotional efforts and/or in recognition of their marketing, administrative services, and/or processing support. This compensation from MFD is not reflected in the fees and expenses listed in the fee table section of the fund's prospectus. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary and the quality of the overall relationship with the financial intermediary.
These additional payments by MFD may take the form of payments to financial intermediaries that provide marketing support and administrative services to
MFD with respect to fund shares sold or held through the financial intermediary's retail distribution network and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. MFD may also make payments to financial intermediaries to help offset the cost associated with client account maintenance support, statement preparation, and transaction processing. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, MFD may make other payments or allow other promotional incentives or payments to financial intermediaries.
You can find further details in the SAI about the payments made by MFD and the services provided by financial intermediaries. Financial intermediaries may charge you additional fees and/or commissions other than those disclosed in this prospectus. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries that sell fund shares may also act as a broker/dealer in connection with a MFS fund's purchase or sale of portfolio securities. However, the fund and MFS do not consider financial intermediaries' sales of shares of a MFS fund as a factor when choosing broker/dealers to effect portfolio transactions for the MFS funds.
HOW TO PURCHASE, REDEEM, AND EXCHANGE SHARES
You may purchase, redeem, and exchange shares of the fund in the manner described below. If you buy or sell shares of a fund through a retirement account, 529 plan, or financial intermediary, the procedures for buying, selling, and exchanging shares of the fund and the features, policies and fees may differ from those discussed in this prospectus.
HOW TO PURCHASE SHARES
Your shares will be bought at the offering price (the net asset value per share plus any applicable initial sales charge) next calculated after your purchase order is received in proper form. MFSC reserves the right to reject any purchase order that is not in proper form. The specific requirements for proper form vary among account types and transactions. Certain restrictions apply to the use of a transfer on death registration. You or your financial intermediary should contact MFSC to obtain a Transfer on Death registration form and for information regarding MFSC's other requirements for transfer on death registrations.
The fund may reject for any reason, or cancel as permitted or required by law, any purchase orders, including exchanges. The fund may stop offering shares completely, or may offer shares only on a limited basis, for a period of time or permanently.
The fund is required by law to obtain from you certain personal information that will be used to verify your identify. If you do not provide the information, the fund may not be able to open your account. The fund must also take certain steps to verify that the account information you provide is correct.
CLASS A, CLASS B, AND CLASS C SHARES. With respect to Class A, Class B, and Class C shares, you can establish an account by having your financial intermediary process your purchase. The minimum initial investment is generally $1,000, except for: fee-based and wrap accounts offered through certain financial intermediaries, for which there is no minimum initial investment; and IRAs, for which the minimum initial investment is generally $250 ($200 for rollovers from certain Serviced Plans). In addition, the minimum initial investment is $50 for automatic investment or exchange plans. MFSC waives or lowers the initial investment minimum for certain types of investors and investments.
Purchases of Class B shares are subject to a total account value limitation at the time of purchase of $99,999, and purchases of Class C shares are subject to a total account value limitation at the time of purchase of $999,999. If your existing accounts for all share classes held with the MFS funds have a total value equal to $99,999 for Class B share purchases or $999,999 for Class C share purchases, you will not be able to purchase Class B or Class C shares, as applicable. For the purpose of determining your total account value, existing accounts for all share classes held with the MFS funds that are linked under a LOI or ROA will be included.
The fund or its agents may at their discretion accept a purchase request for Class B shares or Class C shares that would otherwise exceed the total account value limitation of $99,999 and $999,999, respectively, under certain circumstances, including, but not limited to, purchases by certain types of group retirement plans sponsored or serviced by MFS or an affiliate.
You may have your financial intermediary process your subsequent purchases or you may contact MFS directly. Generally, there is no minimum for subsequent investments except there is generally a $50 minimum for subsequent investments by check and through automatic exchange plans.
- ADDITIONAL PURCHASES DIRECTLY THROUGH MFSC.
- BY MAIL. You may purchase additional shares by mailing a check with the returnable portion of your statement to MFSC.
- BY TELEPHONE. You may purchase additional shares by transferring money by phone from your pre-designated bank account. You must elect this privilege on your account application or service application.
- ELECTRONICALLY. You may purchase additional shares from a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- BY WIRE. To purchase additional shares by wire, call MFSC for instructions.
- AUTOMATIC INVESTMENT PLAN. You may purchase additional shares by automatically investing a designated amount from your checking or savings account on any day of the month. You must elect this privilege on your account application or service application.
- ADDITIONAL PURCHASES THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary purchase shares on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
CLASS I SHARES. With respect to Class I shares, you can establish an account through your MFD representative, by contacting MFSC directly, or by having your financial intermediary process your purchase. Generally, there are no initial or subsequent investment minimums except as may be required to be an eligible purchaser of Class I shares.
HOW TO REDEEM SHARES
Your shares will be sold at the net asset value per share next calculated after
your redemption order is received in proper form, minus any applicable CDSC.
MFSC
reserves the right to reject any redemption request that is not in proper form. The specific requirements for proper form vary among types of accounts and transactions. In certain circumstances, you may need to have your signature guaranteed and/or submit additional documentation to redeem your shares. In general, no signature guarantee is required for a redemption order for up to $100,000 that is signed by all owners or fiduciaries identified in the account registration, paid as registered, and mailed to the address of record.
The fund normally sends out your redemption proceeds within seven days after your request is received in proper form. Under unusual circumstances, such as when the New York Stock Exchange is closed, trading on the Exchange is restricted, or as permitted by the SEC, the fund may suspend redemptions or postpone payment for more than seven days. Redemption proceeds (other than exchanges) may be delayed until money from prior purchases sufficient to cover your redemption has been received and collected. This can take up to seven days after a purchase.
You may redeem your shares either by having your financial intermediary process your redemption or by contacting MFSC directly.
REDEEMING DIRECTLY THROUGH MFSC.
- BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the name of the fund, your account number, and the number of shares or dollar amount to be redeemed.
- BY TELEPHONE. If a signature guarantee is not required, you can call MFSC to have shares redeemed from your account and proceeds mailed to the address of record on the account. You can also call MFSC to have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account. You must elect this privilege on your account application or service application if you wish to have proceeds wired to your bank account.
- ELECTRONICALLY. You can have shares redeemed from your account and the proceeds wired directly to a pre-designated bank account via the Internet at mfs.com (MFS Access). You must elect this privilege on your account application or service application and establish a personal identification number (PIN) on MFS Access to use this service.
- SYSTEMATIC WITHDRAWAL PLAN. For Class A, Class B, Class C, or Class I shares, you may elect to automatically receive (or designate someone else to receive) regular periodic payments through an automatic redemption of such classes. Please contact MFSC for details.
REDEEMING THROUGH YOUR FINANCIAL INTERMEDIARY. You can have your financial intermediary process a redemption on your behalf. Your financial intermediary will be responsible for furnishing all necessary documents to MFSC and may charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. If a signature guarantee is required, your signature may be guaranteed by an eligible bank, broker/dealer, credit union, national securities exchange, registered securities association, clearing agency, or savings association. MFSC may require additional documentation for certain types of registrations and under certain circumstances. Signature guarantees and this additional documentation shall be accepted in accordance with policies established by MFSC, and MFSC may, at its discretion, make certain exceptions to these requirements. Please contact MFSC with any questions and for the requirements for your particular situation.
SHARE CERTIFICATES. If certificates are outstanding for your shares, you may only redeem such shares by mailing the certificates to MFSC. Telephone, electronic, and systematic withdrawal plan redemptions and checkwriting are not available if certificates are outstanding for your shares.
REDEMPTIONS IN KIND. If, during any 90-day period, you redeem shares in an amount greater than the lesser of $250,000 or 1% of fund net assets, the fund has the right to pay the redemption amount above such threshold by a distribution in-kind of portfolio securities (redemption in kind). In the event that the fund makes a redemption in kind, you should expect to incur brokerage and other transaction charges when converting the securities to cash, and the securities may increase or decrease in value before you sell them.
INVOLUNTARY REDEMPTIONS. Because it is costly to maintain small accounts, the MFS funds have reserved the right to redeem your shares without your permission when your account contains less than $500 due to your redemptions or exchanges. Before the fund makes such a redemption, you will be notified and given 60 days to increase your investment to at least $500.
In addition, the MFS funds have reserved the right to redeem your shares without your permission in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Any applicable CDSC will be assessed upon redemption of your shares.
HOW TO EXCHANGE SHARES
An exchange involves the redemption of shares of one fund and the purchase of shares of another fund.
EXCHANGE PRIVILEGE. You can exchange your shares for shares of the same class of most other MFS funds by having your financial intermediary process your exchange request or by contacting MFSC directly. Your shares will be bought at the net asset value next calculated after your exchange order is received in proper form.
You can exchange your Class A shares and your Class I shares for shares of the MFS Money Market Fund or the MFS Government Money Market Fund.
Certain qualified retirement plans may make certain exchanges between the MFS funds and the MFS Fixed Fund. With respect to Class C shares subject to a CDSC,
you will only be eligible to make the exchange to the MFS Fixed Fund if the CDSC would have been waived had the Class C shares been redeemed. Contact MFSC for information concerning transactions involving the MFS Fixed Fund.
The MFS funds allow certain financial intermediaries to place exchange orders on behalf of a group of their discretionary investment advisory clients ("group exchange orders"). As with any exchange request, the funds and their agents reserve the right to reject any group exchange order, and the funds' agents will generally reject any group exchange order received by the funds or their agents after 1 p.m., Eastern time. In addition, MFD has agreements with certain financial intermediaries which set forth the terms and conditions under which group exchange orders may be placed by these financial intermediaries. These conditions may be more restrictive than those applicable to individual exchange orders, and may include the requirement to provide the funds or their agents with advance notice of group exchange orders.
The minimum exchange amount is generally $1,000 (generally $50 for exchanges made under the automatic exchange plan) or all the shares in an account. MFSC waives or lowers the minimum exchange amount for certain types of investors and investments.
Shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged fund and the original purchase date of the shares subject to the CDSC.
Other funds may have different exchange restrictions. You should read the prospectus of the MFS fund into which you are exchanging and consider the differences in objectives, policies, and risks before making any exchange. The exchange privilege may be changed or discontinued at any time, and all exchanges are subject to certain limitations and MFS funds' policies concerning excessive trading practices, which are designed to protect the funds and their shareholders from the harmful effects of frequent trading.
OTHER CONSIDERATIONS
FREQUENT TRADING
- RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. The Board of Trustees of the MFS funds has adopted the purchase and exchange limitation policies described below, which it believes are reasonably designed to discourage frequent fund share transactions. MFSC seeks to monitor and enforce these policies, subject to oversight by the Board of Trustees, pursuant to procedures approved by the Board of Trustees. The MFS funds may alter their policies at any time without notice to shareholders.
- GENERAL PURCHASE AND EXCHANGE LIMITATION POLICIES. The MFS funds reserve the right to restrict, reject, or cancel (with respect to
cancellations, within one business day of the order), without any prior notice, any purchase or exchange order, including transactions believed to represent frequent trading activity. For example, MFSC may in its discretion restrict, reject, or cancel a purchase or exchange order even if the transaction is not subject to specific exchange or other limitations described in this prospectus if MFSC determines that accepting the order could interfere with the efficient management of a fund's portfolio, increase costs to the fund, dilute the value of an investment in the fund to long-term shareholders, or otherwise not be in the fund's best interests. In the event that MFSC rejects or cancels an exchange request, neither the redemption nor the purchase side of the exchange will be processed. Each MFS fund reserves the right to delay for one business day the processing of exchange requests in the event that, in MFSC's judgment, such delay would be in the fund's best interest, in which case both the redemption and purchase side of the exchange will receive the fund's net asset values at the conclusion of the delay period.
- SPECIFIC EXCHANGE AND PURCHASE LIMITATION POLICIES. Under the MFS Funds' purchase and exchange limitation policy, MFSC will generally restrict, reject or cancel purchase and exchange orders if MFSC determines that an accountholder has made two exchanges, each in an amount of $5,000 or more, out of an account in an MFS fund during a calendar quarter ("two exchange limit"). This policy does not apply to exchanges:
- out of the MFS money market funds; or
- initiated by a retirement plan trustee or sponsor rather than by a plan participant, and other similar non-discretionary exchanges (e.g., in connection with fund mergers/acquisitions/liquidations).
In circumstances where shareholders hold shares through financial intermediaries, the MFS funds may rely upon the financial intermediary's policy to restrict frequent trading and its monitoring of such policy in lieu of the MFS funds' two-exchange limit if MFSC believes that the financial intermediary's policy is reasonably designed to identify and curtail trading activity that is not in the best interest of the fund.
In addition, MFSC may make exceptions to this policy if, in its judgment, the transaction does not represent frequent trading activity, such as purchases made through systematic purchase plans or payroll contributions. In applying this policy, MFSC considers the information available to it at the time and reserves the right to consider trading multiple accounts under common ownership, control, or influence to be trading out of a single account.
Exchanges made on the same day in the same account are aggregated for purposes of counting the number and dollar amount of exchanges made by the accountholder (e.g., a shareholder who on the same day
exchanges $6,000 from one MFS fund into two other MFS funds, by exchanging $3,000 into each of the two MFS funds, will be viewed as having made one exchange transaction exceeding $5,000 in value).
- LIMITATIONS ON THE ABILITY TO DETECT AND CURTAIL FREQUENT TRADING PRACTICES. Shareholders seeking to engage in frequent trading practices may deploy a variety of strategies to avoid detection, and, despite the efforts of MFSC to prevent frequent trading, there is no assurance that MFSC will be able to identify such shareholders or curtail their trading practices. The ability of MFSC to detect and curtail frequent trading practices may also be limited by operational systems and technological limitations.
MFSC receives purchase, exchange, and redemption orders through certain financial intermediaries that hold omnibus accounts with an MFS fund. Omnibus account arrangements are common forms of holding shares of MFS funds, particularly among certain financial intermediaries such as brokers, retirement and 529 plans, investment advisors, and variable insurance products. A financial intermediary's policy restricting frequent trading may be more or less restrictive than the MFS funds' policies, may permit certain transactions not permitted by the MFS funds' policies, or prohibit transactions not subject to the MFS funds' policies.
MFSC is generally not able to identify trading by a particular underlying shareholder within an omnibus account, which makes it difficult or impossible to determine if a particular underlying shareholder has violated the two exchange limit or is otherwise engaged in frequent trading. However, MFSC reviews trading activity at the omnibus level to detect suspicious trading activity. If MFSC detects suspicious trading activity at the omnibus level it will contact the financial intermediary to request underlying shareholder level activity to determine whether there is underlying shareholder level frequent trading. In certain instances, a financial intermediary may be unwilling or unable to provide MFSC with information about underlying shareholder level activity.
If frequent trading is identified, MFSC will take appropriate action. MFSC's ability to monitor and deter frequent trading in omnibus accounts at the underlying shareholder level is dependent upon the capability and cooperation of the financial intermediary. Accordingly, depending upon the composition of a fund's shareholder accounts, the level of cooperation provided by the financial intermediary and in light of efforts made by certain shareholders to evade these limitations, MFSC may not be in a position to monitor and deter frequent trading with respect to a significant percentage of a fund's shareholders. You should consult your financial intermediary regarding the application of these limitations and whether your financial intermediary imposes any additional or different limitations.
- FREQUENT TRADING RISKS. To the extent that the MFS funds or their agents are unable to curtail excessive trading practices in a fund, these practices may interfere with the efficient management of the fund's portfolio, may result in increased transaction and administrative costs, and may adversely impact the fund's performance.
In addition, to the extent that the fund invests in foreign securities, the interests of long-term shareholders may be diluted as a result of time-zone arbitrage, a short-term trading practice that seeks to exploit changes in the value of the fund's investments that result from events occurring after the close of the foreign markets on which the investments trade, but prior to the time the fund determines its net asset value. The fund's use of fair valuation can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that the fund's fair valuation policies and procedures will prevent dilution of the fund's net asset value by short-term traders.
To the extent that the fund invests in securities that trade infrequently or are difficult to value, such as the securities of smaller companies, high yield debt instruments, and floating rate loans, the interests of long-term shareholders may be diluted as a result of price arbitrage, a short-term trading strategy that seeks to exploit perceived pricing inefficiencies in the fund's investments. Such short-term trading strategies may interfere with efficient management of the fund's portfolio to a greater degree than funds that invest in more frequently traded or liquid securities, in part because the fund may have difficulty selling these portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage may also cause dilution in the value of fund shares held by other shareholders.
UNAUTHORIZED TRANSACTIONS. MFS will not be responsible for losses that result from unauthorized transactions unless MFSC does not follow procedures reasonably designed to verify your identity. If an account has more than one owner or authorized person, MFSC will accept telephone and online instructions from any one owner or authorized person. It is important that you contact MFSC immediately about any transactions you believe to be unauthorized.
ABILITY TO CONTACT MFSC. Certain methods of contacting MFSC, such as by mail, telephone, or electronically, may be unavailable or delayed (for example, after natural disasters or during periods of significant/major political, social, or economic instability).
RESERVATION OF OTHER RIGHTS. In addition to the rights expressly stated elsewhere in this prospectus, MFSC reserves the right to: 1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; and 2) freeze any account or suspend account services when MFSC has received reasonable notice (written or otherwise) of a dispute between registered or
beneficial account owners or when MFSC believes a fraudulent transaction may occur or has occurred.
ANTI-MONEY LAUNDERING RESTRICTIONS. Federal law requires the fund to implement policies and procedures reasonably designed to prevent, detect and report money laundering and other illegal activity. The fund, consistent with applicable federal law, may redeem your shares and close your account; suspend, restrict or cancel purchase and redemption orders; process redemption requests and withhold your proceeds; and take other action if it is unable to verify your identity within a reasonable time or conduct required due diligence on your account or as otherwise permitted by its anti-money laundering policies and procedures. Any applicable CDSC will be assessed upon redemption of your shares.
CONFIRMATIONS IN QUARTERLY STATEMENTS. Transactions made under certain periodic investment and withdrawal programs (including reinvestment plans) will be confirmed on quarterly account statements.
OTHER INFORMATION
VALUATION
The price of each class of the fund's shares is based on its net asset value. The net asset value of each class of shares is determined each day the New York Stock Exchange (the Exchange) is open for trading as of the close of regular trading on the Exchange (generally 4:00 p.m. Eastern time). However, net asset value may be calculated earlier as permitted by the SEC. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. On days when the Exchange is closed (such as week-ends and holidays), net asset value is not calculated, and the fund does not transact purchase and redemption orders. To the extent the fund's assets are traded in other markets on days when the fund does not price its shares, the value of the fund's assets may change when you will not be able to purchase or redeem shares.
To determine net asset value, the fund's investments for which reliable market quotations are readily available are valued at market value. Certain short term debt instruments are valued at amortized cost.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund's investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees.
Under the fund's valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. These valuations can be based on both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as a foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net
asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund's net asset value may differ from quoted or published prices for the same investments.
DISTRIBUTIONS
The fund intends to declare and pay a dividend to shareholders at least annually.
Any capital gains are distributed at least annually.
DISTRIBUTION OPTIONS
The following distribution options are generally available:
- Dividend and capital gain distributions reinvested in additional shares (THIS OPTION WILL BE ASSIGNED IF NO OTHER OPTION IS SPECIFIED);
- Dividend distributions in cash; capital gain distributions reinvested in additional shares;
- Dividend and capital gain distributions in cash; or
- Dividend and capital gain distributions reinvested into the same class of shares of another MFS Fund.
The distribution option for accounts with dividend distributions of less than $10 will generally be changed to reinvestment in additional shares of the fund. If you have elected to receive distributions in cash, and the postal service is unable to deliver checks to your address of record, or you do not respond to mailings from MFSC with regard to uncashed distribution checks, your distribution option may be converted to having all distributions reinvested in additional shares. You should contact MFSC to change your distribution option, and your request to do so must be received by MFSC before the record date for a distribution in order to be effective for that distribution. No interest will accrue on amounts represented by uncashed distribution checks.
TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in the fund may have on your particular
tax situation, including possible foreign, state, and local taxes. Also, this discussion does not apply to shares of the fund held through tax-exempt retirement plans.
The fund expects to distribute substantially all of its income and gains annually. Distributions from the fund are taxable whether you receive them in cash or reinvest them in additional shares. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Any gain resulting from the sale or exchange of your shares will generally also be subject to tax.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the fund owned the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains from the sale of investments that the fund owned for more than one year and that are properly designated by the fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the fund owned for one year or less will be taxable as ordinary income. For taxable years beginning before January 1, 2011, if some or all of the fund's income derives from "qualified dividend income" and if you are an individual who meets holding period and other requirements with respect to the fund's shares, those distributions that are properly designated by the fund as derived from "qualified dividend income" are taxed at the rates applicable to long-term capital gains.
Long-term capital gain rates applicable to most individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
The fund's investments in foreign securities may be subject to foreign withholding taxes, which will decrease the fund's return on those securities. The fund generally will be eligible to elect to "pass through" to you foreign income taxes that it pays, in which case you must include your share of those taxes in gross income as a distribution from the fund and you will be allowed to claim a credit (or a deduction, if you itemize deductions) for such amounts on your federal income tax return, subject to certain limitations. In addition, the fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the fund's recognition of ordinary income and may affect the timing, amount, or character of the fund's distributions.
The Form 1099 that is mailed to you every January details your distributions and how they are treated for federal tax purposes.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS AND PROSPECTUSES
The fund produces financial reports every six months and updates its prospectus annually. To avoid sending duplicate copies of materials to households, only one copy of the fund's annual and semiannual report and prospectus will be mailed to
shareholders having the same residential address on the fund's records. However, any shareholder may contact MFSC (please see back cover for address and telephone number) to request that copies of these reports and prospectuses be sent personally to that shareholder.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a fund's financial performance for the past five years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent registered public accounting firm, whose report, together with the fund's financial statements, are included in the fund's Annual Report to shareholders. The fund's Annual Report is available upon request by contacting MFS Service Center, Inc. (please see back cover for address and telephone number). The financial statements contained in the Annual Report are incorporated by reference into the SAI. The fund's independent registered public accounting firm is Ernst & Young LLP.
YEARS ENDED 5/31
----------------------------------------------------
2007 2006 2005 2004 2003
CLASS A
Net asset value, beginning of period $ 23.85 $ 18.90 $ 17.07 $ 13.02 $ 14.22
-------- -------- -------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.20 $ 0.27 $ 0.08 $ 0.05 $ (0.00)(w)
Net realized and unrealized gain (loss) on
investments and foreign currency 6.07 5.10 1.75 4.00 (1.20)
-------- -------- -------- ------- -------
Total from investment operations $ 6.27 $ 5.37 $ 1.83 $ 4.05 $ (1.20)
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.23) $ (0.00)(w) $ -- $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.92) (0.42) -- -- --
-------- -------- -------- ------- -------
Total distributions declared to shareholders $ (2.15) $ (0.42) $ -- $ -- $ --
-------- -------- -------- ------- -------
Net asset value, end of period $ 27.97 $ 23.85 $ 18.90 $ 17.07 $ 13.02
======== ======== ======== ======= =======
Total return (%) (r)(s)(t) 27.35 28.68 10.72 31.21 (8.57)
-------- -------- -------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 1.50 1.63 1.72 2.05 2.23
Expenses after expense reductions (f) 1.50 1.60 1.65 1.92 2.16
Net investment income (loss) 0.80 1.24 0.43 0.30 (0.03)
Portfolio turnover 67 90 75 102 87
Net assets at end of period (000 omitted) $295,921 $206,522 $110,876 $56,503 $42,544
|
YEARS ENDED 5/31
-----------------------------------------------
2007 2006 2005 2004 2003
CLASS B
Net asset value, beginning of period $ 22.77 $ 18.17 $ 16.52 $ 12.66 $ 13.91
------- ------- ------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.01 $ 0.09 $ (0.07) $ (0.05) $ (0.07)
Net realized and unrealized gain (loss) on
investments and foreign currency 5.80 4.93 1.72 3.91 (1.18)
------- ------- ------- ------- -------
Total from investment operations $ 5.81 $ 5.02 $ 1.65 $ 3.86 $ (1.25)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.05) $ -- $ -- $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.92) (0.42) -- -- --
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (1.97) $ (0.42) $ -- $ -- $ --
------- ------- ------- ------- -------
Net asset value, end of period $ 26.61 $ 22.77 $ 18.17 $ 16.52 $ 12.66
======= ======= ======= ======= =======
Total return (%) (r)(s)(t) 26.52 27.87 9.99 30.49 (8.99)
------- ------- ------- ------- -------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 2.15 2.28 2.37 2.60 2.73
Expenses after expense reductions (f) 2.15 2.25 2.30 2.47 2.66
Net investment income (loss) 0.06 0.43 (0.37) (0.31) (0.55)
Portfolio turnover 67 90 75 102 87
Net assets at end of period (000 omitted) $50,259 $52,531 $46,211 $39,093 $29,341
|
YEARS ENDED 5/31
----------------------------------------------
2007 2006 2005 2004 2003
CLASS C
Net asset value, beginning of period $ 22.60 $ 18.04 $ 16.40 $12.57 $13.81
------- ------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.03 $ 0.12 $ (0.05) $ 0.00(w) $(0.06)
Net realized and unrealized gain (loss) on
investments and foreign currency 5.74 4.86 1.69 3.83 (1.18)
------- ------- ------- ------ ------
Total from investment operations $ 5.77 $ 4.98 $ 1.64 $ 3.83 $(1.24)
------- ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.08) $ -- $ -- $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.92) (0.42) -- -- --
------- ------- ------- ------ ------
Total distributions declared to shareholders $ (2.00) $ (0.42) $ -- $ -- $ --
------- ------- ------- ------ ------
Net asset value, end of period $ 26.37 $ 22.60 $ 18.04 $16.40 $12.57
======= ======= ======= ====== ======
Total return (%) (r)(s)(t) 26.54 27.85 10.00 30.47 (8.98)
------- ------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 2.15 2.28 2.37 2.56 2.73
Expenses after expense reductions (f) 2.15 2.25 2.30 2.43 2.66
Net investment income (loss) 0.12 0.57 (0.27) 0.03 (0.54)
Portfolio turnover 67 90 75 102 87
Net assets at end of period (000 omitted) $40,611 $32,965 $19,356 $9,916 $3,685
|
YEARS ENDED 5/31
-------------------------------------------------
2007 2006 2005 2004 2003
CLASS I
Net asset value, beginning of period $ 25.67 $ 20.27 $ 18.24 $13.75 $14.83
-------- -------- ------- ------ ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) (d) $ 0.34 $ 0.46 $ 0.27 $ 0.47 $(0.07)
Net realized and unrealized gain (loss) on
investments and foreign currency 6.52 5.40 1.76 4.02 (1.01)
-------- -------- ------- ------ ------
Total from investment operations $ 6.86 $ 5.86 $ 2.03 $ 4.49 $(1.08)
-------- -------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $ (0.31) $ (0.04) $ -- $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.92) (0.42) -- -- --
-------- -------- ------- ------ ------
Total distributions declared to shareholders $ (2.23) $ (0.46) $ -- $ -- $ --
-------- -------- ------- ------ ------
Net asset value, end of period $ 30.30 $ 25.67 $ 20.27 $18.24 $13.75
======== ======== ======= ====== ======
Total return (%) (r)(s) 27.76 29.16 11.13 32.65 (7.22)
-------- -------- ------- ------ ------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA:
Expenses before expense reductions (f) 1.14 1.28 1.39 1.31(k) 1.80(k)
Expenses after expense reductions (f) 1.14 1.25 1.32 1.18(k) 1.73(k)
Net investment income (loss) 1.25 1.93 1.42 2.81 (0.54)
Portfolio turnover 67 90 75 102 87
Net assets at end of period (000 omitted) $710,686 $356,948 $92,403 $ 7 $ 0(l)
|
Any redemption fees charged by the fund during the 2004 and 2005 fiscal years resulted in a per share impact of less than $0.01.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(k) Expense ratio is not in correlation with the contractual fee arrangement due to the timing of sales and redemptions for the fund shares during the period.
(l) Net assets were less than $500.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
(t) Total returns do not include any applicable sales charges.
(w) Per share amount was less than $0.01.
MFS INTERNATIONAL GROWTH FUND
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF TRUSTEES. The Board of Trustees of the MFS funds has adopted procedures by which shareholders may send communications to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [fund name], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116-3741, Attention: Frank Tarantino, Independent Chief Compliance Officer of the Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the MFS fund to which they relate and (iii) identify the class and number of shares held by the shareholder.
IF YOU WANT MORE INFORMATION ABOUT MFS INTERNATIONAL GROWTH FUND, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's actual investments. Annual reports discuss the effect of recent market conditions and investment strategies on the fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated October 1, 2007, provides more detailed information about the fund and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: mfs.com
Information about the fund (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other information about the fund are available on the Edgar Database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-4492.
Class W Shares
MFS INTERNATIONAL GROWTH FUND
PROSPECTUS OCTOBER 1, 2007
The Prospectus describes the MFS International Growth Fund. The investment objective of the fund is to seek capital appreciation.
RISK RETURN SUMMARY 1 EXPENSE SUMMARY 8 CERTAIN INVESTMENT POLICIES AND RISKS 10 MANAGEMENT OF THE FUND 11 DESCRIPTION OF SHARE CLASSES 15 HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES 18 OTHER INFORMATION 24 FINANCIAL HIGHLIGHTS 28 The Securities and Exchange Commission has not approved or disapproved the fund's shares or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. |
RISK RETURN SUMMARY
INVESTMENT OBJECTIVE
The fund's investment objective is to seek capital appreciation. The fund's objective may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS (Massachusetts Financial Services Company, the fund's investment adviser) normally invests the fund's assets primarily in foreign equity securities, including emerging market equity securities.
MFS may invest a relatively high percentage of the fund's assets in a single country or a small number of countries.
MFS focuses on investing the fund's assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). Growth companies tend to have stock prices that are high relative to their earnings, dividends, book value, or other financial measures.
MFS may invest the fund's assets in companies of any size.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of issuers and their potential in light of their current financial condition and industry position, and market, economic, political, and regulatory conditions. Factors considered may include analysis of earnings, cash flows, competitive position, and management ability. Quantitative analysis of these and other factors may also be considered.
PRINCIPAL INVESTMENT TYPES
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, and depository receipts for those securities.
DERIVATIVES: Derivatives are financial instruments whose value is based on the value of one or more indicators, such as a security, asset, currency, interest rate, credit rating or index. Derivatives often involve a counterparty to the transaction.
Derivatives include futures, forward contracts, options, structured notes, inverse floating rate instruments, swaps, caps, floors, and collars.
PRINCIPAL RISKS
As with any mutual fund, you could lose money on your investment in the fund. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
The principal risks of investing in the fund are:
STOCK MARKET RISK: The price of an equity security fluctuates in response to issuer, market, economic, industry, political, and regulatory developments. Prices can decrease significantly in response to these developments, and these developments can affect a single issuer, issuers within a broad market sector, industry or geographic region, or the market in general. Different parts of the market and different types of securities can react differently to these developments. For example, the stocks of growth companies can react differently from the stocks of value companies, and the stocks of large cap companies can react differently from the stocks of small cap companies. Certain unanticipated events, such as natural disasters, terrorist attacks, war, and other geopolitical events, can have a dramatic adverse effect on stock markets.
COMPANY RISK: Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of an investment. The price of securities of smaller, less well-known companies can be more volatile than the price of securities of larger companies or the market in general.
GROWTH COMPANY RISK: The stocks of growth companies can be more sensitive to the company's earnings and more volatile than the market in general.
FOREIGN RISK: Investments in securities of foreign companies, securities of companies with significant foreign exposure, and foreign currencies can involve additional risks relating to market, economic, political, or regulatory conditions and developments. Political, social, and economic instability, the imposition of currency or capital controls, or the expropriation or nationalization of assets in a particular country can cause dramatic declines in that country's economy. Less stringent regulatory, accounting, and disclosure requirements for issuers and markets are more common in certain foreign countries. Enforcing legal rights can be difficult, costly, and slow in certain foreign countries, and can be particularly difficult against foreign governments. Additional risks of foreign investments include trading, settlement, custodial, and other operational risks, and withholding and other taxes. These factors can make foreign investments, especially those in emerging markets, more volatile and less liquid than U.S. investments. In addition, foreign markets can react differently to market, economic, political, or regulatory developments than the U.S. market.
EMERGING MARKETS RISK: Emerging markets investments can involve additional and greater risks than the risks associated with investments in developed foreign markets securities. Emerging markets typically have less economic development, market structure and depth and regulatory oversight than developed countries. Emerging markets can also be subject to greater political, social, and economic instability. These factors can make emerging market investments more volatile and less liquid than investments in developed markets.
CURRENCY RISK: A decline in the value of a foreign currency relative to the U.S. dollar reduces the value of the foreign currency and investments denominated in that currency. In addition, the use of foreign exchange contracts to reduce foreign currency exposure can eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. The value of foreign currencies relative to the U.S. dollar fluctuates in response to, among other factors, interest rate changes, intervention (or failure to intervene) by U.S. or foreign governments, central banks, or supranational entities such as the International Monetary Fund, the imposition of currency controls, and other political or regulatory developments in the U.S. or abroad. Foreign currency values can decrease significantly both in the short term and over the long term in response to these and other developments.
GEOGRAPHIC CONCENTRATION RISK: Because MFS may invest a relatively large percentage of the fund's assets in issuers located in a single country, a small number of countries, or a particular geographic region, the fund's performance could be closely tied to the market, currency, economic, political, or regulatory conditions and developments in those countries or that region, and could be more volatile than the performance of more geographically-diversified funds.
DERIVATIVES RISK: Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicator(s). Gains or losses from derivatives can be substantially greater than the derivatives' original cost, and therefore, can involve leverage. Derivatives can be complex instruments and can involve analysis that differs from that required for other investment types used by the fund. If the value of a derivative does not correlate well with the particular market or other asset class the derivative is intended to provide exposure to, the derivative may not have the effect anticipated. Derivatives can also reduce the opportunity for gain or result in losses by offsetting positive returns in other investments. Derivatives can be less liquid than other types of investments.
INVESTMENT SELECTION RISK: The MFS analysis of an investment can be incorrect and its selection of investments can lead to an investment focus that results in the fund underperforming other funds with similar investment strategies and/or underperforming the markets in which the fund invests.
COUNTERPARTY AND THIRD PARTY RISK: Transactions involving a counterparty other than the issuer of the instrument, or a third party responsible for servicing the instrument, are subject to the credit risk of the counterparty or third party,
and to the counterparty's or third party's ability to perform in accordance with the terms of the transaction.
LIQUIDITY RISK: Certain investments and types of investments are subject to restrictions on resale, may trade in the over-the-counter market or in limited volume, or may not have an active trading market. As a result, it may not be possible to sell the investment at any particular time or at an acceptable price.
LEVERAGING RISK: Certain transactions, including when-issued, delayed-delivery, and forward commitment purchases, loans of portfolio securities, and the use of some derivatives, can result in leverage. Leverage involves investment exposure in an amount exceeding the initial investment. In transactions involving leverage, a relatively small market movement or change in other underlying indicator can lead to significantly larger losses to the fund. Leverage can cause increased volatility by magnifying gains or losses on underlying investments.
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of the risks of investing in the fund by showing changes in the fund's performance over time. The performance table also shows:
- how the fund's performance over time compares with that of a broad measure of market performance and one or more other performance measures, and
- returns before the deduction of taxes and returns after the deduction of certain taxes for Class A shares.
Because Class W shares were initially offered for public sale on May 1, 2006, the class does not yet have a performance record to report. The bar chart and the performance table show performance of the fund's Class A shares, which are offered through a separate prospectus. Although the Class W and Class A shares would have similar annual returns (because they represent interests in the same portfolio of securities), Class W and Class A performance would differ to the extent that Class W has lower expenses. The chart and table provide past performance information. The fund's past performance (before and after taxes) does not necessarily indicate how the fund will perform in the future. The performance information in the chart and table is based upon calendar year periods, while the performance information presented under the caption "Financial Highlights" and in the fund's shareholder reports is based upon the fund's fiscal year. Therefore, these performance results may differ. The returns do not reflect any fees or charges imposed by a fee-based wrap program, through which an investment is made. If these fees or charges were included, they would reduce these returns.
BAR CHART. The bar chart shows changes over time in the annual total return of Class A shares for the past ten calendar years, and assumes the reinvestment of distributions. The chart and related notes do not take into account any sales
charges (loads) that you may be required to pay upon purchase or redemption of the fund's shares. If these sales charges were included, they would reduce these returns.
CALENDER GAIN OR YEAR LOSSS(%) 1997 2.22% 1998 (0.34%) 1999 32.48% 2000 (11.37%) 2001 (17.28%) 2002 (12.13%) 2003 36.03% 2004 17.54% 2005 13.95% 2006 25.72% |
The total return for the six-month period ended June 30, 2007 for the fund's Class A shares was 11.77%. During the periods shown in the bar chart, the highest quarterly return was 26.61% (for the calendar quarter ended December 31, 1999) and the lowest quarterly return was (17.46)% (for the calendar quarter ended September 30, 1998).
PERFORMANCE TABLE. This table shows how the average annual total returns of Class A shares of the fund, before the deduction of taxes ("Returns Before Taxes"), compare to a broad measure of market performance and one or more other performance measures, and assumes the deduction of the maximum applicable sales loads (initial sales charge and/or contingent deferred sales charge (CDSC), as applicable), and the reinvestment of distributions. In addition, for Class A shares, this table shows Class A average annual total returns:
- after the deduction of taxes on distributions made on Class A shares, such as capital gains and income distributions ("Class A Shares' Return After Taxes on Distributions"), and
- after the deduction of taxes on both distributions made on Class A shares and on redemption of Class A shares, assuming that the shares are redeemed at the end of the periods for which returns are shown ("Class A Shares' Return After Taxes on Distributions and Sale of Class A Shares").
Average Annual Total Returns (for the periods ended December 31, 2006)
SHARE CLASS 1 YEAR 5 YEAR 10 YEAR ------------------------------------------------------------------------------------------------------------ RETURNS BEFORE TAXES A Shares, With Initial Sales Charge (5.75%) 18.49% 13.66% 6.50% RETURNS AFTER TAXES (CLASS A SHARES ONLY) A Shares' Return After Taxes on Distributions, With Initial Sales Charge (5.75%) 16.29% 13.17% 5.90% A Shares' Returns After Taxes on Distributions and Sale of Class A Shares With Initial Sales Charge (5.75%) 13.07% 11.82% 5.40% BENCHMARK COMPARISON (RETURNS BEFORE TAXES) MSCI All Country World (ex-US) Growth Index#+* 23.96% 14.34% 6.20% MSCI EAFE (Europe, Australasia, Far East) Growth Index#+** 22.69% 12.63% 5.35% |
# Effective March 30, 2007, the MSCI All Country World (ex-US) Growth Index replaced the MSCI EAFE (Europe, Australia, Far East) Growth Index because the adviser believes the MSCI All Country World (ex-US) Growth Index better reflects the fund's investment policies and objectives.
* The Morgan Stanley Capital International (MSCI) All Country World (ex-US) Growth Index is a market capitalization index that is designed to measure equity market performance for growth securities in the global developed and emerging markets, excluding the U.S.
** The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia, Far East) Growth Index is a market capitalization index that is designed to measure equity market performance for growth securities in the developed markets, excluding the U.S. and Canada.
+ Source: FactSet Research Systems Inc.
All performance results reflect any applicable fee and expense waivers in effect during the periods shown; without these, the results would have been lower.
After-tax returns are calculated using the historical highest individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your own tax situation, and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns are shown for only one of the fund's classes of shares, and after-tax returns for the fund's other classes of shares will vary from the returns shown.
The fund commenced investment operations October 24, 1995 with the offering of Class A and Class B shares, and subsequently offered Class W shares on May 1, 2006.
Performance for Class W shares will include the performance of the fund's Class A shares for periods prior to their offering. Blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class specific operating expenses (such as Rule 12b-1 fees). Compared to performance Class W shares would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance
for share classes with higher operating expenses than those of the share class to which they are blended, and lower performance for share classes with lower operating expenses than those of the share class to which they are blended.
Prior to November 30, 1998, Foreign & Colonial Management Ltd. ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), managed certain assets of the fund. MFS assumed all portfolio management responsibilities from FCM and FCEM for the fund on November 30, 1998. Performance information for periods prior to November 30, 1998 reflects this former sub-investment advisory relationship.
EXPENSE SUMMARY
EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy, redeem, and hold shares of the fund. The annual fund operating expenses are based on expenses incurred during the fund's most recently completed fiscal year, adjusted to reflect annualized expenses. These expenses do not reflect the fees or charges imposed by a fee-based wrap program through which an investment is made. If these fees or charges had been included, your expenses would be higher. The fund's annual operating expense may vary in future years.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
SHARE CLASS W -------------------------------------------------------------------------------------- Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) N/A Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is less) N/A -------------------------------------------------------------------------------------- |
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
SHARE CLASS W
--------------------------------------------------
Management Fees 0.90%
Distribution (12b-1) Fees(1) 0.10%
Other Expenses(2) 0.28%
----
Total Annual Fund Operating Expenses(2) 1.28%
|
(1) The fund's Rule 12b-1 plan permits it to pay distribution fees to support the sale and distribution of the fund's Class W shares and the services provided by financial intermediaries. The maximum rates that may be charged under the plan, together with details of any fee reduction arrangements, are set forth under "Distribution Fees."
(2) The fund has entered into an expense offset arrangement that reduces the fund's custodian fee based upon the amount of cash maintained by the fund with its custodian. Such fee reduction is not reflected in the table. Had this fee reduction been taken into account, "Net Expenses" would be: Class W shares: 1.28%. Also, "Other Expenses" also include the estimated payment of a portion of the transfer-agent-related expenses of the MFS funds that invest in the fund ("MFS Funds-of-Funds"). See "Management of the Fund - Special Servicing Agreement."
EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. These examples do not reflect the fees and expenses imposed by the investment vehicle through which an investment in the fund is made. If these fees and expenses were included, your expenses would be higher.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you redeem your shares at the end of the time periods (unless otherwise indicated);
- Your investment has a 5% return each year and dividends and other distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions your costs would be:
CERTAIN INVESTMENT POLICIES AND RISKS
TURNOVER
MFS may engage in active and frequent trading in pursuing the fund's principal investment strategies. Frequent trading increases transaction costs, which may reduce the fund's return. Frequent trading can also result in the realization of a higher percentage of short-term capital gains and a lower percentage of long-term capital gains as compared to a fund that trades less frequently. Because short-term capital gains are distributed as ordinary income, this would generally increase your tax liability unless you hold your shares through a tax-deferred or exempt vehicle.
TEMPORARY DEFENSIVE POLICY
In response to market, economic, political, or other conditions, MFS may depart from the fund's principal investment strategies by temporarily investing for defensive purposes. When MFS invests defensively, different factors could affect the fund's performance and the fund may not achieve its investment objective. In addition, the defensive strategy may not work as intended.
FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Information about investment strategies and investment types not described in the Prospectus and the risks associated with those investment strategies and investment types are described in the fund's Statement of Additional Information ("SAI").
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS"), located at 500 Boylston Street, Boston, Massachusetts, serves as the investment adviser for the fund. Subject to the supervision of the Board of Trustees, MFS is responsible for managing the fund's investments, executing transactions and providing related administrative services and facilities under an Investment Advisory Agreement between the fund and MFS.
For the fiscal year ended May 31, 2007, the fund paid MFS an effective management fee equal to 0.90% of the fund's average daily net assets.
The management fee set forth in the Investment Advisory Agreement is 0.90% annually of the first $1 billion of the fund's average daily net assets; 0.80% annually of the next $1 billion of the fund's average daily net assets; and 0.70% annually in excess of $2 billion of the fund's average daily net assets.
MFS has agreed in writing to bear the Fund's expenses such that "Total Annual Fund Operating Expenses," do not exceed 1.55% annually for Class W shares.
A discussion regarding the basis for the Board of Trustees' approval of the Investment Advisory Agreement is available in the fund's most recent semi-annual report for the six-month period that ends November 30.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $202 billion as of June 30, 2007.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of the MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, and inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries with respect to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The lawsuits assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940, the Employee Retirement Income Security Act of 1974 (ERISA), as well as fiduciary duties and other violations of common law. The lawsuits variously have
been commenced as class actions or individual actions on behalf of investors who purchased, held, or redeemed shares of the MFS funds during specified periods, as ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT
LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER),
NO. 1:04-MD-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS funds include RIGGS V. MFS ET AL., CASE NO. 04-CV-01162-JFM
(direct), HAMMERSLOUGH V. MFS ET AL., CASE NO. 04-MD-01620 (derivative), ANITA
WALKER V. MFS ET AL., CASE NO. 1:04-CV-01758 (ERISA), and REAVES V. MFS SERIES
TRUST I, ET AL., CASE NO. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District of
Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., ET AL., NO. 04CV10584 (GAO)
(a consolidated action, first filed on March 25, 2004) and MARCUS DUMOND, ET AL.
V. MASSACHUSETTS FINANCIAL SERVS. CO., ET AL., NO. 04CV11458 (GAO) (filed on May
4, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages,
punitive damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. Insofar as any of the actions is appropriately
brought derivatively on behalf of any of the MFS funds, any recovery will inure
to the benefit of the MFS funds. Several claims of the various lawsuits have
been dismissed; MFS and the other named defendants continue to defend the
various lawsuits.
DISCLOSURE OF PORTFOLIO HOLDINGS. The MFS funds have established a policy with respect to the disclosure of fund portfolio holdings. A description of this policy is provided in the SAI. In addition, by clicking on a fund name under "Select a fund" on the MFS Web site (MFS.COM), the following information is generally available to you:
INFORMATION APPROXIMATE DATE OF POSTING TO WEB SITE -------------------------------------------------------------------------------------------------- Fund's top 10 securities holdings as of each month's end 14 days after month end Fund's full securities holdings as of each month's end 24 days after month end |
If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for funds that primarily invest in shares of the other MFS funds, all
securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the funds or MFS may suspend the posting of this information or modify the elements of this web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
PORTFOLIO MANAGER(S)
Information regarding the portfolio manager(s) of the fund is set forth below. Further information regarding the portfolio manager(s), including other accounts managed, compensation, ownership of fund shares, and possible conflicts of interest, is available in the fund's SAI. The portfolio manager is primarily responsible for the day-to-day management of the fund.
PORTFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
-----------------------------------------------------------------------------------------------------
Barry Dargan Portfolio Manager 2001 Investment Officer of MFS; employed in the investment
management area of MFS since 1996.
|
ADMINISTRATOR
MFS provides the fund with certain financial, legal, and other administrative services under a Master Administrative Services Agreement between the fund and MFS. Under the Agreement, MFS is paid an annual fee for providing these services.
DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary of MFS, is the distributor of shares of the fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. MFSC may receive a fee based on the costs it incurs in providing these services plus a target profit margin, including payments made to affiliated and unaffiliated service providers that provide certain sub-accounting and other shareholder services (shareholder servicing payments) and out-of-pocket expenses.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund-of-Funds and the fund, the fund may pay a portion of the transfer agent-related expenses of each MFS Fund-of-Funds, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of benefits realized or expected to be realized by the fund from the investment in the fund by the MFS Fund-of-Funds.
DESCRIPTION OF SHARE CLASSES
The fund offers Class W shares through this prospectus. The fund also offers Class A, Class B, Class C, and Class I shares. Class A, Class B, Class C, and Class I shares are made available through a separate prospectus provided to investors eligible to purchase these share classes.
CLASS W SHARES
Class W shares generally are available only to fee-based wrap programs sponsored by financial intermediaries that have entered into an agreement with MFD to offer Class W shares to their clients. The use of Class W shares by a financial intermediary will depend on, among other things, the structure of the particular fee-based wrap program.
Shareholders may be able to convert Class W shares to another class of the fund if they satisfy the eligibility requirements for the other share class. Please contact your financial intermediary for additional information on how to convert your Class W shares into another share class.
If a shareholder converts Class W shares of the fund to another class of the fund, the transaction will be based on the respective net asset value of each class as of the trade date for the conversion. Consequently, the converting shareholder may receive fewer shares or more shares than originally owned, depending on that day's net asset values. The total value of the initially held shares, however, will equal the total value of the converted shares. A conversion between share classes of the same fund is a nontaxable event.
SALES CHARGES AND WAIVERS
Eligible investors may purchase Class W shares without an initial sales charge or CDSC upon redemption.
DISTRIBUTION FEES
The fund has adopted a plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"). Under the Distribution Plan the fund pays distribution fees to MFD to support the sale and distribution of Class W shares, as well as shareholder servicing and account maintenance activities. These distribution fees are equal on an annual basis up to 0.10% of the average daily net assets attributable to Class W shares. These fees are paid out of the assets of the Class W shares. Because these fees are an ongoing expense of the fund, they increase the cost of your investment over time and may cost you more than other types of sales charges.
FINANCIAL INTERMEDIARY COMPENSATION
The term "financial intermediary" includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administrator, insurance company, and any other institutions having a selling, administration, or any similar agreement with MFD, MFS, or one of its affiliates.
Financial intermediaries receive various forms of compensation in connection with the sale of shares of a fund and/or the servicing of shareholder accounts. Financial intermediaries may receive such compensation (i) in the form of ongoing asset-based compensation paid by MFD based on Distribution Plan distribution payments received by MFD from the fund, (ii) in the form of shareholder servicing payments paid by MFD and/or one or more of its affiliates (for purposes of this section only, collectively, "MFD") based on the receipt of such payments by MFD from the fund, and (iii) in the form of payments paid by MFD from MFD's own additional resources.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories and such payments can be significant to the financial intermediary. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular fund or share class.
Financial intermediaries may also receive all or a portion of the following payments: Distribution Plan distribution fees as described in "Description of Share Classes - Distribution Fees"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
In addition, financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS funds, to cooperate with MFD's promotional efforts and/or in recognition of their marketing, administrative services, and/or processing support. This compensation from MFD is not reflected in the fees and expenses listed in the fee table section of the fund's prospectus. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary and the quality of the overall relationship with the financial intermediary.
These additional payments by MFD may take the form of payments to financial intermediaries that provide marketing support and administrative services to MFD with respect to fund shares sold or held through the financial intermediary's retail distribution network and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity)
programs. MFD may also make payments to financial intermediaries to help offset the cost associated with client account maintenance support, statement preparation, and transaction processing. To the extent permitted by SEC and NASD rules and other applicable laws and regulations, MFD may make other payments or allow other promotional incentives or payments to financial intermediaries.
You can find further details in the SAI about the payments made by MFD and the services provided by financial intermediaries. Financial intermediaries may charge you additional fees and/or commissions other than those disclosed in this prospectus. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries that sell fund shares may also act as a broker/dealer in connection with a MFS fund's purchase or sale of portfolio securities. However, the fund and MFS do not consider financial intermediaries' sales of shares of a MFS fund as a factor when choosing broker/dealers to effect portfolio transactions for the MFS funds.
HOW TO PURCHASE, REDEEM AND EXCHANGE SHARES
You may purchase, redeem, convert, and exchange your Class W shares only through a fee-based wrap program sponsored by a financial intermediary that has entered into an agreement with MFD to offer Class W shares to the financial intermediary's clients. Please see your financial intermediary for additional information on the procedures for purchasing, redeeming, converting, and exchanging shares of the fund, and additional investment requirements of the fee-based wrap program. Your financial intermediary generally will charge fees, which are in addition to those described in this prospectus.
HOW TO PURCHASE SHARES
Your shares will be bought at the net asset value next calculated after your purchase order is received in proper form. MFSC reserves the right to reject any purchase order that is not in proper form. The specific requirements for proper form vary among account types and transactions. Certain restrictions apply to the use of a transfer on death registration. You or your financial intermediary should contact MFSC to obtain a Transfer on Death registration form and for information regarding MFSC's other requirements for transfer on death registrations.
The fund may reject for any reason, or cancel as permitted or required by law, any purchase orders, including exchanges. The fund may stop offering shares completely, or may offer shares only on a limited basis, for a period of time or permanently.
The fund is required by law to obtain from you certain personal information that will be used to verify your identity. If you do not provide the information, the fund may not be able to open your account. The fund must also take certain steps to verify that the account information you provide is correct.
Generally, there are no initial or subsequent investment minimums except as may be required by your financial intermediary's fee-based wrap program.
HOW TO REDEEM SHARES
Your shares will be sold at the net asset value per share next calculated after your redemption order is received in proper form. MFSC reserves the right to reject any redemption request that is not in proper form. The specific requirements for proper form vary among types of accounts and transactions. In certain circumstances, you may need to have your signature guaranteed and/or submit additional documentation to redeem your shares. In general, no signature guarantee is required for a redemption order for up to $100,000 that is signed by all owners or fiduciaries identified in the account registration, paid as registered, and mailed to the address of record.
The fund sends out your redemption proceeds within seven days after your request is received in proper form. Under unusual circumstances, such as when
the New York Stock Exchange is closed, trading on the Exchange is restricted, or as permitted by the SEC, the fund may suspend redemptions or postpone payment. Redemption proceeds (other than exchanges) may be delayed until money from prior purchases sufficient to cover your redemption has been received and collected. This can take up to seven days after a purchase.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. If a signature guarantee is required, your signature may be guaranteed by an eligible bank, broker, dealer, credit union, national securities exchange, registered securities association, clearing agency, or savings association. MFSC may require additional documentation for certain types of registrations and under certain circumstances. Signature guarantees and this additional documentation shall be accepted in accordance with policies established by MFSC, and MFSC may, at its discretion, make certain exceptions to these requirements. Please contact MFSC for the requirements for your particular situation.
REDEMPTIONS IN KIND. If, during any 90-day period, you redeem shares in an amount greater than the lesser of $250,000 or 1% of fund net assets, the fund has the right to pay the redemption amount above such threshold by a distribution in-kind of portfolio securities (redemption in kind). In the event that the fund makes a redemption in kind, you should expect to incur brokerage and other transaction charges when converting the securities to cash, and the securities may increase or decrease in value before you sell them.
INVOLUNTARY REDEMPTIONS. Because it is costly to maintain small accounts, the MFS funds have reserved the right to redeem your shares without your permission when your account contains less than $500 due to your redemptions or exchanges. Before the fund makes such a redemption, you will be notified and given 60 days to increase your investment to at least $500.
In addition, the MFS funds have reserved the right to redeem your shares without your permission in cases of threatening conduct or suspicious, fraudulent, or illegal activity.
HOW TO EXCHANGE SHARES
An exchange involves the redemption of shares of one fund and the purchase of shares of another fund.
EXCHANGE PRIVILEGE. You can exchange your shares for shares of the same class of certain other MFS funds by having your financial intermediary process your exchange request. Your shares will be bought at the net asset value next calculated after your exchange order is received in proper form. There is no minimum exchange amount. You should read the prospectus of the MFS fund into which you are exchanging and consider the differences in objectives, policies, and risks before making any exchange.
OTHER CONSIDERATIONS
FREQUENT TRADING
- RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. The Board of Trustees of the MFS funds has adopted the purchase and exchange limitation policies described below, which it believes are reasonably designed to discourage frequent fund share transactions. MFSC seeks to monitor and enforce these policies, subject to oversight by the Board of Trustees, pursuant to procedures approved by the Board of Trustees. The MFS funds may alter their policies at any time without notice to shareholders.
- GENERAL PURCHASE AND EXCHANGE LIMITATION POLICIES. The MFS funds reserve the right to restrict, reject, or cancel (with respect to cancellations, within one business day of the order), without any prior notice, any purchase or exchange order, including transactions believed to represent frequent trading activity. For example, MFSC may in its discretion restrict, reject, or cancel a purchase or exchange order even if the transaction is not subject to specific exchange or other limitations described in this prospectus if MFSC determines that accepting the order could interfere with the efficient management of a fund's portfolio, increase costs to the fund, dilute the value of an investment in the fund to long-term shareholders, or otherwise not be in the fund's best interests. In the event that MFSC rejects or cancels an exchange request, neither the redemption nor the purchase side of the exchange will be processed. Each MFS fund reserves the right to delay for one business day the processing of exchange requests in the event that, in MFSC's judgment, such delay would be in the fund's best interest, in which case both the redemption and purchase side of the exchange will receive the fund's net asset values at the conclusion of the delay period.
- SPECIFIC EXCHANGE AND PURCHASE LIMITATION POLICIES. Under the MFS Funds' purchase and exchange limitation policy, MFSC will generally restrict, reject or cancel purchase and exchange orders if MFSC determines that an accountholder has made two exchanges, each in an amount of $5,000 or more, out of an account in an MFS fund during a calendar quarter ("two exchange limit"). This policy does not apply to exchanges:
- out of the MFS money market funds; or
- initiated by a retirement plan trustee or sponsor rather than by a plan participant, and other similar non-discretionary exchanges (e.g., in connection with fund mergers/acquisitions/liquidations).
In circumstances where shareholders hold shares through financial intermediaries, the MFS funds may rely upon the financial intermediary's policy to restrict frequent trading and its monitoring of such policy in
lieu of the MFS funds' two-exchange limit if MFSC believes that the financial intermediary's policy is reasonably designed to identify and curtail trading activity that is not in the best interest of the fund.
In addition, MFSC may make exceptions to this policy if, in its judgment, the transaction does not represent frequent trading activity, such as purchases made through systematic purchase plans or payroll contributions. In applying this policy, MFSC considers the information available to it at the time and reserves the right to consider trading multiple accounts under common ownership, control, or influence to be trading out of a single account.
Exchanges made on the same day in the same account are aggregated for purposes of counting the number and dollar amount of exchanges made by the accountholder (e.g., a shareholder who on the same day exchanges $6,000 from one MFS fund into two other MFS funds, by exchanging $3,000 into each of the two MFS funds, will be viewed as having made one exchange transaction exceeding $5,000 in value).
- LIMITATIONS ON THE ABILITY TO DETECT AND CURTAIL FREQUENT TRADING PRACTICES. Shareholders seeking to engage in frequent trading practices may deploy a variety of strategies to avoid detection, and, despite the efforts of MFSC to prevent frequent trading, there is no assurance that MFSC will be able to identify such shareholders or curtail their trading practices. The ability of MFSC to detect and curtail frequent trading practices may also be limited by operational systems and technological limitations.
MFSC receives purchase, exchange, and redemption orders through certain financial intermediaries that hold omnibus accounts with an MFS fund. Omnibus account arrangements are common forms of holding shares of MFS funds, particularly among certain financial intermediaries such as brokers, retirement and 529 plans, investment advisors, and variable insurance products. A financial intermediary's policy restricting frequent trading may be more or less restrictive than the MFS funds' policies, may permit certain transactions not permitted by the MFS funds' policies, or prohibit transactions not subject to the MFS funds' policies.
MFSC is generally not able to identify trading by a particular underlying shareholder within an omnibus account, which makes it difficult or impossible to determine if a particular underlying shareholder has violated the two exchange limit or is otherwise engaged in frequent trading. However, MFSC reviews trading activity at the omnibus level to detect suspicious trading activity. If MFSC detects suspicious trading activity at the omnibus level it will contact the financial intermediary to request underlying shareholder level activity to determine whether there is underlying shareholder level frequent trading. In certain instances, a
financial intermediary may be unwilling or unable to provide MFSC with information about underlying shareholder level activity.
If frequent trading is identified, MFSC will take appropriate action. MFSC's ability to monitor and deter frequent trading in omnibus accounts at the underlying shareholder level is dependent upon the capability and cooperation of the financial intermediary. Accordingly, depending upon the composition of a fund's shareholder accounts, the level of cooperation provided by the financial intermediary and in light of efforts made by certain shareholders to evade these limitations, MFSC may not be in a position to monitor and deter frequent trading with respect to a significant percentage of a fund's shareholders. You should consult your financial intermediary regarding the application of these limitations and whether your financial intermediary imposes any additional or different limitations.
- FREQUENT TRADING RISKS. To the extent that the MFS funds or their agents are unable to curtail excessive trading practices in a fund, these practices may interfere with the efficient management of the fund's portfolio, may result in increased transaction and administrative costs, and may adversely impact the fund's performance.
In addition, to the extent that the fund invests in foreign securities, the interests of long-term shareholders may be diluted as a result of time-zone arbitrage, a short-term trading practice that seeks to exploit changes in the value of the fund's investments that result from events occurring after the close of the foreign markets on which the investments trade, but prior to the time the fund determines its net asset value. The fund's use of fair valuation can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that the fund's fair valuation policies and procedures will prevent dilution of the fund's net asset value by short-term traders.
To the extent that the fund invests in securities that trade infrequently or are difficult to value, such as the securities of smaller companies, high yield debt instruments, and floating rate loans, the interests of long-term shareholders may be diluted as a result of price arbitrage, a short-term trading strategy that seeks to exploit perceived pricing inefficiencies in the fund's investments. Such short-term trading strategies may interfere with efficient management of the fund's portfolio to a greater degree than funds that invest in more frequently traded or liquid securities, in part because the fund may have difficulty selling these portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage may also cause dilution in the value of fund shares held by other shareholders.
UNAUTHORIZED TRANSACTIONS. MFS will not be responsible for losses that result from unauthorized transactions unless MFSC does not follow procedures reasonably designed to verify your identity. If an account has more than one owner or authorized person, MFSC will accept telephone and online instructions from any one owner or authorized person. It is important that you contact MFSC immediately about any transactions you believe to be unauthorized.
ABILITY TO CONTACT MFSC. Certain methods of contacting MFSC, such as by mail, telephone, or electronically, may be unavailable or delayed (for example, after natural disasters or during periods of significant/major political, social, or economic instability).
RESERVATION OF OTHER RIGHTS. In addition to the rights expressly stated elsewhere in this prospectus, MFSC reserves the right to: 1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; and 2) freeze any account or suspend account services when MFSC has received reasonable notice (written or otherwise) of a dispute between registered or beneficial account owners or when MFSC believes a fraudulent transaction may occur or has occurred.
ANTI-MONEY LAUNDERING RESTRICTIONS. Federal law requires the fund to implement policies and procedures reasonably designed to prevent, detect and report money laundering and other illegal activity. The fund, consistent with applicable federal law, may redeem your shares and close your account; suspend, restrict or cancel purchase and redemption orders; process redemption requests and withhold your proceeds; and take other action if it is unable to verify your identity within a reasonable time or conduct required due diligence on your account or as otherwise permitted by its anti-money laundering policies and procedures. Any applicable CDSC will be assessed upon redemption of your shares.
CONFIRMATIONS IN QUARTERLY STATEMENTS. Transactions made under certain periodic investment and withdrawal programs (including reinvestment plans) will be confirmed on quarterly account statements.
OTHER INFORMATION
VALUATION
The price of each class of the fund's shares is based on its net asset value. The net asset value of each class of shares is determined each day the New York Stock Exchange (the Exchange) is open for trading as of the close of regular trading on the Exchange (generally 4:00 p.m. Eastern time). However, net asset value may be calculated earlier as permitted by the SEC. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. On days when the Exchange is closed (such as week-ends and holidays), net asset value is not calculated, and the fund does not transact purchase and redemption orders. To the extent the fund's assets are traded in other markets on days when the fund does not price its shares, the value of the fund's assets may change when you will not be able to purchase or redeem shares.
To determine net asset value, the fund's investments for which reliable market quotations are readily available are valued at market value. Certain short term debt instruments are valued at amortized cost.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund's investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees.
Under the fund's valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. These valuations can be based on both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as a foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net
asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund's net asset value may differ from quoted or published prices for the same investments.
DISTRIBUTIONS
The fund intends to declare and pay a dividend to shareholders at least annually.
Any capital gains are distributed at least annually.
DISTRIBUTION OPTIONS
The following distribution options are generally available:
- Dividend and capital gain distributions reinvested in additional shares (THIS OPTION WILL BE ASSIGNED IF NO OTHER OPTION IS SPECIFIED);
- Dividend distributions in cash; capital gain distributions reinvested in additional shares;
- Dividend and capital gain distributions in cash; or
- Dividend and capital gain distributions reinvested into the same class of shares of another MFS Fund.
The distribution option for accounts with dividend distributions of less than $10 will generally be changed to reinvestment in additional shares of the fund. If you have elected to receive distributions in cash, and the postal service is unable to deliver checks to your address of record, or you do not respond to mailings from MFSC with regard to uncashed distribution checks, your distribution option may be converted to having all distributions reinvested in additional shares. You should contact MFSC to change your distribution option, and your request to do so must be received by MFSC before the record date for a distribution in order to be effective for that distribution. No interest will accrue on amounts represented by uncashed distribution checks.
TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax adviser regarding the effect that an investment in the fund may have on your particular
tax situation, including possible foreign, state, and local taxes. Also, this discussion does not apply to shares of the fund held through tax-exempt retirement plans.
The fund expects to distribute substantially all of its income and gains annually. Distributions from the fund are taxable whether you receive them in cash or reinvest them in additional shares. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Any gain resulting from the sale or exchange of your shares will generally also be subject to tax.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the fund owned the investments that generated them, rather than how long you have owned your shares. Distributions of net capital gains from the sale of investments that the fund owned for more than one year and that are properly designated by the fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the fund owned for one year or less will be taxable as ordinary income. For taxable years beginning before January 1, 2011, if some or all of the fund's income derives from "qualified dividend income" and if you are an individual who meets holding period and other requirements with respect to the fund's shares, those distributions that are properly designated by the fund as derived from "qualified dividend income" are taxed at the rates applicable to long-term capital gains.
Long-term capital gain rates applicable to most individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
The fund's investments in foreign securities may be subject to foreign withholding taxes, which will decrease the fund's return on those securities. The fund generally will be eligible to elect to "pass through" to you foreign income taxes that it pays, in which case you must include your share of those taxes in gross income as a distribution from the fund and you will be allowed to claim a credit (or a deduction, if you itemize deductions) for such amounts on your federal income tax return, subject to certain limitations. In addition, the fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the fund's recognition of ordinary income and may affect the timing, amount, or character of the fund's distributions.
The Form 1099 that is mailed to you every January details your distributions and how they are treated for federal tax purposes.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS AND PROSPECTUSES
The fund produces financial reports every six months and updates its prospectus annually. To avoid sending duplicate copies of materials to households, only one copy of the fund's annual and semiannual report and prospectus will be mailed to
shareholders having the same residential address on the fund's records. However, any shareholder may contact MFSC (please see back cover for address and telephone number) to request that copies of these reports and prospectuses be sent personally to that shareholder.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a fund's financial performance for the past five years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent registered public accounting firm, whose report, together with the fund's financial statements, are included in the fund's Annual Report to shareholders. The fund's Annual Report is available upon request by contacting MFS Service Center, Inc. (please see back cover for address and telephone number). The financial statements contained in the Annual Report are incorporated by reference into the SAI. The fund's independent registered public accounting firm is Ernst & Young LLP.
YEARS ENDED 5/31
-----------------
2007 2006(i)
CLASS W
Net asset value, beginning of period $ 23.86 $25.12
------- ------
Income (loss) from investment operations
Net investment income (d) $ 0.52 $ 0.11
Net realized and unrealized gain (loss) on investments and foreign currency 5.81 (1.37)(g)
------- -------
Total from investment operations $ 6.33 $(1.26)
------- -------
Less distributions declared to shareholders
From net investment income $(0.29) $ --
From net realized gain on investments and foreign currency transactions (1.92) --
------- ------
Total distributions declared to shareholders $(2.21) $ --
------- ------
Net asset value, end of period $ 27.98 $23.86
======= ======
Total return (%) (r)(s) 27.66 (5.02)(n)
------- ------
Ratios (%) (to average net assets) and Supplemental data:
Expenses before expense reductions (f) 1.23 1.38(a)
Expenses after expense reductions (f) 1.23 1.35(a)
Net investment income 2.15 5.01(a)
Portfolio turnover 67 90
Net assets at end of period (000 omitted) $ 999 $ 95
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(a) Annualized.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(g) The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because of the timing of sales of fund shares and the per share amount of realized and unrealized gains and losses at such time.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
MFS INTERNATIONAL GROWTH FUND
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF TRUSTEES. The Board of Trustees of the MFS funds has adopted procedures by which shareholders may send communications to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [fund name], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116-3741, Attention: Frank Tarantino, Independent Chief Compliance Officer of the Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the MFS fund to which they relate and (iii) identify the class and number of shares held by the shareholder.
IF YOU WANT MORE INFORMATION ABOUT MFS INTERNATIONAL GROWTH FUND, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's actual investments. Annual reports discuss the effect of recent market conditions and investment strategies on the fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated October 1, 2007, provides more detailed information about the fund and is incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other information about the fund, and make inquiries about the fund, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: mfs.com
Information about the fund (including its prospectus, SAI and shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 202-942-8090. Reports and other information about the fund are available on the Edgar Database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-4492.
[MFS(R) INVESTMENT MANAGEMENT] STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 2007
MFS INTERNATIONAL GROWTH FUND
A SERIES OF MFS SERIES TRUST X
500 BOYLSTON STREET, BOSTON, MA 02116
This Statement of Additional Information ("SAI") contains additional information about the Fund and should be read in conjunction with the Fund's Prospectus dated October 1, 2007. The Fund's financial statements are incorporated into this SAI by reference to the Fund's most recent Annual Report to shareholders. A copy of the Annual Report accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual Report without charge by contacting the Fund's transfer agent, MFS Service Center, Inc. (please see the back cover of Part II of this SAI for address and telephone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains information that is particular to the Fund, while Part II contains information that generally applies to all of the funds in the MFS Family of Funds (the "MFS Funds"). Each part of this SAI has a variety of appendices which can be found at the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION (SAI) - PART I
Part I of this SAI contains information that is particular to the Fund.
DEFINITIONS 1 MANAGEMENT OF THE FUND 1 SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS 2 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS 3 TAX CONSIDERATIONS 3 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS 3 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS 3 APPENDIX A - TRUSTEE COMPENSATION AND COMMITTEES A-1 APPENDIX B - SHARE OWNERSHIP B-1 APPENDIX C - PORTFOLIO MANAGER(S) C-1 APPENDIX D - CERTAIN SERVICE PROVIDER COMPENSATION D-1 APPENDIX E - SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS E-1 APPENDIX F - PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS F-1 |
DEFINITIONS
"Fund" - MFS International Growth Fund, a series of the Trust, was known as MFS/Foreign & Colonial International Growth Fund prior to September 8, 1997.
"Trust" - MFS Series Trust X, a Massachusetts business trust organized in 1985. The Trust was previously known as MFS Government Mortgage Fund (prior to June 2, 1995), MFS Government Income Plus Fund (prior to March 1, 1993), MFS Government Income Plus Trust (prior to August 3, 1992) and MFS Government Securities High Yield Trust (prior to October 16, 1989).
"MFS" or "Adviser" - Massachusetts Financial Services Company, a Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated October 1, 2007, as amended or supplemented from time to time.
MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. The Trust is an open-end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the Trust are set forth in APPENDIX A to Part II of this SAI.
TRUSTEE COMPENSATION AND COMMITTEES
Compensation paid to the non-interested Trustees for certain specified periods, as well as information regarding committees of the Board of Trustees, is set forth in APPENDIX A to this Part I.
SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and officers of the Trust as a group, as well as the dollar value range of each Trustee's share ownership in the Fund and, on an aggregate basis, in all MFS Funds overseen by the Trustee, by investors who are deemed to "control" the Fund, if any, and by investors who own 5% or more of any class of Fund shares, if any, is set forth in APPENDIX B to this Part I.
Part I-1
PORTFOLIO MANAGER(S)
Information regarding the Fund's portfolio manager(s), including other accounts managed, compensation, ownership of Fund shares, and possible conflicts of interest, is set forth in APPENDIX C to this Part I.
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to certain of its service providers for advisory services, administrative services, and transfer agency services, for certain specified periods, are set forth in APPENDIX D to this Part I.
CUSTODIAN
State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, serves as the custodian of the assets of the fund (the "Custodian"). The Custodian is responsible for safekeeping and controlling the fund's cash and securities, handling the receipt and delivery of securities, collecting interest and dividends on the fund's investments, serving as the fund's foreign custody manager, providing reports on foreign securities depositaries, maintaining books of original entry and other required books and accounts for the fund, and calculating the daily net asset value of each class of shares of the fund. The fund may invest in securities of the Custodian and may deal with the Custodian as principal in securities transactions.
The fund has an expense offset arrangement that reduces the fund's custodian fees based upon the amount of cash maintained by the fund with its custodian.
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid for certain specified periods in connection with the purchase and sale of the Fund's shares are set forth in APPENDIX E to this Part I.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Fund's plan in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Distribution Plan"), for the Fund's most recent fiscal year, are set forth in APPENDIX E to this Part I.
Part I-2
INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS
INVESTMENT STRATEGIES AND RISKS
Certain investment strategies and risks are described in APPENDIX E to Part II of this SAI.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which are described in APPENDIX F of Part II of this SAI.
TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, information concerning purchases by the Fund of securities issued by its regular broker/dealers for its most recent fiscal year, and information concerning the amount of transactions and related commissions to broker/dealer firms that MFS has determined provide valuable research for the Fund's most recent fiscal year, are set forth in APPENDIX F to this Part I. Portfolio transactions and brokerage commissions are more fully described in Part II of this SAI under the heading "Portfolio Transactions and Brokerage Commissions."
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS
Ernst & Young LLP is the Independent Registered Public Accounting Firm, providing audit services, tax return review, and other related services and assistance in connection with the review of various Securities and Exchange Commission filings.
The Fund's Financial Statements and Financial Highlights for the fiscal year ended May 31, 2007, are incorporated by reference into this SAI from the Fund's Annual Report to shareholders and have been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon reports of such firm, given upon their authority as experts in accounting and auditing. A copy of the Fund's Annual Report accompanies this SAI.
Part I-3
PART I - APPENDIX A
TRUSTEE COMPENSATION AND COMMITTEES
The Fund pays the non-interested Trustees an annual fee plus a fee for each meeting attended. In addition, the non-interested Trustees are reimbursed for their out-of-pocket expenses.
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFITS TOTAL FEES FROM FUND
ACCRUED AS AND FUND
NAME AND POSITION FEES FROM FUND(1) PART OF FUND EXPENSE COMPLEX(2)
-----------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning N/A N/A N/A
Robert C. Pozen N/A N/A N/A
NON-INTERESTED TRUSTEES
Robert E. Butler $1,279 N/A $210,289
Lawrence H. Cohn, M.D $1,279 $ 0 $208,289
David H. Gunning $1,350 N/A $219,642
William R. Gutow $1,279 N/A $208,289
Michael Hegarty $1,279 N/A $209,289
J. Atwood Ives $1,732 $792 $285,289
Lawrence T. Perera $1,449 $869 $228,289
J. Dale Sherratt $1,520 $ 0 $250,289
Laurie J. Thomsen $1,357 N/A $209,289
Robert W. Uek $1,414 N/A $227,789
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(1) For the fiscal year ended May 31, 2007.
(2) Information provided is for calendar year 2006. Each Trustee receiving compensation served as Trustee of 97 funds within the MFS Fund complex (having aggregate net assets at December 31, 2006, of approximately $102 billion).
Retirement Benefit Deferral Plan-- Under a Retirement Benefit Deferral Plan, certain Trustees have deferred benefits from a prior retirement plan. The value of the benefits is periodically readjusted as though the Trustee had invested an equivalent amount in Class A shares of the Fund(s) designated by such Trustee. The value of the deferred benefits will be paid to the Trustees upon retirement or thereafter. The plan does not obligate a Fund to retain the services of any Trustee or pay any particular level of compensation to any Trustee. The plan is not funded and a Fund's obligation to pay the Trustee's deferred compensation is a general unsecured obligation.
Part I-A-1
COMMITTEES
The Board has established the following Committees:
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
AUDIT COMMITTEE 8 Oversees the accounting and auditing procedures of the Butler*, Gutow*, Sherratt*,
Fund and, among other duties, considers the selection of Thomsen*, and Uek*
the independent accountants for the Fund and the scope
of the audit, and considers the effect on the
independence of those accountants of any non-audit
services such accountants provide to the Fund and any
audit or non-audit services such accountants provide to
other MFS Funds, MFS and/or certain affiliates. The
Committee is also responsible for establishing
procedures for the receipt, retention, and treatment of
complaints received by the Fund regarding accounting,
internal accounting controls, or auditing matters and
the confidential, anonymous submission of concerns
regarding questionable fund accounting matters by
officers of the Fund and employees of the Fund's
investment adviser, administrator, principal
underwriter, or any other provider of accounting-related
services to the Fund.
COMPLIANCE AND 8 Oversees the development and implementation of the Butler*, Cohn*, Gunning*, Gutow*,
GOVERNANCE Fund's regulatory and fiduciary compliance policies, and Sherratt*
COMMITTEE procedures, and practices under the 1940 Act, and other
applicable laws, as well as oversight of compliance
policies of the Fund's investment adviser and certain
other service providers as they relate to Fund
activities. The
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Part I-A-2
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
Fund's Independent Chief Compliance Officer reports
directly to the Committee and assists the Committee in
carrying out its responsibilities. In addition, the
Committee advises and makes recommendations to the Board
on matters concerning Trustee practices and
recommendations concerning the functions and duties of
the committees of the Board.
CONTRACTS 5 Requests, reviews, and considers the information deemed All non-interested Trustees of the
REVIEW reasonably necessary to evaluate the terms of the Board (Butler, Cohn, Gunning,
COMMITTEE investment advisory and principal underwriting Gutow, Hegarty, Ives, Perera,
agreements and the Plan of Distribution under Rule 12b-1 Sherratt, Thomsen, and Uek)
that the Fund proposes to renew or continue, and to make
its recommendations to the full Board of Trustees on
these matters.
NOMINATION AND 1 Recommends qualified candidates to the Board in the All non-interested Trustees of the
COMPENSATION event that a position is vacated or created. The Board (Butler, Cohn, Gunning,
COMMITTEE Committee will consider recommendations by shareholders Gutow, Hegarty, Ives, Perera,
when a vacancy exists. Shareholders wishing to recommend Sherratt, Thomsen, and Uek)
candidates for Trustee for consideration by the
Committee may do so by writing to the Fund's Secretary
at the principal executive office of the Fund. Such
recommendations must be accompanied by biographical and
occupational data on the candidate (including whether
the candidate would be an "interested person" of the
Fund), a written consent by the candidate to be named as
a nominee and to serve as Trustee if elected, record and
ownership
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Part I-A-3
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
information for the recommending shareholder with
respect to the Fund, and a description of any
arrangements or understandings regarding recommendation
of the candidate for consideration. The Committee is
also responsible for making recommendations to the Board
regarding any necessary standards or qualifications for
service on the Board. The Committee also reviews and
makes recommendations to the Board regarding
compensation for the non-interested Trustees.
PORTFOLIO 8 Oversees the policies, procedures, and practices of the Cohn*, Gunning*, Hegarty*,
TRADING AND Fund with respect to brokerage transactions involving and Perera
MARKET REVIEW portfolio securities as those policies, procedures, and
COMMITTEE practices are carried out by MFS and its affiliates. The
Committee also oversees the administration of the Fund's
proxy voting policies and procedures by MFS. In
addition, the Committee receives reports from MFS
regarding the policies, procedures, and practices of MFS
and its affiliates in connection with their marketing
and distribution of shares of the Fund.
PRICING 8 Oversees the determination of the value of the portfolio Hegarty*, Perera*, Thomsen*,
COMMITTEE securities and other assets held by the Fund and and Uek*
determines or causes to be determined the fair value of
securities and assets for which market quotations are
not "readily available" in accordance with the 1940 Act.
The Committee delegates primary responsibility for
carrying out these functions to MFS and
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Part I-A-4
NUMBER OF
NAME OF MEETINGS IN CURRENT
COMMITTEE LAST FISCAL YEAR FUNCTIONS MEMBERS(1)
----------------------------------------------------------------------------------------------------------------------------------
MFS' internal valuation committee pursuant to pricing
policies and procedures approved by the Committee and
adopted by the full Board. These policies include
methodologies to be followed by MFS in determining the
fair values of portfolio securities and other assets
held by the Fund for which market quotations are not
readily available. The Committee meets periodically with
the members of MFS' internal valuation committee to
review and assess the quality of fair valuation and
other pricing determinations made pursuant to the Fund's
pricing policies and procedures, and to review and
assess the policies and procedures themselves. The
Committee also exercises the responsibilities of the
Board under the Amortized Cost Valuation Procedures
approved by the Board on behalf of each Fund which holds
itself out as a "money market fund" in accordance with
Rule 2a-7 under the 1940 Act.
SERVICES 8 Reviews and evaluates the contractual arrangements of Gunning*, Sherratt*, Thomsen*,
CONTRACTS the Fund relating to transfer agency, administrative and Uek*
COMMITTEE services, custody, pricing and bookkeeping services, and
lending of portfolio securities, and makes
recommendations to the full Board of Trustees on these
matters.
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(1) The Trustees' identification and background are set forth in Appendix A to
Part II.
* Non-Interested or independent Trustees. Although Mr. Ives is not a member of all Committees of the Board, he is invited to and attends many of the committees' meetings in his capacity as Chair of the Trustees.
Part I-A-5
PART I - APPENDIX B
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of August 31, 2007, the current Trustees and officers of the Trust as a group owned less than 1% of any class of the Fund's shares. The following table shows the dollar range of equity securities beneficially owned by each current Trustee in the Fund and, on an aggregate basis, in all MFS Funds overseen by each current Trustee, as of December 31, 2006.
The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. Over $100,000
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE OF EQUITY EQUITY SECURITIES IN ALL MFS
NAME OF TRUSTEE SECURITIES IN THE FUND FUNDS OVERSEEN BY TRUSTEES
-------------------------------------------------------------------------------
INTERESTED TRUSTEES
Robert J. Manning D D
Robert C. Pozen N D
NON-INTERESTED TRUSTEES
Robert E. Butler N D
Lawrence H. Cohn, M.D N D
David H. Gunning N D
William R. Gutow N D
Michael Hegarty N D
J. Atwood Ives N D
Lawrence T. Perera A D
J. Dale Sherratt C D
Laurie J. Thomsen N D
Robert W. Uek N D
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25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the Fund's shares (all share classes taken together) as of August 31, 2007, and are therefore presumed to control the Fund. All holdings are of record unless otherwise indicated.
Part I-B-1
JURISDICTION OF
NAME AND ADDRESS OF ORGANIZATION (IF A PERCENTAGE INVESTOR COMPANY) OWNERSHIP ------------------------------------------------------------------------ MFS International Diversification Fund Massachusetts 52.99% 500 Boylston Street Boston, MA 02116-3740 |
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any class of a Fund's shares as of August 31, 2007. All holdings are of record unless otherwise indicated.
NAME AND ADDRESS OF INVESTOR PERCENTAGE OWNERSHIP ------------------------------------------------------------------ Merrill Lynch Pierce Fenner & Smith Inc 11.39% of Class A Shares For the Sole Benefit of its Customers 38.68% of Class C Shares 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 Charles Schwab & Co Inc 8.02% of Class A Shares FBO Clearing Customers 101 Montgomery Street San Francisco, CA 94104-4151 Wells Fargo Bank, NA TTEE 5.29% of Class A Shares City of Houston Deferred Comp Plan c/o Fascorp 8515 East Orchard Rd # 2T2 Greenwood Vlg, CO 80111-5002 Citigroup Global Markets Inc 8.79% of Class C Shares 333 W 34th Street New York, New York 10001-2402 MFS International Diversification Fund 83.34% of Class I Shares 500 Boylston Street Boston, MA 02116 MFS Investment Management 6.81% of Class W Shares c/o Thomas B. Hastings 500 Boylston Street Boston, MA 02116 |
Part I-B-2
PART I - APPENDIX C
PORTFOLIO MANAGER(S)
COMPENSATION
Portfolio manager total cash compensation is a combination of base salary and performance bonus:
BASE SALARY - Base salary represents a smaller percentage of portfolio manager total cash compensation (generally below 33%) than incentive compensation.
PERFORMANCE BONUS - Generally, incentive compensation represents a majority of portfolio manager total cash compensation.
The performance bonus is based on a combination of quantitative and qualitative factors, with more weight given to the former (generally over 60%) and less weight given to the latter.
The quantitative portion is based on pre-tax performance of all of the accounts managed by the portfolio manager (which includes the Fund and any other accounts managed by the portfolio manager) over a one-, three-, and five-year period relative to the appropriate Lipper peer group universe and/or one or more benchmark indices with respect to each account. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one- and five-year periods (adjusted as appropriate if the portfolio manager has served for shorter periods).
The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts, and traders) and management's assessment of overall portfolio manager contributions to investor relations and the investment process (distinct from fund and other account performance).
Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors.
Finally, portfolio managers are provided with a benefits package including a defined contribution plan, health coverage and other insurance, which are available to other employees of MFS on substantially similar terms. The percentage such benefits represent of any portfolio manager's compensation depends upon the length of the individual's tenure at MFS and salary level, as well as other factors.
Part I-C-1
OWNERSHIP OF FUND SHARES
The following table shows the dollar range of equity securities of the Fund beneficially owned by the Fund's portfolio manager(s) as of the Fund's fiscal year ended May 31, 2007. The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
Barry Dargan D
OTHER ACCOUNTS
In addition to the Fund, the Fund's portfolio manager is responsible (either individually or jointly) for the day-to-day management of certain other accounts, the number and total assets of which, as of the Fund's fiscal year ended May 31, 2007, were as follows:
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
NAME COMPANIES* VEHICLES OTHER ACCOUNTS
------------------------------------------------------------------------------------------------
NUMBER OF TOTAL NUMBER OF TOTAL NUMBER OF TOTAL
ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS ASSETS
------------------------------------------------------------------------------------------------
Barry Dargan 5 $2.1 billion 2 $162.0 million 3 $62.0 million
|
* Includes the Fund.
Advisory fees are not based upon performance of any of the accounts identified in the table above.
POTENTIAL CONFLICTS OF INTEREST
The Adviser seeks to identify potential conflicts of interest resulting from a portfolio manager's management of both the Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts.
The management of multiple funds and accounts (including proprietary accounts) may give rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there may be securities which are suitable for the Fund's portfolio as well as for accounts of the Adviser or its subsidiaries with similar investment objectives. A Fund's trade allocation policies may give rise to conflicts of interest if the Fund's orders do not get fully executed
Part I-C-2
or are delayed in getting executed due to being aggregated with those of other accounts of the Adviser or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely impact the value of the Fund's investments. Investments selected for funds or accounts other than the Fund may outperform investments selected for the Fund.
When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and 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 most cases, however, the Adviser believes that the Fund's ability to participate in volume transactions will produce better executions for the Fund.
The Adviser does not receive a performance fee for its management of the Fund. As a result, the Adviser and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund - for instance, those that pay a higher advisory fee and/or have a performance fee.
Part I-C-3
PART I - APPENDIX D
CERTAIN SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund for advisory services, administrative services, and transfer agency services, over the specified periods are set forth below. For information regarding sales charges and distribution payments paid to MFD, see APPENDIX E to this Part I.
AMOUNT AMOUNT AMOUNT
PAID TO MFS WAIVED PAID TO MFS FOR AMOUNT
FOR ADVISORY BY MFS FOR GENERAL PAID TO MFSC
FISCAL YEAR SERVICES AFTER ADVISORY ADMINISTRATIVE FOR TRANSFER
ENDED WAIVERS SERVICES SERVICES AGENCY SERVICES(1)
---------------------------------------------------------------------------------
May 31, 2007 $7,351,573 N/A $134,337 $945,264
May 31, 2006 $4,020,552 N/A $ 63,572 N/A
May 31, 2005 $1,456,586 N/A $ 16,367 N/A
|
(1) Amount paid to MFSC for transfer agency services includes: a) reimbursements for certain out-of-pocket expenses and payments made under agreements with affiliated and unaffiliated entities that provide subaccounting services; and b) payments made pursuant to the Special Servicing Agreement for transfer agent related expenses of Fund-of Funds investing in the Fund. In addition to the fees disclosed, the Fund also paid directly $62,692 for transfer agent related services for the fiscal year ended May 31, 2007.
Part I-D-1
PART I - APPENDIX E
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
------------------------------------------------------------------------------------
REALLOWED TO
RETAINED FINANCIAL CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD INTERMEDIARIES SHARES SHARES SHARES
------------------------------------------------------------------------------------
May 31, 2007 $282,979 $36,259 $246,720 $1,639 $52,206 $5,474
May 31, 2006 $338,190 $45,665 $292,525 $4,135 $58,262 $5,377
May 31, 2005 $368,560 $50,569 $317,991 $4,396 $47,706 $1,763
|
DISTRIBUTION PLAN PAYMENTS
During the fiscal year ended May 31, 2007, the Fund made the following Distribution Plan payments:
PAID TO FINANCIAL
CLASS OF SHARES PAID BY FUND RETAINED BY MFD INTERMEDIARIES(1)
--------------------------------------------------------------------
Class A Shares $875,405 $301,226 $574,179
Class B Shares $506,929 $369,758 $137,171
Class C Shares $359,192 $ 87,299 $271,893
Class I Shares N/A N/A N/A
Class W Shares $ 254 $ 254 $ 0
|
(1) May include amounts paid to financial intermediaries affiliated with MFD.
Amounts retained by MFD may represent fees paid to MFD but not yet paid to intermediaries as of the close of the period, compensation to MFD for commissions advanced by MFD to financial intermediaries upon sale of Fund shares, and/or compensation for MFD's distribution and servicing costs.
Part I-E-1
PART I - APPENDIX F
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
The following brokerage commissions were paid by the Fund during the specified time periods:
FISCAL YEAR END BROKERAGE COMMISSIONS PAID BY FUND* ----------------------------------------------------- May 31, 2007 $2,013,352 May 31, 2006 $1,601,017 May 31, 2005 $ 588,697 |
* The increase in brokerage commissions paid by the Fund over the preceding two fiscal years was due to a corresponding increase in Fund assets from May 31, 2005 to May 31, 2007.
SECURITIES ISSUED BY REGULAR BROKER/DEALERS
During the fiscal year ended May 31, 2007, the Fund purchased securities issued by the following regular broker/dealers of the Fund, which had the following values as of May 31, 2007:
BROKER/DEALER VALUE OF SECURITIES ------------------------------------------------ UBS AG $22,188,496 Merrill Lynch & Co., Inc. $17,086,000 Societe Generale $ 8,040,685 |
TRANSACTIONS WITH RESEARCH FIRMS
During the fiscal year ended May 31, 2007, the Fund allocated the following amount of transactions, and related commissions, to broker/dealer firms that have been deemed by MFS to provide valuable Research ("Research Firms"). The provision of Research was not necessarily a factor in the placement of this business with such Research Firms. (1)
DOLLAR AMOUNT OF TRANSACTIONS WITH COMMISSIONS PAID ON TRANSACTIONS WITH RESEARCH FIRMS RESEARCH FIRMS -------------------------------------------------------------------------- $824,042,944 $1,597,450 |
(1) The amounts shown do not include transactions directed to electronic communication networks (ECNs) owned by the Research Firms.
Part I-F-1
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI, updated through July 1, 2007, as amended or supplemented from time to time, describes policies and practices that apply to the Funds in the MFS Family of Funds. References in this Part II to a "Fund" mean each Fund in the MFS Family of Funds, unless noted otherwise. References in this Part II to a "Trust" mean the Massachusetts business trust of which the Fund is a series, or, if the Fund is itself a Massachusetts business trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
DEFINITIONS ............................................................. 3 MANAGEMENT OF THE FUND .................................................. 3 SALES CHARGE WAIVERS .................................................... 10 DISTRIBUTION PLAN ....................................................... 10 FINANCIAL INTERMEDIARY COMPENSATION ..................................... 13 INVESTMENT STRATEGIES, RISKS, AND RESTRICTIONS .......................... 13 NET INCOME AND DISTRIBUTIONS ............................................ 13 TAX CONSIDERATIONS ...................................................... 14 PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS ........................ 27 DISCLOSURE OF PORTFOLIO HOLDINGS ........................................ 31 DETERMINATION OF NET ASSET VALUE ........................................ 35 SHAREHOLDER SERVICES .................................................... 37 DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES .................... 40 APPENDIX A - TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND ...... 42 APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES ....................... 51 APPENDIX C - WAIVERS OF SALES CHARGES ................................... 75 APPENDIX D - FINANCIAL INTERMEDIARY COMPENSATION ........................ 91 APPENDIX E - INVESTMENT STRATEGIES AND RISKS ............................ 102 APPENDIX F - INVESTMENT RESTRICTIONS .................................... 137 APPENDIX G - RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS ........................................................ 141 APPENDIX H - DESCRIPTION OF BOND RATINGS ................................ 143 |
I. DEFINITIONS
"Alliance Plans" - include retirement plans with respect to which MFS (or one of its affiliates) has entered into an administrative arrangement with a third party to provide certain recordkeeping and/or administrative services.
"Financial intermediary" - includes any broker, dealer, bank (including bank trust departments), registered investment adviser, financial planner, retirement plan administrator, third-party administration, and any other institutions having a selling, administration or other similar agreement with MFD, MFS or one of its affiliates.
"Majority Shareholder Vote" - as defined currently in the 1940 Act to be the lesser of (i) 67% or more of the voting securities present at a meeting at which holders of voting securities representing more than 50% of the outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities.
"Serviced Plans" - include retirement plans for which MFS or one of its affiliates is responsible for providing participant recordkeeping services.
"1940 Act"- the Investment Company Act of 1940 and the rules and regulations thereunder, as amended from time to time, and as such Act, rules or regulations are interpreted by the Securities and Exchange Commission.
II. MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
Board Oversight -- The Board of Trustees which oversees the Fund provides broad supervision over the business and operations of the Fund.
Trustees and Officers -- Identification and Background -- The identification and background of the Trustees and Officers of the Trust are set forth in Appendix A of this Part II.
INVESTMENT ADVISER
MFS provides the Fund with investment advisory services. MFS and its predecessor organizations have a history of money management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc., which in turn is an indirect majority-owned subsidiary of Sun Life Financial Inc. (a diversified financial services company).
Unless otherwise noted, MFS votes proxies on behalf of the Funds pursuant to the proxy voting policies described in Appendix B to this SAI Part II (except for the MFS Union Standard Equity Fund, for which Institutional Shareholders Services, Inc., votes proxies as described in Appendix B to this SAI Part II). Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, 2006 is available without charge by visiting MFS.COM and clicking on "Proxy Voting" and by visiting the SEC's Web site at http://www.sec.gov. Prior to January 1, 2007, JMR/Financial, Inc., voted proxies on behalf of MFS Union Standard Equity Fund.
INVESTMENT SUB-ADVISERS - MFS has engaged Sun Capital Advisers LLC (referred to as Sun Capital) to act as sub-adviser with respect to the real estate related portion of the MFS Diversified Income Fund's portfolio. Sun Capital is located at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Sun Capital is an indirect wholly-owned subsidiary of Sun Life Financial Inc. ("Sun Life Financial"), a corporation organized in Canada as well as an affiliate of MFS. Sun Life Financial and its affiliates currently transact business in Canada, the United States and Asia Pacific region. Sun Life Financial is a reporting company under the Securities Exchange Act of 1934 with common shares listed on the Toronto, New York, and Philippine stock exchanges. Sun Life Financial Inc. is located at 150 King Street West, Toronto, Canada, M5H 1J9.
Sun Capital is a Delaware limited liability company and a registered investment adviser. Sun Capital provides investment management and supervisory services to mutual funds and institutional accounts.
MFS has engaged Valley Forge Capital Advisors, Inc. (referred to as Valley Forge), to act as sub-adviser with respect to the MFS Sector Rotational Fund's portfolio. Valley Forge is located at 83 General Warren Boulevard, Suite 200, Malvern, Pennsylvania 19355. Valley Forge is 56% owned by George M. Mara and 20% owned by Maryanne P. Mara.
Valley Forge is a Delaware corporation and a registered investment adviser. Valley Forge provides investment management and supervisory services to mutual funds, high net worth individuals and institutional accounts.
Unless otherwise noted, all references to "sub-adviser" shall include Sun Capital with respect to that portion of the Diversified Income Fund for which Sun Capital provides day-to-day investment advisory services and Valley Forge for MFS Sector Rotational Fund.
INVESTMENT ADVISORY AGREEMENT -- MFS manages the Fund pursuant to an Investment Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, MFS provides the Fund with investment advisory services. Subject to such policies as the Trustees may determine, MFS makes investment decisions for the Fund. For these services, MFS receives an annual investment advisory fee, computed and paid monthly, as disclosed in the Prospectus under the heading "Management of the Fund(s)."
MFS pays the compensation of the Trust's officers and of any Trustee who is an employee of MFS. MFS also furnishes at its own expense investment advisory and administrative services, office space, equipment, clerical personnel, investment advisory facilities, and executive and supervisory personnel necessary for managing the Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are "not affiliated" with MFS and all expenses of the Fund incurred in its operation and offering of shares (other than those assumed by MFS in writing) including but not limited to: management fees; Rule 12b-1 fees; administrative services fees; retirement plan administration services fees; program management services fees; governmental fees; interest charges; taxes; membership dues in the Investment Company Institute allocable to the Fund; fees and expenses of independent auditors, of legal counsel, and of any transfer agent, registrar, or dividend disbursing agent of the Fund; expenses of repurchasing and redeeming shares and servicing shareholder accounts; expenses of preparing, printing and mailing stock certificates, shareholder reports, notices, proxy statements, confirmations, periodic investment 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; organizational and start up costs; and such non-recurring or extraordinary expenses as may arise, including those relating to actions, suits, or proceedings to which the Fund is a party or otherwise may have an exposure, and the legal obligation which the Fund may have to indemnify the Trust's Trustees and officers with respect thereto. 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 to the extent that the Distribution Agreement with MFS Fund Distributors, Inc. ("MFD"), provides that MFD is to pay all of such expenses. Expenses of the Trust which are not attributable to a specific series are allocated between the series in a manner believed by management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two-year term and continues in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by Majority Shareholder Vote and, in either case, by a majority of the Trustees who are not "interested persons" of the Fund or MFS as defined by the 1940 Act. The Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a Majority Shareholder Vote, or by either party on not more than 60 days' nor less than 30 days' written notice. The Advisory Agreement may be approved, renewed, amended, or terminated as to one Fund in the Trust, even though the Agreement is not approved, renewed, amended, or terminated as to any other Fund in the Trust.
The Advisory Agreement also provides that neither MFS 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, gross negligence, or reckless disregard of its or their duties and obligations under the Advisory Agreement.
SUB-ADVISORY AGREEMENTS - Sun Capital serves as the MFS Diversified Income Fund's Sub-Adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Sun Capital (the "Sun Capital Sub-Advisory Agreement"). The Sun Capital Sub-Advisory Agreement provides that the Adviser delegate to Sun Capital the authority to make investment decisions for a portion of the MFS Diversified Income Fund (for the purposes of this paragraph, the "Fund"). Sun Capital will provide portfolio management services for the Fund for the portion of the portfolio invested in REITs ("real estate investment trust") and other real estate related investments. For these services, the Adviser pays Sun Capital an investment advisory fee, computed daily and paid monthly in arrears, at the annual rate of 0.30% of the Fund's average daily net assets managed by Sun Capital. The Sun Capital Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by a majority of the Independent Trustees. The Sun Capital Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by a majority of the Independent Trustees, by a Majority Shareholder Vote, or by the Adviser or Sub-Adviser on not less than 60 days' written notice. The Sun Capital Sub-Advisory Agreement specifically provides that neither the Sub-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 misconduct, bad faith, reckless disregard, or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under the Sun Capital Sub-Advisory Agreement.
Valley Forge serves as the MFS Sector Rotational Fund's sub-adviser pursuant to a Sub-Investment Advisory Agreement between the Adviser and Valley Forge (for purposes of this paragraph, the "Valley Forge Sub-Advisory Agreement"). The Valley Forge Sub-Advisory Agreement provides that the Adviser delegate to Valley Forge the authority to make investment decisions for the MFS Sector Rotational Fund (for the purposes of this paragraph, the "Fund"). For these services, the Adviser pays Valley Forge an investment advisory fee, computed and paid quarterly in arrears, in an amount equal to 0.35% annually of the first $1 billion of the fund's average daily net assets; 0.30% annually of the fund's average daily net assets in excess of $1 billion and up to $2.5 billion; 0.25% annually of the fund's average daily nets assets in excess of $2.5 billion and up to $5 billion; and 0.20% annually of the fund's average daily net assets in excess of $5 billion. The Valley Forge Sub-Advisory Agreement will continue in effect after its initial two year period provided that such continuance is specifically approved at least annually by the Board of Trustees or by the vote of a majority of the Fund's outstanding voting securities, and, in either case, by a majority of the Trustees who are not parties to the Valley Forge Sub-Advisory Agreement or interested persons of any such party. The Valley Forge Sub-Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by the Trustees, by vote of a majority of the Fund's outstanding voting securities, or by the Adviser or Valley Forge on not less than 60 days' written notice. The Valley Forge Sub-Advisory Agreement specifically provides that neither Valley Forge 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 duties or by reason of reckless disregard of its obligations and duties under the Valley Forge Sub-Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal and other administrative services under a Master Administrative Services Agreement between the Fund and MFS. Under the Agreement, the fund pays an annual fee to MFS for providing these services.
Effective August 1, 2006, the maximum annual fee payable by each Fund is $17,500 plus an amount equal to the following percentage of the Fund's average daily net assets (except for Funds investing primarily in shares of MFS Funds):
------------------------------------------------------------------- On the first $50,000,000 in assets 0.0000% ------------------------------------------------------------------- $50,000,000 - $750,000,000 in assets 0.0175% ------------------------------------------------------------------- $750,000,000 - $1,500,000,000 in assets 0.0170% ------------------------------------------------------------------- $1,500,000,000 - $2,500,000,000 in assets 0.0165% ------------------------------------------------------------------- $2,500,000,000 - $4,000,000,000 in assets 0.0120% ------------------------------------------------------------------- Over $4,000,000,000 0.0000% ------------------------------------------------------------------- |
The fees are subject to minimum and maximum fees, based on the asset level of the MFS Funds.
In addition, MFS provides, either directly or through affiliated and/or unaffiliated entities, certain administrative, recordkeeping, and communication/educational services to the retirement plans and retirement plan participants which invest in Class R1, Class R2, Class R3, Class R4 and Class R5 shares under a Master Class R Administration and Services Agreement. Under the Agreement, the Fund pays an annual fee to MFS for these services at the following percentages of the average daily net assets attributable to that class of shares: 0.35% for Class R1; 0.25% for Class R2; 0.15% for Class R3; 0.15% for Class R4; and 0.10% for Class R5 shares.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, provides transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the Fund under a Shareholder Servicing Agent Agreement. Under the Agreement, MFSC may receive a fee based on the costs it incurs in providing these services, plus a target profit margin. MFSC may also contract with other affiliated and unaffiliated service providers to provide some or all of the services described above. State Street Bank and Trust Company, with a place of business at 225 Franklin St., Boston, MA 02110, performs dividend disbursing agent functions for the Fund.
MFSC may receive a fee from the Fund designed to achieve a target pre-tax annual profit margin. Taking into account this goal, effective April 1, 2007, the Fund (except Funds investing primarily in other MFS Funds) pays MFSC a fee based on its average daily net assets equal to 0.048%. Such fee rate shall continue until modified by agreement between the Fund and MFSC, taking into account MFSC's pre-tax profit margin target.
In addition, MFSC is reimbursed by the Fund for certain expenses incurred by MFSC on behalf of the Fund. These reimbursements include payments for certain out-of-pocket expenses, such as costs related to mailing shareholder statements and the use of third party recordkeeping systems, incurred by MFSC in performing the services described above. MFSC is also reimbursed for payments made under agreements with affiliated and unaffiliated service providers that provide sub-accounting and other shareholder services, including without limitation recordkeeping, reporting and transaction processing services. Payments made under these agreements are based on the Fund's average daily net assets and/or the Fund accounts serviced by the service provider.
SPECIAL SERVICING AGREEMENT
Under a Special Servicing Agreement among MFS, each MFS Fund which invests in other MFS Funds ("MFS fund-of-funds") and each underlying fund in which an MFS fund-of-funds invests ("underlying funds"), the underlying fund may pay a portion of each MFS fund-of-fund's transfer agent-related expenses, including sub-accounting fees payable to financial intermediaries, to the extent such payments are less than the amount of the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the MFS fund-of-funds.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD" or the "Distributor"), a wholly owned subsidiary of MFS, serves as distributor for the continuous offering of shares of the Fund pursuant to a Distribution Agreement. The Agreement obligates MFD to use best efforts to find purchasers for shares of the Fund.
See Appendix D to this Part II for information regarding sales charges and Rule 12b-1 distribution and service payments paid to MFD.
PROGRAM MANAGER(S)
MFD serves as program manager for a qualified tuition program under Section 529 of the Internal Revenue Code through which 529 share classes are available as investment options to program participants. The Fund's 529 share classes may also be offered through qualified tuition programs for which MFD does not serve as program manager. MFD provides, either directly or through third parties, recordkeeping, tax reporting, and account services, as well as services designed to maintain the programs' compliance with the Internal Revenue Code and other regulatory requirements under a Master 529 Administrative Services Agreement.
Under the Agreement, the Fund pays MFD a fee for these services of up to 0.35% annually of the assets attributable to the 529 share classes. The current annual fee has been established at 0.25% of the average daily net assets attributable to each 529 share class up to $10 billion in assets, 0.225% from $10 billion in assets up to $20 billion in assets, and 0.20% from $20 billion in assets and above. The fee may only be increased with the approval of the Fund's Board of Trustees. MFD pays a portion of this fee to third parties who provide these services.
Please consult the program description for your particular qualified tuition program for a discussion of the fees paid to and services received from the program manager.
CODE OF ETHICS
The Fund, its Adviser, its sub-adviser (if applicable) and Distributor have adopted separate codes of ethics as required under the Investment Company Act of 1940 ("the 1940 Act"). Subject to certain conditions and restrictions, each code permits personnel subject to the code to invest in securities for their own accounts, including securities that may be purchased, held or sold by the Fund. Securities transactions by some of these persons may be subject to prior approval of the Adviser's or sub-adviser's Compliance Departments, and securities transactions of certain personnel are subject to quarterly reporting and review requirements.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge paid to MFD and imposed upon
purchases of Class A, Class A1, and Class 529A shares, and the CDSC paid to MFD
and imposed upon redemptions of Class A, Class A1, Class B, Class B1, Class C,
Class 529B, and Class 529C shares, are waived. These circumstances are described
in Appendix C of this Part II. The Fund, MFS, and their affiliates reserve the
right to eliminate, modify, and add waivers at any time in their discretion.
DISTRIBUTION PLAN
The Trustees have approved a plan for all funds (except the MFS Money Market
Fund and the MFS Government Money Market Fund) in accordance with Rule 12b-1
under the 1940 Act for Class A, Class B, Class B1, Class C, Class 529A, Class
529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, Class W and
Class J shares (the "Distribution Plan"). The Fund has not adopted a
Distribution Plan with respect to its Class A1, Class I or Class R5 shares. In
approving the Distribution Plan, the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust as defined in the 1940
Act and have no direct or indirect financial interest in the operation of the
Distribution Plan or any agreements relating to the Distribution Plan
("Distribution Plan Qualified Trustees"), concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders.
The Distribution Plan is designed to promote sales of shares and minimize redemptions, as well as to assist in the servicing and maintenance of shareholder accounts. Increasing a Fund's net assets through sales of shares, or minimizing reductions in net assets by minimizing redemptions, may help reduce a Fund's expense ratio by spreading the Fund's fixed costs over a larger base and may reduce the potential adverse effect of selling a Fund's portfolio securities to meet redemptions. There is, however, no assurance that the net assets of the Fund will increase or not be reduced, or that other benefits will be realized as a result of the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its continuance is specifically approved at least annually by vote of both the Trustees and a majority of the Distribution Plan Qualified Trustees. The Distribution Plan also requires that the Fund and MFD each provide the Trustees, and that the Trustees review, at least quarterly, a written report of the amounts expended (and purposes therefor) under the Distribution Plan. The Distribution Plan may be terminated at any time by vote of a majority of the Distribution Plan Qualified Trustees or by a Majority Shareholder Vote of the shares of the class to which the Distribution Plan relates ("Designated Class"). The Distribution Plan may not be amended to increase materially the amount of permitted distribution expenses without the approval of a majority of the shares of the Designated Class of the Fund, or may not be materially amended in any case without a vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The distribution and service fees paid to MFD equal on an annual basis up to the following maximum percentages of average daily net assets of the class:
-------------------------------------------------------------------------------
MAXIMUM TOTAL
MAXIMUM MAXIMUM SERVICE DISTRIBUTION AND
CLASS DISTRIBUTION FEE FEE SERVICE FEE
-------------------------------------------------------------------------------
Class A 0.10% 0.25% 0.35%
-------------------------------------------------------------------------------
Class B 0.75% 0.25% 1.00%
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Class B1 0.75% 0.25% 1.00%
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Class C 0.75% 0.25% 1.00%
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Class 529A 0.25% 0.25% 0.50%
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Class 529B 0.75% 0.25% 1.00%
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Class 529C 0.75% 0.25% 1.00%
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Class R 0.25% 0.25% 0.50%
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Class R1 0.50% 0.25% 0.75%
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Class R2 0.25% 0.25% 0.50%
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Class R3 0.25% 0.25% 0.50%
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Class R4 0.00% 0.25% 0.25%
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Class W 0.10% 0.00% 0.10%
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Class J 0.25% 0.70%/0.75% 0.95%/1.00%
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Service Class 0.25% 0.00% 0.25%
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In certain circumstances, the fees described above may not be implemented, are being waived, or do not apply to certain MFS Funds. Current distribution and service fees for each Fund are reflected under the captions "Expense Summary" and "Description of Share Classes -- Distribution and Service Fees" in the Prospectus.
SERVICE FEES
The Distribution Plan provides that the Fund may pay MFD a service fee based on the average daily net assets attributable to the Designated Class, (i.e., Class A, Class B, Class B1, Class C, Class 529A, Class 529B, Class 529C, Class R, Class R1, Class R2, Class R3, Class R4, or Class J shares, as appropriate) annually. Class W shares do not pay a service fee. MFD may, at its discretion, retain all or a portion of such payments or pay all or a portion of such payments to financial intermediaries. Service fees compensate MFD and/or financial intermediaries for shareholder servicing and account maintenance activities, including, but not limited to, shareholder recordkeeping (including assisting in establishing and maintaining customer accounts and records), transaction processing (including assisting with purchase, redemption and exchange requests), shareholder reporting, arranging for bank wires, monitoring dividend payments from the Funds on behalf of customers, forwarding certain shareholder communications from the Funds to customers, corresponding with shareholders and customers regarding the Funds (including receiving and responding to inquiries and answering questions regarding the Funds), and aiding in maintaining the investment of their respective customers in the Funds. Financial intermediaries may from time to time be required to meet certain criteria in order to receive service fees.
DISTRIBUTION FEES
The Distribution Plan provides that the Fund may pay MFD a distribution fee based on the average daily net assets attributable to the Designated Class as partial consideration for distribution services performed and expenses incurred in the performance of MFD's obligations under its distribution agreement with the Fund. Distribution fees compensate MFD and/or financial intermediaries for their expenses in connection with the distribution of Fund shares, including, but not limited to, commissions to financial intermediaries, printing prospectuses and reports used for sales purposes, the preparation and printing of sales literature, personnel, travel, office expense and equipment, payments made to wholesalers employed by MFD (employees may receive additional compensation if they meet certain targets for sales of one or more MFS Funds), and other distribution-related expenses. The amount of the distribution fee paid by the Fund with respect to each class differs under the Distribution Plan, as does the use by MFD of such distribution fees. While the amount of compensation received by MFD in the form of distribution fees during any year may be more or less than the expenses incurred by MFD under its distribution agreement with the Fund, the Fund is not liable to MFD for any losses MFD may incur in performing services under its Distribution Agreement with the Fund.
In addition, with respect to Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Emerging Growth Fund, MFS High Income Fund, MFS Total Return Fund, MFS Research Fund, MFS Strategic Income Fund, and MFS Bond Fund, to the extent that the annualized aggregate service and distribution fees paid under the Distribution Plan do not exceed 0.35% of Class A shares' average daily net assets, the Fund is permitted to pay such distribution-related expenses or other distribution-related expenses.
FINANCIAL INTERMEDIARY COMPENSATION
MFD and/or its affiliates may pay commissions, Rule 12b-1 distribution and service fees, 529 administrative services fees, retirement plan administrative and service fees, shareholder servicing fees, and other payments to financial intermediaries that sell Fund shares as described in Appendix D of this Part II.
INVESTMENT STRATEGIES, RISKS AND RESTRICTIONS
Set forth in Appendix E of this Part II is a description of investment strategies which the MFS Funds may generally use in pursuing their investment objectives and investment policies to the extent such strategies are consistent with their investment objectives and investment policies, and a description of the risks associated with these investment strategies. Set forth in Appendix F of this Part II is a description of investment restrictions to which the Fund is subject.
NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund is determined each day during which the New York Stock Exchange is open for trading (see "Determination of Net Asset Value" below for a list of days that the Exchange is closed).
For this purpose, the net income attributable to shares of a money market fund (from the time of the immediately preceding determination thereof) shall consist of (i) all interest income accrued on the portfolio assets of the money market fund less (ii) all actual and accrued expenses of the money market fund determined in accordance with generally accepted accounting principles. Interest income shall include discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income is determined, the net asset value per share (i.e., the value of the net assets of the money market fund divided by the number of shares outstanding) is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment, representing the reinvestment of dividend income, is reflected by an increase in the number of shares in the shareholder's account.
It is expected that the shares of the money market fund will have a positive net income at the time of each determination thereof. If for any reason the net income determined at any time is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the money market fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to each such account. If and to the extent that such negative amount exceeds such declared dividends at the end of the month (or during the month in the case of an account liquidated in its entirety), the money market fund could reduce the number of its outstanding shares by treating each shareholder of the money market fund as having contributed to its capital that number of full and fractional shares of the money market fund in the account of such shareholder which represents its proportion of such excess. Each shareholder of the money market fund will be deemed to have agreed to such contribution in these circumstances by his or her investment in the money market fund. This procedure would permit the net asset value per share of the money market fund to be maintained at a constant $1.00 per share.
In addition, the money market funds intend to distribute net realized short- and long-term capital gains, if any, at least annually.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute to its shareholders all or substantially all of its net investment income. The net investment income of these Funds consists of non-capital gain income less expenses. In addition, these Funds intend to distribute net realized short- and long-term capital gains, if any, at least annually. Shareholders will be informed of the tax consequences of such distributions, including whether any portion represents a return of capital, after the end of each calendar year.
TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important federal
(and, where noted, state) income tax consequences affecting the Fund and its
shareholders. The discussion is very general, and therefore prospective
investors are urged to consult their tax advisers about the impact an investment
in the Fund may have on their own tax situations.
TAX TREATMENT OF THE FUND
Federal Taxes -- The Fund (even if it is a Fund in a Trust with multiple series) is treated as a separate entity for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has elected (or in the case of a new Fund, intends to elect) to be, and intends to qualify to be treated each year as, a "regulated investment company" under Subchapter M of the Code.
In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in "qualified publicly traded partnerships" (as defined below);
(b) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid-generally, taxable ordinary income and the excess, if any, of the net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year; and
(c) diversify its holdings so that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested (x) in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or businesses or (y) in the securities of one or more qualified publicly traded partnerships (as defined below).
In the case of the Fund's investment in loan participations, the Fund shall treat both the financial intermediary and the issuer of the loan participation as an issuer for the purposes of meeting the diversification requirement described in paragraph (c).
In general, for purposes of the 90% income requirement described in paragraph
(a) above, income derived from a partnership will be treated as qualifying
income only to the extent such income is attributable to items of income of the
partnership which would be qualifying income if realized by the regulated
investment company. However, 100% of the net income derived from an interest in
a "qualified publicly traded partnership" (which is defined as any partnership
(i) whose interests are traded on an established securities market or whose
interests are readily traded on a secondary market or the substantial equivalent
thereof and (ii) that derives less than 90% of its income from the qualifying
income described in paragraph (a)(i) above) will be treated as qualifying
income. In addition, although in general the passive loss rules of the Code do
not apply to regulated investment companies, such rules do apply to a regulated
investment company with respect to items attributable to an interest in a
qualified publicly traded partnership. Finally, for purposes of paragraph (c)
above, the term "outstanding voting securities of such issuer" will include
the equity securities of a qualified publicly traded partnership.
As a regulated investment company, the Fund will not be subject to any federal income or excise taxes on its net investment income and net realized capital gains that it distributes to shareholders in accordance with the timing requirements imposed by the Code. The Fund's foreign-source income, if any, may be subject to foreign withholding taxes. If the Fund failed to qualify as a "regulated investment company" in any year, it would incur a regular federal corporate income tax on all of its taxable income, whether or not distributed, and Fund distributions would generally be taxable as dividend income to the shareholders.
If the Fund fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or later if the Fund is permitted so to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders by the Fund in January of a year generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November, or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
Massachusetts Taxes -- As long as it qualifies as a regulated investment company under the Code, the Fund will not be required to pay Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
Tax Treatment of Distributions -- Subject to the special rules discussed below for Municipal Funds, shareholders of the Fund normally will have to pay federal income tax and any state or local income taxes on the dividends and "Capital Gain Dividends" (as defined below) they receive from the Fund. Except as described below, any distributions from ordinary income or from net short-term capital gains are taxable to shareholders as ordinary income for federal income tax purposes whether paid in cash or reinvested in additional shares.
For taxable years beginning before January 1, 2011, "qualified dividend income" received by an individual will be taxed at the rates applicable to long-term capital gains. In order for some portion of the dividends received by a Fund shareholder to be qualified dividend income, the Fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to the Fund's shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (1) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such date), (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) if the recipient elects to have the dividend income treated as investment interest, or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (b) treated as a passive foreign investment company. Payments in lieu of dividends, such as payments pursuant to securities lending arrangements, also do not qualify to be treated as qualified dividend income.
In general, a distribution of investment income designated by the Fund as derived from qualified dividend income will be treated as qualified dividend income by a shareholder taxed as an individual provided the shareholder meets the holding period and other requirements described above with respect to the Fund's shares. In any event, if the qualified dividend income received by the Fund during any taxable year is 95% or more of its gross income for that taxable year, then 100% of the Fund's dividends (other than Capital Gain Dividends), will be eligible to be treated as qualified dividend income. For this purpose, in the case of a sale or other disposition of the Fund of stock or securities, the only gain included in the term "gross income" is the excess of net short-term capital gain from such sales or dispositions over the net long-term capital loss from such sales or dispositions.
Properly designated distributions of net capital gain (i.e., the excess of net long-term capital gain over the net short-term capital loss) ("Capital Gains Dividends"), whether paid in cash or reinvested in additional shares, are taxable to shareholders as long-term capital gains for federal income tax purposes without regard to the length of time the shareholders have held their shares.
Long-term capital gain rates applicable to individuals have been temporarily reduced for taxable years beginning before January 1, 2011.
Any Fund dividend that is declared in October, November, or December of any calendar year, payable to shareholders of record in such a month and paid during the following January, will be treated as if received by the shareholders on December 31 of the year in which the dividend is declared. The Fund will notify shareholders regarding the federal tax status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the Fund on a daily basis, will have the effect of reducing the per share net asset value of Fund shares by the amount of the distribution. If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay full price for the shares and then receive a portion back as a taxable distribution.
Capital Loss Carryovers-- Distributions from capital gains are generally made after applying any available capital loss carryovers. The amounts and expiration dates of any capital loss carryovers available to the Fund are shown in the notes to the financial statements for the Fund.
Dividends-Received Deduction-- If the Fund receives dividend income from U.S. corporations, a portion of the Fund's ordinary income dividends is normally eligible for the dividends-received deduction for corporations if the recipient otherwise qualifies for that deduction with respect to its holding of Fund shares. Availability of the deduction for particular corporate shareholders is subject to certain limitations, and deducted amounts may be subject to the alternative minimum tax or result in certain basis adjustments.
Disposition of Shares-- In general, any gain or loss realized upon a disposition of Fund shares by a shareholder that holds such shares as a capital asset will be treated as a long-term capital gain or loss if the shares have been held for more than 12 months and otherwise as a short-term capital gain or loss. However, any loss realized upon a disposition of Fund shares held for six months or less will be treated as a long-term capital loss to the extent of any Capital Gain Dividends made with respect to those shares.
Shares Purchased Through Tax-Qualified Plans -- Distributions by the Fund to
retirement plans that qualify for tax-exempt treatment under federal income tax
laws will not be taxable. Special tax rules apply to investments through such
plans. You should consult your tax adviser to determine the suitability of the
Fund as an investment through such a plan and the tax treatment of distributions
(including distributions of amounts attributable to an investment in the Fund)
from such a plan.
U.S. Taxation of Non-U.S. Persons -- Capital Gain Dividends and exempt-interest
dividends, if any, will not be subject to withholding of federal income tax.
However, distributions properly designated as exempt-interest dividends may be
subject to backup withholding, as discussed below. In general, dividends other
than Capital Gain Dividends and exempt-interest dividends, if any, paid by the
Fund to a shareholder that is not a "U.S. person" within the meaning of the
Code (such shareholder, a "Non-U.S. Person") are subject to withholding of U.S
federal income tax at a rate of 30% (or lower applicable treaty rate) even if
they are derived from income or gains (such as portfolio interest, short-term
capital gains, or foreign-source dividend and interest income) that, if paid to
a Non-U.S. Person directly, would not be subject to withholding. However,
effective for taxable years of the Fund beginning after December 31, 2004, and
before January 1, 2008, the Fund will not be required to withhold any amounts
with respect to (i) distributions (other than distributions to a Non-U.S. Person
(w) that has not provided a satisfactory statement that the beneficial owner is
not a U.S. person, (x) to the extent that the dividend is attributable to
certain interest on an obligation if the Non-U.S. Person is the issuer or is a
10% shareholder of the issuer, (y) that is within certain foreign countries that
have inadequate information exchange with the United States, or (z) to the
extent the dividend is attributable to interest paid by a person that is a
related person of the Non-U.S. Person and the Non-U.S. Person is a controlled
foreign corporation) from U.S.-source interest income that would not be subject
to U.S. federal income tax if earned directly by an individual Non-U.S. Person
(an "interest-related dividend"), and (ii) distributions (other than
distributions to an individual Non-U.S. Person who is present in the United
States for a period or periods aggregating 183 days or more during the year of
the distribution) of net short-term capital gains in excess of net long-term
capital losses (a "short-term capital gain dividend"), in each such case to
the extent such distributions are properly designated by the Fund. This
provision will first apply to the Fund (1) with respect to its direct portfolio
investments (if any) in its taxable year beginning after December 31, 2004, and,
(2) with respect to its investments in underlying Funds (if any), with respect
to designated distributions from such underlying Funds in their taxable years
beginning after December 31, 2004, that are received by the Fund in its taxable
year beginning after December 31, 2004. Depending on the circumstances, the Fund
may make such designations with respect to all, some or none of its potentially
eligible dividends and/or treat such dividends, in whole or in part, as
ineligible for this exemption for withholding. The Fund does not currently
intend to, but may in certain circumstances, designate distributions as
interest-related dividends or as short-term capital gain dividends except with
respect to Research Bond Fund J shares. In order to qualify for this exemption
from withholding, a foreign person will need to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN or substitute Form). In the case of
shares held through an intermediary, the intermediary may withhold even if the
Fund makes a designation with respect to a payment. Foreign persons should
contact their intermediaries with respect to the application of these rules to
their accounts.
If a beneficial holder who is a Non-U.S. Person has a trade or business in the United States, and the dividends are effectively connected with the conduct by the beneficial holder of a trade or business in the United States, the dividend will be subject to U.S. federal net income taxation at regular income tax rates.
In general, special tax rules apply to distributions that a "qualified investment entity" (a "QIE") pays to foreign shareholders that are attributable to gain from the Fund's sale or exchange of "U.S. real property interests" (a "USRPI Distribution"). A Fund will be a QIE if it is both (i) a regulated investment company and (ii) a "U.S. real property holding corporation" (determined without regard to certain exceptions, described below, for 5% holders of publicly traded classes of stock and for interests in domestically-controlled regulated investment companies and real estate investment trusts ("REITs")). Under the Code, a "U.S. real property holding corporation" is any corporation that holds (or held during the previous five-year period) "U.S. real property interests" ("USRPIs") (defined as U.S. real property and interests (other than solely as a creditor) in "U.S. real property holding corporations") with an aggregate fair market value equal to 50% or more of the fair market value of the corporation's real property assets and other trade-or-business assets. A USRPI does not include (i) any class of stock of a corporation that is traded on an established securities market with respect to a person who holds 5% or less of such class of stock at all times during the previous five-year period and (ii) a regulated investment company's interests in domestically controlled REITs and other regulated investment companies.
For taxable years beginning on or after January 1, 2006, where a foreign shareholder has owned more than 5% of a class of shares of a Fund that is a QIE during the one-year period preceding the date of the USRPI Distribution, the Fund will be required to withhold 35% of any USRPI Distribution and the foreign shareholder will have an obligation to file a U.S. tax return and pay tax. For all other foreign shareholders of a Fund that is a QIE, a USRPI Distribution will be treated as ordinary income (notwithstanding any designation by the Fund that such distribution is a Capital Gain Dividend) and the Fund will be required to withhold 30% (or lower applicable treaty rate) of such distribution. If a Fund that is a QIE makes a distribution to its foreign shareholders that is attributable to a USRPI Distribution received by the Fund from a "lower-tier" REIT or regulated investment company that is a QIE, that distribution will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the "lower-tier" REIT or regulated investment company.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend and certain other conditions are met, or (iii) the shares are USRPIs or the Capital Gain Dividends are USRPI Distributions.
Foreign shareholders in the Fund should consult their tax advisers with respect to the potential application of the above rules.
Backup Withholding -- The Fund is also required in certain circumstances to apply backup withholding at the rate of 28% on taxable dividends, including Capital Gain Dividends, redemption proceeds (except for redemptions by money market funds), and certain other payments that are paid to any non-corporate shareholder (including a Non-U.S. Person) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. Backup withholding will not, however, be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor residents of the United States. The back-up withholding rules also apply to distributions that are properly designated as exempt-interest dividends.
Foreign Income Taxation of a Non-U.S. Person -- Distributions received from the Fund by a Non-U.S. Person may also be subject to tax under the laws of their own jurisdictions.
State and Local Income Taxes: U.S. Government Securities -- Dividends paid by the Fund that are derived from interest on obligations of the U.S. Government and certain of its agencies and instrumentalities (but generally not distributions of capital gains realized upon the disposition of such obligations) may be exempt from state and local income taxes. The Fund generally intends to advise shareholders of the extent, if any, to which its dividends 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.
Certain Investments -- Any investment in zero coupon bonds, deferred interest bonds, payment-in-kind bonds, certain inflation-adjusted debt instruments, certain stripped securities, and certain securities purchased at a market discount (including certain high yield debt obligations) will cause the Fund to recognize income prior to the receipt of cash payments with respect to those securities. To distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund's investments in REIT equity securities may also require the Fund to accrue and distribute income not yet received and may at other times result in the Fund's receipt of cash in excess of the REIT's earnings. If the Fund distributes such amounts, such distribution could constitute a return of capital to Fund shareholders for federal income tax purposes. Income from REIT securities generally will not be eligible for treatment as qualified dividend income. Any investment in residual interests of a Collateralized Mortgage Obligation (a "CMO") that has elected to be treated as a real estate mortgage investment conduit (a "REMIC") can create complex tax problems, especially if the Fund has state or local governments or other tax-exempt organizations as shareholders. Under current law, the Fund serves to block unrelated business taxable income ("UBTI") from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if either: (1) the Fund invests in REITs that hold residual interests in REMICs; or (2) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). If a charitable remainder trust (as defined in Code Section 664) realizes any UBTI for a taxable year, it will lose its tax-exempt status for the year.
Options, Futures Contracts, and Forward Contracts -- The Fund's transactions in options, futures contracts, forward contracts, short sales, and swaps and related transactions will be subject to special tax rules that may affect the amount, timing, and character of Fund income and distributions to shareholders. For example, certain positions held by the Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out on that day), and any gain or loss associated with the positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by the Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," and may be subject to special tax rules that would cause deferral of Fund losses, adjustments in the holding periods of Fund securities, and conversion of short-term into long-term capital losses. Certain tax elections exist for straddles that may alter the effects with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. The Fund will limit its activities in options, futures contracts, forward contracts, short sales, and swaps and related transactions to the extent necessary to meet the diversification requirements of Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to foreign investments by the Fund. Foreign exchange gains and losses realized by the Fund may be treated as ordinary income and loss. Use of foreign currencies for non-hedging purposes and investment by the Fund in certain "passive foreign investment companies" may be limited in order to avoid a tax on the Fund. The Fund may elect to mark to market certain investments in "passive foreign investment companies" on the last day of each year. This election may cause the Fund to recognize income prior to the receipt of cash payments with respect to those investments; in order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund.
Foreign Income Taxes -- Investment income received by the Fund and gains with respect to foreign securities may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of tax or an exemption from tax on such income; the Fund intends to qualify for treaty reduced rates where available. It is not possible, however, to determine the Fund's effective rate of foreign tax in advance, since the amount of the Fund's assets to be invested within various countries is not known.
If more than 50% of the total assets of a Fund are represented by direct investments in foreign stock and securities at the close of its taxable year, the Fund may elect to "pass through" to its shareholders foreign income taxes paid by it. If the Fund so elects, shareholders will be required to treat their pro rata portions of the foreign income taxes paid by the Fund as part of the amounts distributed to them by it and thus includable in their gross income for federal income tax purposes. Shareholders who do not itemize deductions would (subject to such limitations) be able to claim a credit but not a deduction. No deduction will be permitted to individuals in computing their alternative minimum tax liability. If the Fund is not eligible, or does not elect, to "pass through" to its shareholders foreign income taxes it has paid, shareholders will not be able to claim any deduction or credit for any part of the foreign taxes paid by the Fund. In addition, the Fund's investments in certain foreign securities (including fixed income securities and derivatives) denominated in foreign currencies may increase or accelerate the Fund's recognition of ordinary income and may affect the timing, amount, or character of the Fund's distributions.
Tax Shelter Reporting -- Under Treasury regulations, if a shareholder recognizes a loss with respect to the Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Underlying Funds -- If the Fund invests all of its assets in shares of underlying Funds, its distributable income and gains will normally consist entirely of distributions from the underlying Funds' income and gains and gains and losses on the dispositions of shares of underlying Funds. To the extent that an underlying Fund realizes net losses on its investments for a given taxable year, the Fund will not be able to recognize its share of those losses (so as to offset distributions of net income or capital gains from other underlying Funds) until it disposes of shares of the underlying Fund. Moreover, even when the Fund does make such a disposition, a portion of its loss may be recognized as a long-term capital loss, which will not be treated as favorably for federal income tax purposes as a short-term capital loss or an ordinary deduction. In particular, the Fund will not be able to offset any capital losses from its dispositions of underlying Fund shares against its ordinary income, which includes distributions of any net short-term capital gains realized by an underlying Fund. In addition, in certain circumstances, the "wash sale" rules under Section 1091 of the Code may apply to a Fund's sales of underlying Fund shares that have generated losses. A wash sale occurs if shares of an underlying Fund are sold by the Fund at a loss and the Fund acquires additional shares of that same underlying Fund thirty days before or after the date of the sale. The wash sale rules could defer losses of the Fund on sales of underlying Fund shares (to the extent such sales are wash sales) for extended (and, in certain cases, potentially indefinite) periods of time. As a result of the foregoing rules, and certain other special rules, it is possible that the amounts of net investment income and net capital gains that the Fund will be required to distribute to shareholders will be greater than such amounts would have been had the Fund invested directly in the securities held by the underlying Funds, rather than investing in shares of the underlying Funds. For similar reasons, the character of distributions from a Fund (e.g., capital gains as compared to ordinary income, eligibility for the dividends-received deduction, etc.) will not necessarily be the same as it would have been had the Fund invested directly in the securities held by the underlying Funds.
If the Fund received dividends from an underlying Fund that qualifies as a regulated investment company, and the underlying Fund designates such dividends as "qualified dividend income," then the Fund is permitted in turn to designate a portion of its distributions as "qualified dividend income" as well, provided the Fund meets holding period and other requirements with respect to shares of the underlying Fund.
Depending on the Fund's percentage ownership in an underlying Fund before and after a redemption of shares of such underlying Fund, such a redemption may cause the Fund to be treated as receiving a dividend on the full amount of the distribution instead of receiving capital gain income on the shares of the underlying Fund. This would be the case where the Fund holds a significant interest in an underlying Fund and redeems only a small portion of such interest. It is possible that such a dividend will qualify as "qualified dividend income;" otherwise, it will be taxable as ordinary income.
The fact that a Fund achieves its investment objectives by investing in underlying Funds will generally not adversely affect the Fund's ability to pass on to foreign shareholders the full benefit of the interest-related dividends and short-term capital gain dividends that it receives from its underlying investments in the Funds, except possibly to the extent that (1) interest-related dividends received by the Fund are offset by deductions allocable to the Fund's qualified interest income or (2) short-term capital gain dividends received by the Fund are offset by the Fund's net short- or long-term capital losses, in which case the amount of a distribution from the Fund to a foreign shareholder that is properly designated as either an interest-related dividend or a short-term capital gain dividend, respectively, may be less than the amount that such shareholder would have received had they invested directly in the underlying Funds. Furthermore, if the Fund is a QIE and invests in an underlying Fund that is a QIE, a distribution to a foreign shareholder that is attributable to a USRPI Distribution received by the Fund will retain its character as a USRPI Distribution when passed through to the foreign shareholder regardless of the Fund's percentage ownership of the underlying Fund.
Under the current law, a Fund of Funds cannot pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying Fund. A Fund is permitted to elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and securities at the close of its taxable year. Foreign securities held indirectly through an underlying Fund do not contribute to this 50% threshold.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of Funds whose objective is to invest primarily in obligations that pay interest that is exempt from federal income tax ("Municipal Funds").
Tax-Exempt Distributions -- The portion of a Municipal Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends will increase a corporate shareholder's alternative minimum tax. Except when the Fund provides actual monthly percentage breakdowns, the percentage of income designated as tax-exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Taxable Distributions -- A Municipal Fund may also earn some income that is taxable as ordinary income (including interest from any obligations that lose their federal tax exemption and, subject to a de minimis exception, when a bond purchased at a price less than its stated redemption price at maturity (a so-called "market discount bond") matures or is disposed of by the Municipal Fund) and may recognize capital gains and losses as a result of the disposition of securities and from certain options and futures transactions. Shareholders normally will have to pay federal income tax on the non-exempt interest dividends and capital gain distributions they receive from the Fund, whether paid in cash or reinvested in additional shares. However, such Funds do not expect that the non-tax-exempt portion of their net investment income, if any, will be substantial. Because Municipal Funds expect to earn primarily tax-exempt interest income, it is expected that dividends from such Funds will not qualify for the dividends-received deduction for corporations and will not be treated as "qualified dividend income" taxable to non-corporate shareholders at reduced rates.
Consequences of Distributions by a Municipal Fund: Effect of Accrued Tax-Exempt Income -- Shareholders redeeming shares after tax-exempt income has been accrued but not yet declared as a dividend should be aware that a portion of the proceeds realized upon redemption of the shares will reflect the existence of such accrued tax-exempt income and that this portion 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 redemption. For this reason, if a shareholder wishes to redeem shares of a Municipal Fund that does not declare dividends on a daily basis, the shareholder may wish to consider whether he or she could obtain a better tax result by redeeming immediately after the Fund declares dividends representing substantially all the ordinary income (including tax-exempt income) accrued for that period.
Certain Additional Information for Municipal Fund Shareholders -- Interest on indebtedness incurred by shareholders to purchase or carry Municipal Fund shares will not be deductible for federal income tax purposes. Exempt-interest dividends are taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal income tax. You should consult your tax adviser to determine what effect, if any, an investment in a Fund may have on the federal taxation of your benefits. Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by private activity bonds should consult their tax advisers before purchasing Fund shares.
Consequences of Redeeming Shares -- Any loss realized on a redemption of Municipal Fund shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received with respect to those shares. If not disallowed, any such loss will be treated as a long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares.
State and Local Income Taxes: Municipal Obligations -- The exemption of exempt-interest dividends for federal income tax purposes does not necessarily result in exemption under the income tax laws of any state or local taxing authority. Some states do exempt from tax that portion of an exempt interest dividend that represents interest received by a regulated investment company on its holdings of securities issued by that state and its political subdivisions and instrumentalities. Therefore, the Fund will report annually to its shareholders the percentage of interest income earned by it during the preceding year on Municipal Bonds and will indicate, on a state-by-state basis only, the source of such income.
SPECIAL CONSIDERATIONS FOR 529 SHARE CLASSES
The following special consideration applies specifically to the ownership of a Fund' 529 share classes through a tuition program that qualifies under Section 529 of the Code.
The 529 share classes are an investment option under one or more tuition programs designed to qualify under Section 529 of the Code so that earnings on investments are not subject to federal income tax (to either a contributor to the tuition program or a designated beneficiary) until the earnings are withdrawn. Withdrawals of earnings that are used to pay "qualified higher education expenses" are tax-free for federal income tax purposes. State and local taxes may still apply. These tax benefits are not available to 529 shares that are not owned through a qualifying Section 529 tuition program.
Withdrawals of earnings that are not used for the designated beneficiary's qualified higher education expenses generally are subject not only to federal income tax but also to a 10% penalty tax unless such amounts are transferred within sixty (60) days to another tuition program for the same designated beneficiary (only one such transfer may be made in any twelve (12) month period) or another designated beneficiary who is a member of the family of the designated beneficiary with respect to which the distribution was made and certain other conditions are satisfied. The 10% penalty tax will not apply to withdrawals made under certain circumstances, including certain withdrawals made after the designated beneficiary dies, becomes disabled, or receives a scholarship or other tax-free payment for educational expenses that does not exceed the amount of the distribution. Withdrawals attributable to contributions to the tuition program (including the portion of any rollover from another tuition program that is attributable to contributions to that program) are not subject to tax.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
For the purposes of this section, all references to the "Adviser" shall include
the Sub-Adviser with respect to MFS Diversified Income Fund and MFS Sector
Rotational Fund.
Specific decisions to purchase or sell securities for the Funds are made by persons affiliated with the Adviser. Any such person may serve other clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
In connection with the selection of broker/dealers and the placing of Fund
portfolio transactions, the Adviser seeks to achieve for the Funds the best
overall price and execution available from responsible brokerage firms, taking
account of all factors it deems relevant, including by way of illustration:
price; the size of the transaction; the nature of the market of the security;
the amount of the commission; the timing and impact of the transaction taking
into account market prices and trends; the reputation, experience and financial
stability of the broker/dealer involved; the willingness of the broker/dealer to
commit capital; the need for anonymity in the market; and the quality of
services rendered by the broker/dealer in that and other transactions.
In the case of securities traded in the over-the-counter market, portfolio transactions may be effected either on an agency basis, which involves the payment of negotiated brokerage commissions to the broker/dealer, including electronic communication networks, or on a principal basis at net prices without commissions, but which include compensation to the broker/dealer in the form of a mark-up or mark-down, depending on where the Adviser believes best execution is available. In the case of securities purchased from underwriters, the cost of such securities generally includes a fixed underwriting commission or concession. From time to time, soliciting dealer fees are available to the Adviser on tender or exchange offers. Such soliciting or dealer fees are, in effect, recaptured by the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended ("Section 28(e)"), the Adviser may cause the Funds to pay a broker/dealer which provides "brokerage and research services" (as defined by the Securities Exchange Act of 1934, as amended) to the Adviser an amount of commission for effecting a securities transaction for the Funds in excess of the amount other broker/dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the effecting broker/dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Funds and its other clients. "Commissions," as interpreted by the SEC, include fees paid to brokers for trades conducted on an agency basis, and certain mark-ups, markdowns, commission equivalents and other fees received by dealers in riskless principal transactions placed in the over-the-counter market.
The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement) or required in connection therewith by applicable rules. In determining whether a service or product qualifies as "brokerage and research services," the Adviser evaluates whether the service or product provides lawful and appropriate assistance to the Adviser in carrying out its investment decision-making responsibilities. It is often not possible to place a dollar value on the brokerage and research services the Adviser received from brokers. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions is based primarily on the professional opinions of the persons responsible for the placement and review of such transactions.
Broker/dealers may be willing to furnish statistical, research and other factual information or services ("Research"), for example, investment research reports; access to analysts; execution systems and trading analytics; reports or databases containing corporate, fundamental, and technical analyses; portfolio modeling strategies; and economic research services, such as publications, chart services, and advice from economists concerning macroeconomics information, and analytical investment information about particular corporations to the Adviser for no consideration other than brokerage or underwriting commissions. Such broker/dealers may be involved from time to time in executing, clearing or settling securities transactions on behalf of the Funds ("Executing Brokers"), or may have entered into agreements with one or more Executing Brokers pursuant to which they are responsible for performing one or more functions, the performance of which has been identified by the SEC as being sufficient to constitute effecting securities transactions within the meaning of Section 28(e) as interpreted by the SEC ("Effecting Brokers"). In reliance on this interpretation the Adviser expects to enter into Commission Sharing Agreements with Executing Brokers which will provide for the Executing Brokers to pay a portion of the Commissions paid by the Funds for securities transactions to Effecting Brokers. In addition to effecting securities transactions on behalf of the Funds pursuant to a Commission Sharing Agreement, the Effecting Brokers will also provide Research for the benefit of the Adviser. If a government agency with regulatory authority over the affairs of the Adviser or its subsidiaries, or a court of competent jurisdiction, were to determine that an Effecting Broker is not effecting a securities transaction within the meaning of Section 28(e), the Adviser believes that such Research should be considered as Research provided by the relevant Executing Broker and permitted by Section 28(e), provided that the relationship with such Executing Broker is otherwise consistent with the requirement for Research under Section 28(e). In such circumstances the Adviser will in effect be paying a greater commission in order to obtain third party research. The Adviser may use brokerage commissions from the Funds' portfolio transactions to acquire Research, subject to the procedures and limitations described in this discussion.
The advisory fee paid by each of the Funds to the Adviser is not reduced as a consequence of the Adviser's receipt of Research. To the extent the Funds' portfolio transactions are used to obtain Research, the brokerage commissions paid by the Funds might exceed those that might otherwise be paid for execution only. The Research received may be useful and of value to the Adviser in serving both the Funds and other clients of the Adviser; accordingly, not all of the Research provided by brokers through which the Funds effect securities transactions may be used by the Adviser in connection with the Funds. The Adviser would, through the use of the Research, avoid the additional expenses that would be incurred if it attempted to develop comparable information through its own staff.
From time to time, the Adviser prepares a list of broker/dealer firms that have been deemed by the Adviser to provide valuable Research as determined periodically by the investment staff ("Research Firms"), together with a suggested non-binding amount of brokerage commissions ("non-binding target") to be allocated to each Research Firm, subject to certain requirements. These Research Firms may include Executing Brokers and Effecting Brokers. In instances when the Adviser allocates commissions to Research Firms that are effecting trades within the meaning of Section 28(e) on behalf of client accounts, such trades will be executed in accordance with the Adviser's obligation to seek best execution for its client accounts. Neither the Adviser nor the Funds have an obligation to any Research Firm if the amount of brokerage commissions paid to the Research Firm is less than the applicable non-binding target. The Adviser reserves the right to pay cash to the Research Firm from its own resources in an amount the Adviser determines in its discretion.
If the Adviser determines that any service or product has a mixed use (i.e., it also serves functions that do not assist the investment decision-making or trading process), the Adviser will allocate the costs of such service or product accordingly in its reasonable discretion. The Adviser will allocate brokerage commissions to Research Firms only for the portion of the service or product that the Adviser determines assists it in the investment decision-making or trading process and will pay for the remaining value of the product or service in cash.
In effecting portfolio transactions on behalf of the Funds and the Adviser's other clients, the Adviser from time to time may instruct the broker/dealer that executes a transaction to allocate, or "step out," a portion of such transaction to another broker/dealer. The broker/dealer to which the Adviser has "stepped out" would then settle and complete the designated portion of the transaction, and the executing broker/dealer would settle and complete the remaining portion of the transaction that has not been "stepped out." Each broker/dealer may receive a commission or brokerage fee with respect to that portion of the transaction that it settles and completes.
In certain instances there may be securities that are suitable for the Funds' portfolios as well as for one or more of the other clients of the Adviser or of any subsidiary of the Adviser (or that the Adviser believes should no longer be held by the Funds' portfolios or by other clients of the Adviser or any subsidiary of the Adviser). 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. Transactions for each client are generally effected independently unless the Adviser determines to purchase or sell the same securities for several clients at approximately the same time. The Adviser may, but is not required to, aggregate together purchases and sales for several clients and will allocate the trades in a fair and equitable manner, across participating clients. The Adviser has adopted policies that are reasonably designed to ensure that when two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. Among other things, these policies prohibit allocations of equity initial public offerings, equity limited offerings or fixed income new issues to, among others: (1) Private Portfolio Management accounts; (2) funds or other accounts the beneficial owners of which are principally the Adviser's officers and employees of the Trust or Trustees which are not being offered to the public; and (3) any accounts owned beneficially solely by the Adviser or any direct or indirect subsidiary of the Adviser. However, these policies do not prohibit allocations to funds or other accounts owned beneficially by Sun Life of Canada (U.S.) Financial Services Holdings, Inc., or Sun Life Financial Inc., or their affiliates other than the Adviser and its direct and indirect subsidiaries. In addition, accounts in which the Adviser or any of its direct or indirect subsidiaries is the sole beneficial owner generally will be allocated investment opportunities (other than with respect to equity initial public offerings, equity limited offerings or fixed income new issues) on the same basis as Funds or other clients of the Adviser when the account has been established and seeded by the Adviser or the subsidiary with a limited amount of assets for the purpose of establishing a performance record to enable the Adviser or the subsidiary to offer the account's investment style to unaffiliated third parties.
It is recognized that in some cases this system could have a detrimental effect on the price or availability of a security as far as the Funds are concerned. In other cases, however, the Adviser believes that such practices may produce increased investment opportunities for the Funds.
DISCLOSURE OF PORTFOLIO HOLDINGS
Each Fund has established a policy governing the disclosure of its portfolio
holdings that is reasonably designed to protect the confidentiality of the
Fund's non-public portfolio holdings and prevent inappropriate selective
disclosure of such holdings. The Fund's Board of Trustees has approved this
policy and will be asked to approve any material amendments to this policy.
Exceptions to this policy may be authorized by MFS' general counsel or a senior
member of the MFS legal department acting under the supervision of MFS' general
counsel (an "Authorized Person").
Neither MFS nor the Fund nor, if applicable, a sub-adviser, will receive any compensation or other consideration in connection with its disclosure of Fund portfolio holdings.
PUBLIC DISCLOSURE OF PORTFOLIO HOLDINGS
In addition to the public disclosure of Fund portfolio holdings through required SEC quarterly filings, a Fund may make its portfolio holdings publicly available on the MFS Web site in such scope and form and with such frequency as MFS may reasonably determine.
The following information is generally available to you on the MFS Web site (MFS.COM):
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APPROXIMATE DATE OF POSTING
INFORMATION TO WEB SITE
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Fund's full securities holdings 24 days after month end
as of each month's end
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Fund's top 10 securities holdings
as of each month's end 14 days after month end
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If a fund has substantial investments in both equity and debt instruments, the fund's top 10 equity holdings and top 10 debt holdings will be made available. In addition, for fund's that primarily invest in shares of the other MFS funds, all securities holdings in shares of MFS funds, the top 10 aggregated equity holdings within the underlying MFS funds, and the top 10 aggregated debt holdings within the underlying MFS funds will be made available.
Note that the Fund or MFS may suspend the posting of this information or modify the elements of this Web posting policy without notice to shareholders. Once posted, the above information will remain available on the Web site until at least the date on which the Fund files a Form N-CSR or Form N-Q for the period that includes the date as of which the Web site information is current.
Not all registered investment companies that are advised by MFS publicly disclose portfolio holdings in the form or on the schedule described above, and registered investment companies that are sub-advised by MFS or its affiliates may be subject to different portfolio holdings disclosure policies that may permit public disclosure of portfolio holdings information in different forms and at different times. In addition, separate account and unregistered product clients of MFS or its affiliates have access to their portfolio holdings, and prospective clients have access to representative portfolio holdings. These clients and prospective clients are not subject to the Fund's portfolio holdings disclosure policies. Some of these registered investment companies, sub-advised Funds, separate accounts, and unregistered products, all advised or sub-advised by MFS or its affiliates, have substantially similar or identical investment objectives and strategies to certain Funds. They therefore have potentially substantially similar, and in certain cases nearly identical, portfolio holdings as those Funds.
A Fund's portfolio holdings are considered to be publicly disclosed: (a) upon the disclosure of the portfolio holdings in a publicly available, routine filing with the SEC that is required to include the information; (b) the day after the Fund makes such information available on its Web site (assuming that it discloses in its prospectus that such information is available on its Web site); or (c) at such additional times and on such additional basis as determined by the SEC or its staff.
DISCLOSURE OF NON-PUBLIC PORTFOLIO HOLDINGS
A Fund may, in certain cases, disclose to third parties its portfolio holdings which have not been made publicly available. Disclosure of non-public portfolio holdings to third parties may only be made if an Authorized Person determines that such disclosure is not impermissible under applicable law or regulation. In the case of sub-advisers, as applicable, this determination may be made by a senior member of the sub-adviser's legal or compliance departments (a "Sub-Adviser Authorized Person"). In addition, the third party receiving the non-public portfolio holdings may, at the discretion of an Authorized Person, be required to agree in writing to keep the information confidential and/or agree not to trade directly or indirectly based on the information. Such agreements may not be required in circumstances such as where portfolio securities are disclosed to brokers to obtain bids/prices or in interviews with the media. MFS will seek to monitor a recipient's use of non-public portfolio holdings provided under these agreements and, when appropriate, use its best efforts to enforce the terms of these agreements. The restrictions and obligations described in this paragraph do not apply to non-public portfolio holdings provided to MFS or its affiliates.
In addition, to the extent that an Authorized Person determines that there is a potential conflict with respect to the disclosure of information that is not publicly available between the interests of a Fund's shareholders, on the one hand, and MFS, MFD or an affiliated person of MFS, MFD, or the Fund, on the other hand, the Authorized Person must inform MFS' conflicts officer of such potential conflict, and MFS' conflicts officer shall determine whether, in light of the potential conflict, disclosure is reasonable under the circumstances, and shall report such potential conflict of interest determinations to the Fund's Independent Chief Compliance Officer and the Board of Trustees of the Fund. MFS also reports to the Board of Trustees of the Fund regarding the disclosure of information regarding the Fund that is not publicly available.
Subject to compliance with the standards set forth in the previous two paragraphs, non-public portfolio holdings may be disclosed in the following circumstances:
Employees of MFS or MFD or, if applicable, a sub-adviser, (collectively "Fund representatives") disclose non-public portfolio holdings in connection with the day-to-day operations and management of the Fund. Full portfolio holdings are disclosed to a Fund's custodians, independent registered accounting firm, financial printers, regulatory authorities, and stock exchanges and other listing organizations. Portfolio holdings are disclosed to a Fund's pricing service vendors and broker/dealers when requesting bids for, or price quotations on, securities, and to other persons (including independent contractors) who provide systems or software support in connection with Fund operations, including accounting, compliance support, and pricing. Portfolio holdings may also be disclosed to persons assisting a Fund in the voting of proxies or in connection with litigation relating to Fund portfolio holdings. In connection with managing the Funds, MFS or, if applicable, a sub-adviser, may use analytical systems provided by third parties who may have access to Fund portfolio holdings.
Non-public portfolio holdings may be disclosed in connection with other activities, such as to participants in in-kind purchases and redemptions of Fund shares, to service providers facilitating the distribution or analysis of portfolio holdings, once the information is public, and in other circumstances not described above. All such disclosures are subject to compliance with the applicable disclosure standards.
In addition, subject to such disclosure not being impermissible under applicable law or regulation, Fund representatives may disclose Fund portfolio holdings and related information, which may be based on non-public portfolio holdings, under the following circumstances (among others):
Fund representatives may provide oral or written information ("portfolio commentary") about a Fund, including, but not limited to, how the Fund's investments are divided among various sectors, industries, countries, value and growth stocks, small, mid, and large-cap stocks, among stocks, bonds, currencies and cash, types of bonds, bond maturities, bond coupons, and bond credit quality ratings. This portfolio commentary may also include information on how these various weightings and factors contributed to Fund performance. Fund representatives may also express their views orally or in writing on one or more of a Fund's portfolio holdings or may state that a Fund has recently purchased or sold one or more holdings.
Fund representatives may also provide oral or written information ("statistical information") about various financial characteristics of a Fund or its underlying portfolio securities including, but not limited to, alpha, beta, coefficient of determination, duration, maturity, information ratio, Sharpe ratio, earnings growth, payout ratio, price/book value, projected earnings growth, return on equity, standard deviation, tracking error, weighted average quality, market capitalization, percent debt to equity, price to cash flow, dividend yield or growth, default rate, portfolio turnover, and risk and style characteristics.
The portfolio commentary and statistical information may be provided to members of the press, shareholders in the Fund, persons considering investing in the Fund, or representatives of such shareholders or potential shareholders, such as fiduciaries of a 401(k) plan or a trust and their advisers, and the content and nature of the information provided to each of these persons may differ.
ONGOING ARRANGEMENTS TO MAKE NON-PUBLIC PORTFOLIO HOLDINGS AVAILABLE
With authorization from an Authorized Person or, as applicable, a Sub-Adviser Authorized Person, consistent with "Disclosure of Non-Public Portfolio Holdings" above, Fund representatives may disclose non-public Fund portfolio holdings to the recipients identified on Appendix G to this SAI Part II, or permit the recipients identified in Appendix G to this SAI Part II to have access to non-public Fund portfolio holdings, on an on-going basis.
This list of recipients in Appendix G to this SAI Part II is current as of May 31, 2007, and any additions, modifications, or deletions to this list that have occurred since May 31, 2007, are not reflected. The portfolio holdings of the Fund which are provided to these recipients, or to which these recipients have access, may be the Fund's current portfolio holdings. As a condition to receiving or being provided access to non-public Fund portfolio holdings, the recipients listed in Appendix G to this SAI Part II must agree, or otherwise have an independent duty, to maintain this information in confidence.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the New York Stock Exchange (the "Exchange") is open for trading.
(As of the date of this SAI, the Exchange is open for trading every weekday
except in an emergency and for the following holidays (or the days on which they
are observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day, and
Christmas Day.) This determination is made once each day as of the close of
regular trading on the Exchange (generally, 4 p.m., Eastern time) (the
"valuation time") 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 Fund shares outstanding for that class. In
accordance with regulations for regulated investment companies and except for
money market funds, changes in portfolio holdings and number of shares
outstanding are generally reflected in a Fund's net asset value the next
business day after such change.
MONEY MARKET FUNDS
Money market instruments are valued at amortized cost, which approximates market value. Amortized cost involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its current market value. Each money market fund's use of amortized cost is subject to the Fund's compliance with Rule 2a-7 under the Investment Company Act of 1940. The amortized cost value of an instrument can be different from the market value of an instrument.
The Board of Trustees for each money market fund has established procedures designed to stabilize its net asset value per share at $1.00 and has delegated to the Adviser the responsibility for the implementation and administration of such procedures. Under the procedures, the adviser is responsible for monitoring and notifying the Board of Trustees of circumstances where the net asset value calculated by using market valuations may deviate from the $1.00 per share calculated using amortized cost and might result in a material dilution or other unfair result to investors or existing shareholders. Under such circumstances, the Board may take such corrective action, if any, as it deems appropriate to eliminate or reduce, to the extent reasonably practicable, any such dilution or unfair results. Such corrective action could include selling portfolio instruments prior to maturity to realize capital gains or losses; shortening average portfolio maturity; withholding dividends; calculating net asset value by using available market quotations; and such other measures as the Trustees may deem appropriate.
NON-MONEY MARKET FUNDS
Open-end investment companies are generally valued at their net asset value per share. The underlying investments of open-end investment companies managed by the Adviser are valued as described below.
Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded. For securities held short for which there were no sales reported that day, the position is generally valued at the last quoted daily bid quotation as provided by an independent pricing service on the market or exchange on which such securities are primarily traded.
Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by an independent pricing service.
Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value.
Exchange-traded options are generally valued at the last sale or official closing price as provided by an independent pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by an independent pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from an independent source.
Futures contracts are generally valued at last posted settlement price as provided by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by an independent pricing service on the market on which such futures contracts are primarily traded.
Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by an independent pricing service for proximate time periods.
Swaps are generally valued at valuations provided by an independent pricing service.
Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker/dealer bid quotation.
Values obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account 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.
The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by an independent pricing service.
SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available certain programs designed to enable shareholders to add to or withdraw from their investment with applicable sales charges reduced or waived. These programs are generally described in the prospectus and additional details regarding certain of these programs are set forth below. These programs or waivers may be changed or discontinued by the Fund at any time without notice. Some of these programs and waivers may not be available to you if your shares are held through certain types of accounts, such as certain retirement accounts and 529 plans, or certain accounts that you maintain with your financial intermediary. You or your financial intermediary must inform MFSC of your intention to invest in the Fund under one of the programs below upon purchasing Fund shares. You can provide this information in your account application or through a separate document provided by your financial intermediary.
LETTER OF INTENT. Out of the shareholder's initial purchase (or subsequent purchases if necessary), 5% of the dollar amount specified in the Letter of Intent application shall be held in escrow by MFSC in the form of shares registered in the shareholder's name. All distributions on escrowed shares will be paid to the shareholder or to the shareholder's 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 minimum investment amount is not completed, MFSC will redeem an appropriate number of the escrowed shares in order to pay the higher sales charge level for the amount actually purchased. Shares remaining after any such redemption will be released by MFSC. By completing and signing the Account Application or separate Letter of Intent application, the shareholder irrevocably appoints MFSC his or her attorney to surrender for redemption any or all escrowed shares with full power of substitution in the premises.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). To initiate this service, shares having an aggregate value of at least $5,000 must be held on deposit by, or certificates for such shares must be deposited with, MFSC. MFSC may charge the account for services rendered and expenses incurred beyond those normally assumed by the Fund with respect to the redemption of shares. No charge is currently assessed against the account, but one could be instituted by MFSC on 60 days' notice in writing to the shareholder in the event that the Fund ceases to assume the cost of these services. The Fund may terminate any SWP for an account if the value of the account falls below $5,000 as a result of share redemptions (other than as a result of a SWP). Any SWP may be terminated at any time by either the shareholder or the Fund.
GROUP PURCHASES. A bona fide group and all its members may be treated at MFD's discretion as a single purchaser and, under the Right of Accumulation (but not the Letter of Intent), obtain quantity sales charge discounts on the purchase of Class A, Class A1, or 529A shares if the group (1) gives its endorsement or authorization to the investment program so that it may be used by the financial intermediary to facilitate solicitation of the membership, thus effecting economies of sales effort; (2) 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 financial intermediary, 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.
EXCHANGE PRIVILEGE
MONEY MARKET FUNDS
If you exchange your shares out of MFS Cash Reserve Fund, MFS Government Money Market Fund, or MFS Money Market Fund into Class A or Class 529A shares of any other MFS Fund, you will pay the initial sales charge, if applicable, if you have not already paid this charge on these shares. You will not pay the charge if:
o the shares exchanged from either Fund were acquired by an exchange from any other MFS Fund;
o the shares exchanged from either Fund were acquired by automatic investment of dividends from any other MFS Fund; or
o the shares being exchanged would have, at the time of purchase, been eligible for purchase at net asset value had you invested directly in the MFS Fund into which the exchange is being made.
MFS FIXED FUND. Class A, Class A1, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund held by certain qualified retirement plans may be exchanged for units of participation of the MFS Fixed Fund (the "Units"), and Units may be exchanged for Class A, Class C, Class I, Class R, Class R1, Class R2, Class R3, Class R4, and Class R5 shares of any MFS Fund (if the share purchase eligibility for these share classes is met). With respect to exchanges between Class C shares subject to a CDSC and Units, a shareholder will only be eligible to make the exchange if the CDSC would have been waived had the Class C shares been redeemed. With respect to exchanges between Class A and Class A1 shares and Units, shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. Shares or Units will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the exchanged Fund and the original purchase date of the shares subject to the CDSC. In the event that a shareholder initially purchases Units and then exchanges into Class A shares subject to an initial sales charge of a MFS Fund, the initial sales charge shall be due upon such exchange, but will not be imposed with respect to any subsequent exchanges between such Class A and Class A1 shares and Units with respect to shares on which the initial sales charge has already been paid.
TELEPHONE EXCHANGES. No more than ten exchanges may be made in any one exchange request by telephone.
DESCRIPTION OF SHARES, VOTING RIGHTS, AND LIABILITIES
The Trust's Declaration of Trust, as amended or amended and restated from time
to time, permits the Trust's Board of Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) of each
series, 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, and to divide such shares into classes. The Board of Trustees
has reserved the right to create and issue additional series and classes of
shares and to classify or reclassify outstanding shares.
Each shareholder of the Fund is entitled to one vote for each dollar of net asset value (number of shares of the Fund owned times net asset value per share) of the Fund, on each matter on which the shareholder is entitled to vote. Each fractional dollar amount is entitled to a proportionate fractional vote. Except when a larger vote is required by applicable law, a majority of the voting power of the shares voted in person or by proxy on a matter will decide that matter and a plurality of the voting power of the shares voted in person or by proxy will elect a Trustee. Shareholders of all series of the Trust generally will vote together on all matters except when a particular matter affects only shareholders of a particular class or series or when applicable law requires shareholders to vote separately by series or class.
Except in limited circumstances, the Trustees may, without any shareholder vote, amend or otherwise supplement the Trust's Declaration of Trust. Each Trust except MFS Series Trust XII, or any series or class thereof, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets if authorized (either at a meeting or by written consent) by a Majority Shareholder Vote of the class, series, or trust, as applicable. MFS Series Trust XII, or any series or class of MFS Series Trust XII, may merge or consolidate or may sell, lease, or exchange all or substantially all of its assets without any shareholder vote to the extent permitted by law. Each Trust, or any series or class, may reincorporate or reorganize (but not with another operating entity) without any shareholder vote. The Trust, any series of the Trust, or any class of any series, may be terminated at any time by a vote of 1) a Majority Shareholder Vote, or 2) by the Trustees by written notice to the shareholders of that series or class.
The Trustees may cause a shareholder's shares to be redeemed for any reason under terms set by the Trustees, including, but not limited to, 1) to protect the tax status of a Fund, 2) the failure of a shareholder to provide a tax identification number if required to do so, 3) the failure of a shareholder to pay when due for the purchase of shares issued to the shareholder, 4) in order to eliminate accounts whose values are less than a minimum amount established by the Trustees, 5) the failure of a shareholder to meet or maintain the qualifications for ownership of a particular class of shares, and 6) to eliminate ownership of shares by a particular shareholder when the Trustees determine that the particular shareholder's ownership is not in the best interests of the other shareholders of the applicable Fund (for example, in the case of an alleged market timer). The exercise of the above powers is subject to any applicable provisions under the 1940 Act or the rules adopted thereunder.
Under the Declaration of Trust, the Fund may convert to a master/feeder structure or a fund of funds structure without shareholder approval. In a master/feeder structure, a Fund invests all of its assets in another investment company with similar investment objectives and policies. In a Fund of Funds structure, a Fund invests all or a portion of its assets in multiple investment companies.
The Trust is an entity 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 Trust also maintains insurance for the protection of the Trust and its shareholders and the Trustees, officers, employees, and agents of the Trust covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust, and that the Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust or other agreement with a Trustee protects a Trustee against any liability to which he or she would otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.
The Trust's Declaration of Trust provides that shareholders may not bring suit on behalf of the fund without first requesting that the Trustees bring such suit unless there would be irreparable injury to the Fund or if a majority of the Trustees (or a majority of Trustees on any committee established to consider the merits of such action) have a personal financial interest in the action. Trustees are not considered to have a personal financial interest by virtue of being compensated for their services as Trustees or as trustees of Funds with the same or an affiliated investment adviser or distributor.
The Trust's Declaration of Trust provides that by becoming a shareholder of the Fund, each shareholder shall be expressly held to have assented to and agreed to be bound by the provisions of the Declaration of Trust.
PART II - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND
BACKGROUND
The Trustees and officers of the Trust, as of July 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(S) TRUSTEE/OFFICER DURING THE PAST FIVE YEARS
Robert J. Trustee April 2005; Massachusetts Financial
Manning(3) December 2004 - Services Company, Chief
(born 10/20/63) March 2005 Executive Officer,
(Advisory President, Chief
Trustee); Investment Officer and
February - Director
December 2004
(Trustee)
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Robert C. Pozen(3) Trustee April 2005; Massachusetts Financial
(born 8/8/46) December 2004 Services Company, Chairman
-March 2005 (since February 2004); MIT
(Advisory Sloan School (education),
Trustee); Senior Lecturer (since
February - 2006); Secretary of
December 2004 Economic Affairs, The
(Trustee) Commonwealth of
Massachusetts (January
2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to
December 2001); Fidelity
Management & Research
Company (investment
adviser), President (March
1997 to July 2001); Bell
Canada Enterprises
(telecommunications),
Director; Medtronic, Inc.
(medical technology),
Director; Telesat
(satellite
communications), Director
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INDEPENDENT TRUSTEES
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J. Atwood Ives Trustee and February 1992 Private investor; Eastern
Chair of Enterprises (diversified
(born 5/1/36) Trustees services company),
Chairman, Trustee and
Chief Executive Officer
(until November 2000)
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Robert E. Butler(4) Trustee January 2006 Consultant - regulatory
and compliance matters
(born 11/29/41) (since July 2002);
PricewaterhouseCoopers LLP
(professional services
firm), Partner (November
2000 until June 2002)
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Lawrence H. Cohn, Trustee August 1993 Brigham and Women's
M.D. Hospital, Chief of Cardiac
(born 3/11/37) Surgery (until 2005);
Harvard Medical School,
Professor of Cardiac
Surgery; Physician
Director of Medical Device
Technology for Partners
HealthCare
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David H. Gunning Trustee January 2004 Retired; Cleveland-Cliffs
Inc. (mining products and
(born 5/30/42) service provider), Vice
Chairman/Director (until
May 2007); Portman Limited
(mining), Director (since
2005); Encinitos Ventures
(private investment
company), Principal (1997
to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director
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William R. Gutow Trustee December 1993 Private investor and real
(born 9/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman; Atlantic
Coast Tan (tanning
salons), Vice Chairman
(since 2002)
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Michael Hegarty Trustee December 2004 Retired; AXA Financial
(financial services and
(born 12/21/44) insurance), Vice Chairman
and Chief Operating
Officer (until May 2001);
The Equitable Life
Assurance Society
(insurance), President and
Chief Operating Officer
(until May 2001)
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Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 6/23/35) (attorneys), Partner
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J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 9/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing
General Partner (since
1993); Cambridge
Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
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Laurie J. Thomsen Trustee March 2005 New Profit, Inc. (venture
(born 8/5/57) philanthropy), Partner
(since 2006); Private
investor; Prism Venture
Partners (venture
capital), Co-founder and
General Partner (until
June 2004); The Travelers
Companies (commercial
property liability
insurance), Director
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Robert W. Uek Trustee January 2006 Retired (since 1999);
(born 5/18/41) PricewaterhouseCoopers LLP
(professional services
firm), Partner (until
1999); Consultant to
investment company
industry (since 2000); TT
International Funds
(mutual fund complex),
Trustee (2000 until 2005);
Hillview Investment Trust
II Funds (mutual fund
complex), Trustee (2000
until 2005)
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Maria F. Dwyer(3) President November 2005 Massachusetts Financial
(born 12/1/58) Services Company,
Executive Vice President
and Chief Regulatory
Officer (since March 2004)
and Chief Compliance
Officer (since December
2006); Fidelity Management
& Research Company, Vice
President (prior to March
2004); Fidelity Group of
Funds, President and
Treasurer (prior to March
2004)
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Tracy Atkinson(3) Treasurer September 2005 Massachusetts Financial
Services Company, Senior
(born 12/30/64) Vice President (since
September 2004);
PricewaterhouseCoopers
LLP, Partner (prior to
September 2004)
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Christopher R. Assistant July 2005 Massachusetts Financial
Bohane(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 1/18/74) Clerk Counsel (since April
2003); Kirkpatrick &
Lockhart LLP (law firm),
Associate (prior to April
2003)
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Ethan D. Corey(3) Assistant July 2005 Massachusetts Financial
Secretary and Services Company, Special
(born 11/21/63) Assistant Counsel (since December
Clerk 2004); Dechert LLP (law
firm), Counsel (prior to
December 2004)
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David L. Assistant July 2005 Massachusetts Financial
DiLorenzo(3) Treasurer Services Company, Vice
President (since June
(born 8/10/68) 2005); JP Morgan Investor
Services, Vice President
(prior to June 2005)
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Mark D. Fischer(3) Assistant July 2005 Massachusetts Financial
Treasurer Services Company, Vice
(born 10/27/70) President (since May
2005); JP Morgan
Investment Management
Company, Vice President
(prior to May 2005)
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Brian E. Assistant May 2006 Massachusetts Financial
Langenfeld(3) Secretary and Services Company,
Assistant Assistant Vice President
(born 3/7/73) Clerk and Counsel (since May
2006); John Hancock
Advisers, LLC, Assistant
Vice President and Counsel
(May 2005 to April 2006);
John Hancock Advisers,
LLC, Attorney and
Assistant Secretary (prior
to May 2005)
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Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial
(born 11/13/57) Treasurer Services Company, Senior
Vice President
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Susan S. Newton(3) Assistant May 2005 Massachusetts Financial
Secretary and Services Company, Senior
(born 3/7/50) Assistant Vice President and
Clerk Associate General Counsel
(since April 2005); John
Hancock Advisers, LLC,
Senior Vice President,
Secretary and Chief Legal
Officer (prior to April
2005); John Hancock Group
of Funds, Senior Vice
President, Secretary and
Chief Legal Officer (prior
to April 2005)
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Susan A. Assistant July 2005 Massachusetts Financial
Pereira(3) Secretary and Services Company, Vice
Assistant President and Senior
(born 11/5/70) Clerk Counsel (since June 2004);
Bingham McCutchen LLP (law
firm), Associate (prior to
June 2004)
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Mark N. Secretary and January 2006 Massachusetts Financial
Polebaum(3) Clerk Services Company,
Executive Vice President,
(born 5/1/52) General Counsel and
Secretary (since January
2006); Wilmer Cutler
Pickering Hale and Dorr
LLP (law firm), Partner
(prior to January 2006)
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Frank L. Tarantino Independent June 2004 Tarantino LLC (provider of
Chief compliance services),
(born 3/7/44) Compliance Principal (since June
Officer 2004); CRA Business
Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (prior to March
2003)
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James O. Yost(3) Assistant September 1990 Massachusetts Financial
(born 06/12/60) Treasurer Services Company, Senior
Vice President
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|
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each
Trustee has served continuously since appointment unless indicated
otherwise.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of the trust within the meaning of the Investment
Company Act of 1940 (referred to as the 1940 Act), which is the principal
federal law governing investment companies like the fund, as a result of
position with MFS. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
(4) In 2004 and 2005, Mr. Butler provided consulting services to the
independent compliance consultant retained by MFS pursuant to its
settlement with the SEC concerning market timing and related matters. The
terms of that settlement required that compensation and expenses related to
the independent compliance consultant be borne exclusively by MFS and,
therefore, MFS paid Mr. Butler for the services he rendered to the
independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a
total of $351,119.29.
The Trust held a shareholders' meeting in 2005 to elect Trustees, and will hold a shareholders' meeting at least once every five years thereafter, to elect Trustees. Each Trustee (except Messrs. Butler and Uek) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of July 1, 2007, the Trustees served as board members of 97 funds within the MFS Family of Funds.
PART II - APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
MARCH 1, 2007
Massachusetts Financial Services Company, MFS Institutional Advisors, Inc. and MFS' other investment adviser subsidiaries (collectively, "MFS") have adopted proxy voting policies and procedures, as set forth below ("MFS Proxy Voting Policies and Procedures"), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the registered investment companies sponsored by MFS, other than the MFS Union Standard Equity Fund (the "MFS Funds"). References to "clients" in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.
The MFS Proxy Voting Policies and Procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
A. VOTING GUIDELINES
1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST
MFS' policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS' clients, and not in the interests of any other party or in MFS' corporate interests, including interests such as the distribution of MFS Fund shares, administration of 401(k) plans, and institutional relationships.
MFS periodically reviews matters that are presented for shareholder vote by either management or shareholders of public companies. Based on the overall principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote. In all cases, MFS will exercise its discretion in voting on these matters in accordance with this overall principle. In other words, the underlying guidelines are simply that - guidelines. Proxy items of significance are often considered on a case-by-case basis, in light of all relevant facts and circumstances, and in certain cases MFS may vote proxies in a manner different from these guidelines.
As a general matter, MFS maintains a consistent voting position on similar proxy proposals with respect to various issuers. In addition, MFS generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts. However, MFS recognizes that there are gradations in certain types of proposals that might result in different voting positions being taken with respect to different proxy statements. There also may be situations involving matters presented for shareholder vote that are not governed by the guidelines. Some items that otherwise would be acceptable will be voted against the proponent when it is seeking extremely broad flexibility without offering a valid explanation. MFS reserves the right to override the guidelines with respect to a particular shareholder vote when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients.
From time to time, MFS receives comments on these guidelines as well as regarding particular voting issues from its clients. These comments are carefully considered by MFS when it reviews these guidelines each year and revises them as appropriate.
These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its affiliates that are likely to arise in connection with the voting of proxies on behalf of MFS' clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and E below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Voting Committee is responsible for monitoring and reporting with respect to such potential material conflicts of interest.
2. MFS' POLICY ON SPECIFIC ISSUES
ELECTION OF DIRECTORS
MFS believes that good governance should be based on a board with at least a simple majority of directors who are "independent" of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of "independent" directors. While MFS generally supports the board's nominees in uncontested elections, we will withhold our vote for, or vote against, as applicable, a nominee to a board of a U.S. issuer if, as a result of such nominee being elected to the board, the board would be comprised of a majority of members who are not "independent" or, alternatively, the compensation, nominating or audit committees would include members who are not "independent."
MFS will also withhold its vote for, or vote against, as applicable, a nominee to a board if we can determine that he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason stated in the proxy materials. In addition, MFS will withhold its vote for, or vote against, as applicable, all nominees standing for re-election to a board if we can determine: (1) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (2) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. Responsive action would include the rescission of the "poison pill"(without a broad reservation to reinstate the "poison pill" in the event of a hostile tender offer), or assurance in the proxy materials that the terms of the "poison pill" would be put to a binding shareholder vote within the next five to seven years.
MFS will also withhold its vote for, or vote against, as applicable, a nominee (other than a nominee who serves as the issuer's Chief Executive Officer) standing for re-election if such nominee participated (as a director or committee member) in the approval of a senior executive compensation package MFS deems to be "excessive." In the event that MFS determines that an issuer has adopted an "excessive" executive compensation package, MFS will withhold its vote for, or vote against, as applicable, the re-election of the issuer's Chief Executive Officer as director regardless of whether the Chief Executive Officer participated in the approval of the package. MFS will determine whether a senior executive compensation package is excessive on a case by case basis. Examples of "excessive" executive compensation packages include packages that contain egregious employment contract terms or pension payouts, backdated stock options, overly generous hiring bonuses for chief executive officers or packages which include excessive perks.
MFS evaluates a contested election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management's track record, the qualifications of the nominees for both slates and an evaluation of what each side is offering shareholders.
MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company's bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) ("Majority Vote Proposals").
MFS considers voting against Majority Vote Proposals if the company has adopted, or has proposed to adopt in the proxy statement, formal corporate governance principles that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast.
MFS believes that a company's election policy should address the specific circumstances at that company. MFS considers whether a company's election policy articulates the following elements to address each director nominee who fails to receive an affirmative majority of votes cast in an election:
o Establish guidelines for the process by which the company determines the status of nominees who fail to receive an affirmative majority of votes cast and disclose the guidelines in the annual proxy statement;
o Guidelines should include a reasonable timetable for resolution of the nominee's status and a requirement that the resolution be disclosed together with the reasons for the resolution;
o Vest management of the process in the company's independent directors, other than the nominee in question; and
o Outline the range of remedies that the independent directors may consider concerning the nominee.
CLASSIFIED BOARDS
MFS opposes proposals to classify a board (e.g., a board in which only one-third of board members are elected each year). MFS supports proposals to declassify a board.
NON-SALARY COMPENSATION PROGRAMS
MFS votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give "free rides" on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted.
MFS also opposes stock option programs that allow the board or the compensation committee, without shareholder approval, to reprice underwater options or to automatically replenish shares (i.e., evergreen plans). MFS will consider on a case-by-case basis proposals to exchange existing options for newly issued options (taking into account such factors as whether there is a reasonable value-for-value exchange).
MFS opposes stock option programs and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or could result in excessive dilution to other shareholders. As a general guideline, MFS votes against restricted stock plans, stock option, non-employee director, omnibus stock plans and any other stock plan if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS may accept a higher percentage (up to 20%) in the case of startup or small companies which cannot afford to pay large salaries to executives, or in the case where MFS, based upon the issuer's public disclosures, believes that the issuer has been responsible with respect to its recent compensation practices, including the mix of the issuance of restricted stock and options.
EXPENSING OF STOCK OPTIONS
MFS supports shareholder proposals to expense stock options because we believe that the expensing of options presents a more accurate picture of the company's financial results to investors. We also believe that companies are likely to be more disciplined when granting options if the value of stock options were treated as an expense item on the company's income statements.
EXECUTIVE COMPENSATION
MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. Therefore, except as provided in paragraph 2 above with respect to "excessive compensation" and the election of directors, MFS opposes shareholder proposals that seek to set restrictions on executive compensation. MFS also opposes shareholder requests for disclosure on executive compensation beyond regulatory requirements because we believe that current regulatory requirements for disclosure of executive compensation are appropriate and that additional disclosure is often unwarranted and costly. Although we support linking executive stock option grants to a company's performance, MFS opposes shareholder proposals that mandate a link of performance-based options to a specific industry or peer group stock index. MFS believes that compensation committees should retain the flexibility to propose the appropriate index or other criteria by which performance-based options should be measured.
MFS supports reasonably crafted shareholder proposals that (i) require the issuer to adopt a policy to recover the portion of performance-based bonuses and awards paid to senior executives that were not earned based upon a significant negative restatement of earnings unless the company already has adopted a clearly satisfactory policy on the matter, or (ii) expressly prohibit any future backdating of stock options.
EMPLOYEE STOCK PURCHASE PLANS
MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution.
"GOLDEN PARACHUTES"
From time to time, shareholders of companies have submitted proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer's annual compensation that is not determined in MFS' judgment to be excessive.
ANTI-TAKEOVER MEASURES
In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from "poison pills" and "shark repellents" to super-majority requirements.
MFS will vote for proposals to rescind existing "poison pills" and
proposals that would require shareholder approval to adopt prospective "poison
pills." Nevertheless, MFS will consider supporting the adoption of a
prospective "poison pill" or the continuation of an existing "poison pill" if we
can determine that the following two conditions are met: (1) the "poison pill"
allows MFS clients to hold an aggregate position of up to 15% of a company's
total voting securities (and of any class of voting securities); and (2) either
(a) the "poison pill" has a term of not longer than five years, provided that
MFS will consider voting in favor of the "poison pill" if the term does not
exceed seven years and the "poison pill" is linked to a business strategy or
purpose that MFS believes is likely to result in greater value for shareholders;
or (b) the terms of the "poison pill" allow MFS clients the opportunity to
accept a fairly structured and attractively priced tender offer (e.g., a
"chewable poison pill" that automatically dissolves in the event of an all cash,
all shares tender offer at a premium price).
MFS will consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer.
REINCORPORATION AND REORGANIZATION PROPOSALS
When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. While MFS generally votes in favor of management proposals that it believes are in the best long-term economic interests of its clients, MFS may oppose such a measure if, for example, the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers.
ISSUANCE OF STOCK
There are many legitimate reasons for the issuance of stock. Nevertheless, as noted above under "Non-Salary Compensation Programs," when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g. by approximately 15% or more), MFS generally votes against the plan. In addition, MFS votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a "blank check") because the unexplained authorization could work as a potential anti-takeover device. MFS may also vote against the authorization or issuance of common or preferred stock if MFS determines that the requested authorization is not warranted.
REPURCHASE PROGRAMS
MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders.
CONFIDENTIAL VOTING
MFS votes in favor of proposals to ensure that shareholder voting results are kept confidential. For example, MFS supports proposals that would prevent management from having access to shareholder voting information that is compiled by an independent proxy tabulation firm.
CUMULATIVE VOTING
MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS' clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company's nominating committee, which (for U.S. listed companies) must be comprised solely of "independent" directors.
WRITTEN CONSENT AND SPECIAL MEETINGS
Because the shareholder right to act by written consent (without calling a formal meeting of shareholders) can be a powerful tool for shareholders, MFS generally opposes proposals that would prevent shareholders from taking action without a formal meeting or would take away a shareholder's right to call a special meeting of company shareholders.
INDEPENDENT AUDITORS
MFS believes that the appointment of auditors for U.S. issuers is best left to the board of directors of the company and therefore supports the ratification of the board's selection of an auditor for the company. Some shareholder groups have submitted proposals to limit the non-audit activities of a company's audit firm or prohibit any non-audit services by a company's auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company's auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company's auditor for specific pieces of non-audit work in the limited situations permitted under current law.
OTHER CORPORATE GOVERNANCE, CORPORATE RESPONSIBILITY AND SOCIAL ISSUES
There are many groups advocating social change or changes to corporate governance or corporate responsibility standards, and many have chosen the publicly-held corporation as a vehicle for advancing their agenda. Generally, MFS votes with management on such proposals unless MFS can determine that the benefit to shareholders will outweigh any costs or disruptions to the business if the proposal were adopted. Common among the shareholder proposals that MFS generally votes against are proposals requiring the company to use corporate resources to further a particular social objective outside the business of the company, to refrain from investing or conducting business in certain countries, to adhere to some list of goals or principles (e.g., environmental standards), to disclose political contributions made by the issuer, to separate the Chairman and Chief Executive Officer positions, or to promulgate special reports on various activities or proposals for which no discernible shareholder economic advantage is evident.
The laws of various states may regulate how the interests of certain clients subject to those laws (e.g., state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients.
FOREIGN ISSUERS
Many of the items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted in favor) for foreign issuers include the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; and (v) approval of share repurchase programs.
MFS generally supports the election of a director nominee standing for re-election in uncontested elections unless it can be determined that (1) he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason given in the proxy materials; (2) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (3) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the "poison pill" be rescinded. MFS will also withhold its vote for, or vote against, as applicable, a director nominee standing for re-election of an issuer that has adopted an excessive compensation package for its senior executives as described above in the section entitled "Voting Guidelines-MFS' Policy on Specific Issues-Election of Directors."
MFS generally supports the election of auditors, but may determine to vote against the election of a statutory auditor in certain markets if MFS reasonably believes that the statutory auditor is not truly independent. MFS will evaluate all other items on proxies for foreign companies in the context of the guidelines described above, but will generally vote against an item if there is not sufficient information disclosed in order to make an informed voting decision.
In accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting ("share blocking"). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior to the meeting (e.g., one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the "block" restriction lifted early (e.g., in some countries shares generally can be "unblocked" up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer's transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY VOTING COMMITTEE
The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The MFS Proxy Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable;
b. Determines whether any potential material conflicts of interest exist with respect to instances in which (i) MFS seeks to override these MFS Proxy Voting Policies and Procedures and (ii) votes on ballot items not clearly governed by these MFS Proxy Voting Policies and Procedures; and
c. Considers special proxy issues as they may arise from time to time.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its affiliates that could arise in connection with the voting of proxies on behalf of MFS' clients. Any significant attempt to influence MFS' voting on a particular proxy matter should be reported to the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, or (ii) matters presented for vote are not governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy Voting Committee, or delegees, will follow these procedures:
a. Compare the name of the issuer of such proxy against a list of significant current and potential (i) distributors of MFS Fund shares, (ii) retirement plans administered by MFS or its affiliate MFS Retirement Services, Inc. ("RSI"), and (iii) MFS institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee;
c. If the name of the issuer appears on the MFS Significant Client List, then the MFS Proxy Voting Committee will be apprised of that fact and each member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS' clients, and not in MFS' corporate interests; and
d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer's relationship to MFS, the analysis of the matters submitted for proxy vote, the votes as to be cast and the reasons why the MFS Proxy Voting Committee determined that the votes were cast in the best long-term economic interests of MFS' clients, and not in MFS' corporate interests. A copy of the foregoing documentation will be provided to MFS' Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS' distribution, institutional business units and RSI. The MFS Significant Client List will be reviewed and updated periodically, as appropriate.
3. GATHERING PROXIES
Most proxies received by MFS and its clients originate at Automatic Data Processing Corp. ("ADP") although a few proxies are transmitted to investors by corporate issuers through their custodians or depositories. ADP and issuers send proxies and related material directly to the record holders of the shares beneficially owned by MFS' clients, usually to the client's custodian or, less commonly, to the client itself. This material will include proxy cards, reflecting the shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy statements with the issuer's explanation of the items to be voted upon.
MFS, on behalf of itself and the Funds, has entered into an agreement with an independent proxy administration firm, Institutional Shareholder Services, Inc. (the "Proxy Administrator"), pursuant to which the Proxy Administrator performs various proxy vote related administrative services, such as vote processing and recordkeeping functions for MFS' Funds and institutional client accounts. The Proxy Administrator receives proxy statements and proxy cards directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator's system by an MFS holdings datafeed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for all upcoming shareholders' meetings are available on-line to certain MFS employees and the MFS Proxy Voting Committee.
4. ANALYZING PROXIES
Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator at the prior direction of MFS automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by the MFS Proxy Voting Committee. With respect to proxy matters that require the particular exercise of discretion or judgment, MFS considers and votes on those proxy matters. MFS receives research from ISS which it may take into account in deciding how to vote. In addition, MFS expects to rely on ISS to identify circumstances in which a board may have approved excessive executive compensation. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have little or no involvement in specific votes taken by MFS. This is designed to promote consistency in the application of MFS' voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g., corporate actions, such as mergers and acquisitions), a representative of the MFS Proxy Voting Committee may consult with or seek recommendations from portfolio managers or analysts.(1) However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted.
(1) From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst is not available to provide a recommendation on a merger or acquisition proposal. If such a recommendation cannot be obtained prior to the cut-off date of the shareholder meeting, certain members of the MFS Proxy Voting Committee may determine to abstain from voting.
As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients. Any such override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies.
5. VOTING PROXIES
In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy Voting Committee to monitor the proxy voting process. When proxy materials for clients are received, they are forwarded to the Proxy Administrator and are input into the Proxy Administrator's system. Through an interface with the portfolio holdings database of MFS, the Proxy Administrator matches a list of all MFS Funds and clients who hold shares of a company's stock and the number of shares held on the record date with the Proxy Administrator's listing of any upcoming shareholder's meeting of that company.
When the Proxy Administrator's system "tickler" shows that the voting cut-off date of a shareholders' meeting is approaching, a Proxy Administrator representative checks that the vote for MFS Funds and clients holding that security has been recorded in the computer system. If a proxy card has not been received from the client's custodian, the Proxy Administrator calls the custodian requesting that the materials be forwarded immediately. If it is not possible to receive the proxy card from the custodian in time to be voted at the meeting, MFS may instruct the custodian to cast the vote in the manner specified and to mail the proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy cards completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator's system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company's proxy issues, are retained as required by applicable law.
E. REPORTS
MFS FUNDS
MFS will report the results of its voting to the Board of Trustees,
Board of Directors and Board of Managers of the MFS Funds. These reports will
include: (i) a summary of how votes were cast; (ii) a review of situations where
MFS did not vote in accordance with the guidelines and the rationale therefore;
(iii) a review of the procedures used by MFS to identify material conflicts of
interest; and (iv) a review of these policies and the guidelines and, as
necessary or appropriate, any proposed modifications thereto to reflect new
developments in corporate governance and other issues. Based on these reviews,
the Trustees, Directors and Managers of the MFS Funds will consider possible
modifications to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party other than the client or its representatives (unless required by applicable law) because we consider that information to be confidential and proprietary to the client.
MFS UNION STANDARD EQUITY FUND
INSTITUTIONAL SHAREHOLDERS SERVICES TAFT-HARTLEY ADVISORY SERVICES
PROXY VOTING GUIDELINES AND PROCEDURES
The Taft-Hartley Advisory Services Voting Policy is based upon the AFL-CIO Proxy Voting Guidelines, which comply with all the fiduciary standards delineated by the U.S. Department of Labor.
INTRODUCTION
Taft-Hartley client accounts are governed by the Employee Retirement Income Security Act (ERISA). ERISA sets forth the tenets under which pension fund assets must be managed and invested. Proxy voting rights have been declared by the Department of Labor to be valuable plan assets and therefore must be exercised in accordance with the fiduciary duties of loyalty and prudence. The duty of loyalty requires that the voting fiduciary exercise proxy voting authority solely in the economic interest of participants and plan beneficiaries. The duty of prudence requires that decisions be made based on financial criteria and that a clear process exists for evaluating proxy issues.
The Taft-Hartley Advisory Services voting policy was carefully crafted to meet those requirements by promoting long-term shareholder value, emphasizing the "economic best interests" of plan participants and beneficiaries. Taft-Hartley Advisory Services will assess the short-term and long-term impact of a vote and will promote a position that is consistent with the long-term economic best interests of plan members embodied in the principle of a "worker-owner view of value."
Our guidelines address a broad range of issues, including election of directors, executive compensation, proxy contests, auditor ratification, and tender offer defenses - all significant voting items that affect long-term shareholder value. In addition, these guidelines delve deeper into workplace issues that may have an impact on corporate performance, including:
o Corporate policies that affect job security and wage levels;
o Corporate policies that affect local economic development and stability;
o Corporate responsibility to employees and communities; and
o Workplace safety and health issues.
All votes will be reviewed on a case-by-case basis, and no issues will be considered strictly routine. Each issue will be considered in the context of the company under review. In other words, proxy voting guidelines are just that - guidelines. When company-specific factors are taken into account, every proxy voting decision becomes a case-by-case decision. Keeping in mind the concept that no issue is considered "routine", outlined in the following pages are general voting parameters for various types of proxy voting issues (when there are no company-specific reasons for voting to the contrary).
I) BOARD OF DIRECTORS PROPOSALS
Electing directors is the single most important stock ownership right that shareholders can exercise. The board of directors is responsible for holding management accountable to performance standards on behalf of the shareholders. Taft-Hartley Advisory Services holds directors to a high standard when voting on their election, qualifications, and compensation.
Votes on entire board of directors take into account factors that include:
o Company performance relative to its peers;
o Lack of independence of the full board and key board committees (fully
independent audit, compensation, and nominating committees);
o Board diversity;
o Executive compensation-related (excessive salaries/bonuses/pensions, stock
option repricing, misallocation of corporate funds, etc.);
o Failure of board to respond to majority shareholder votes;
o Poor long-term corporate performance record relative to peer, S&P 500 or
Russell 3000 Indices.
Votes on individual director nominees are made on a case-by-case basis, taking into account factors that include:
o Poor attendance;
o Lack of a board that is at least two-thirds (67 percent) independent;
Independence of the key board committees (audit, compensation, and
nominating);
o Performance of the key board committees;
o Failure to establish key board committees; and
o Interlocking and excessive directorships.
NON-INDEPENDENT CHAIRMAN: A principal function of the board is to monitor management, and a fundamental responsibility of the chairman is to monitor the company's CEO. This duty is obviously compromised when the chairman is the CEO. Approximately 60 percent of companies in both the S&P 500 and Russell 3000 have joint chairman and CEO positions. A McKinsey survey of board members at 500 U.S. companies found that nearly 70 percent of directors polled said a CEO should not run the board. As executive compensation is heavily correlated to the managerial power relationship in the boardroom, the separation of the CEO and chairman positions is a critical step in curtailing excessive pay. Indeed, a number of academic studies have demonstrated that executive compensation is twenty to forty percent higher if the CEO is also the chairman of the board. We WITHHOLD votes from non-independent directors who serve as board chairs, and vote FOR proposals calling for non-executive directors who are not former CEOs or senior-level executives to serve as chairman.
INDEPENDENT DIRECTORS: Taft-Hartley Advisory Services believes that a board independent of management is of critical value to safeguard a company and its shareholders. Board independence helps ensure that directors carry out their duties in an objective manner and without manager interference to select, monitor, and compensate management. We will cast votes in a manner consistent with supporting and reinforcing this philosophy. Independence is evaluated upon factors including: past or current employment with the company or its subsidiaries; the provision of consulting services; familial relationships; board interlocks; and service with a non-profit that receives contributions from the company. We vote FOR proposals that request that the board comprise of a two-thirds majority of independent directors, and/or its audit, compensation, and nominating committees be comprised wholly of independent directors. We WITHHOLD votes from non-independent director nominees on boards that are not at least two-thirds (67 percent) independent.
BOARD STRUCTURE: Taft-Hartley Advisory Services supports the principle that all directors should be accountable to shareholder vote on an annual basis. A classified board is a board divided into separate classes (typically three), with only one class of nominees coming up to vote at the annual meeting each year. As a result, shareholders are only able to vote a single director approximately once every three years. A classified board makes it difficult to change control of the board through a proxy contest because typically only one-third of the seats will be at stake. The ultimate result is that classified boards can entrench management and preclude most takeover bids or proxy contests. Good corporate governance practice supports annually elected boards. We vote AGAINST classified boards when the issue comes up for vote.
BOARD AND COMMITTEE SIZE: While there is no hard and fast rule among institutional investors as to what may be an optimal size board, Taft-Hartley Advisory Services believes there is an acceptable range which companies should strive to meet and not exceed. A board that is too large may function inefficiently. Conversely, a board that is too small may allow the CEO to exert disproportionate influence or may stretch the time requirements of individual directors too thin. Given that the preponderance of boards in the U.S. range between five and fifteen directors, we believe this is a useful benchmark for evaluating such proposals. We vote AGAINST any proposal seeking to amend the company's board size to fewer than five seats or more than fifteen seats. On a CASE-BY-CASE basis, we consider WITHHOLDS or other action at companies that have fewer than five directors and more than 15 directors on their board.
FINANCIAL PERFORMANCE TEST FOR BOARDS: Taft-Hartley Advisory Services believes that long-term financial performance should be considered when determining vote recommendations with regard to directors in uncontested elections. When evaluating whether to withhold votes against director nominees, we will look at the company's response to the ongoing performance issues, and consider several factors, including performance improvement in the current year, changes in management or board composition, recent transactions at the company, overall governance practices, particularly any recent changes, and the financial health of the company.
PROPOSALS ON BOARD INCLUSIVENESS: Taft-Hartley Advisory Services votes FOR shareholder proposals asking a company to make efforts to seek more women and minority group members for service on the board. A more diverse group of directors benefits shareholders and the company.
MAJORITY THRESHOLD VOTING REQUIREMENT FOR DIRECTOR ELECTIONS: Taft-Hartley fiduciaries believe shareholders should have a greater voice in regard to the election of directors and view majority threshold voting as a viable alternative to the current deficiencies of the plurality system in the U.S. Shareholders have expressed strong support for resolutions on majority threshold voting. Taft-Hartley Advisory Services supports proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors, provided the proposal includes a carve-out for a plurality voting standard in contested director elections.
CUMULATIVE VOTING: Under a cumulative voting scheme, shareholders are permitted to have one vote per share for each director to be elected and may apportion these votes among the director candidates in any manner they wish. This voting method allows minority shareholders to influence the outcome of director contests by "cumulating" their votes for one nominee, thereby creating a measure of independence from management control. Taft-Hartley Advisory Services votes FOR proposals to allow cumulative voting and votes AGAINST proposals to eliminate it.
POISON PILLS: Shareholder rights plans, more commonly known as poison pills, are warrants issued to shareholders allowing them to purchase shares from the company at a price far below market value when a certain ownership threshold has been reached, thereby effectively preventing a takeover. Poison pills can entrench management and give the board veto power over takeover bids, thereby altering the balance of power between shareholders and management. While we evaluate poison pills on a case-by-case basis depending on a company's particular set of circumstances, Taft-Hartley Advisory Services generally votes FOR proposals to submit a company's poison pill to shareholder vote and/or eliminate or redeem poison pills. We WITHHOLD votes from boards where a dead-hand poison pill provision is in place. From a shareholder perspective, there is no justification for a dead-hand provision.
II) CAPITAL STRUCTURE
INCREASE AUTHORIZED COMMON STOCK: Corporations seek shareholder approval to increase their supply of common stock for a variety of business reasons. We vote FOR proposals to increase authorized common stock when management has provided a specific justification for the increase, evaluating proposals on a case-by-case basis. We believe that an increase of up to 50 percent is enough to allow a company to meet its capital needs. We vote AGAINST proposals to increase an authorization by more than 50 percent unless management provides compelling reasons for the increase.
DUAL CLASS STRUCTURES: Taft-Hartley Advisory Services does not support dual share class structures. Incumbent management can use a dual class structure to gain unequal voting rights. A separate class of shares with superior voting rights can allow management to concentrate its power and insulate itself from the majority of its shareholders. An additional drawback is the added cost and complication of maintaining the two class system. We will vote FOR a one share, one vote capital structure, and we will vote AGAINST the creation or continuation of dual class structures.
III) RATIFYING AUDITORS
Ratifying auditors is no longer a routine procedure. Accounting scandals at companies such as Enron and WorldCom underscore the need to ensure auditor independence in the face of selling consulting services to audit clients. A study by Richard Frankel, Marilyn Johnson, and Karen Nelson found that the ratio of non-audit fees to total fees paid is negatively associated with stock market returns on the filing date, indicating that investors associate non-audit fees "with lower quality audits and, by implication, lower quality earnings." This study also found that companies that pay high non-audit fees are more likely to engage in earnings management.
Auditors are the backbone upon which a company's financial health is measured, and auditor independence is essential for rendering objective opinions upon which investors then rely. When an auditor is paid more in consulting fees than for auditing, its relationship with the company is left open to conflicts of interest. Because accounting scandals evaporate shareholder value, any proposal to ratify auditors is examined for potential conflicts of interest, with particular attention to the fees paid to the auditor, as well as whether the ratification of auditors has been put up for shareholder vote. Failure by a company to present its selection of auditors for shareholder ratification should be discouraged as it undermines good governance and disenfranchises shareholders.
We vote AGAINST ratification of a company's auditor if it receives more than one-quarter of its total fees for consulting and WITHHOLD votes from Audit Committee members when auditor ratification is not included on the proxy ballot and/or when consulting fees exceed audit fees. We support shareholder proposals to ensure auditor independence and effect mandatory auditor ratification.
IV) MERGERS, ACQUISITIONS, AND TRANSACTIONS
Taft-Hartley Advisory Services votes for corporate transactions that take the high road to competitiveness and company growth. Taft-Hartley Advisory Services believes that structuring merging companies to build long-term relationships with a stable and quality work force and preserving good jobs creates long-term company value. We oppose corporate transactions which indiscriminately layoff workers and shed valuable competitive resources.
Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis, taking into account the following factors:
o Impact on shareholder value;
o Changes in corporate governance and their impact on shareholder rights;
o Fairness opinion (or lack thereof);
o Offer price (cost vs. premium);
o Form and mix of payment (i.e. stock, cash, debt, etc.);
o Change-in-control payments to executive officers;
o Perspective of ownership (target vs. acquirer) in the deal;
o Fundamental value drivers behind the deal;
o Anticipated financial and operating benefits realizable through
combined synergies;
o Financial viability of the combined companies as a single entity;
o What are the potential legal or environmental liability risks associated
with the target firm?;
o Impact on community stakeholders and employees in both workforces;
o How will the merger adversely affect employee benefits like pensions and
health care?
REINCORPORATION: Taft-Hartley Advisory Services reviews proposals to change a company's state of incorporation on a case-by-case basis. We vote FOR proposals to reincorporate in another state when the company has provided satisfactory business reasons and there is no significant reduction in shareholder rights. We vote AGAINST proposals to reincorporate that reduce shareholder rights. In cases of offshore reincorporations to tax havens, among other factors, we evaluate the effect upon any and all legal recourse of shareholders in a new jurisdiction, potential harm to company brands and image, and any actual, qualified economic benefit.
V) EXECUTIVE COMPENSATION
STOCK OPTION PLANS: Taft-Hartley Advisory Services supports compensating executives at a reasonable rate and believes that executive compensation should be strongly correlated to performance. Stock option and other forms of compensation should be performance-based with an eye toward improving shareholder value. Well-designed stock option plans align the interests of executives and shareholders by providing that executives benefit when stock prices rise as the company-- and shareholders-- prosper together.
Many plans sponsored by management provide goals so easily attained that executives can realize massive rewards even though shareholder value is not necessarily created. Stock options that are awarded selectively and excessively can dilute shareholders' share value and voting power. In general, Taft-Hartley Advisory Services supports plans that are offered at fair terms to executives who satisfy well-defined performance goals. We evaluate option plans on a case-by-case basis, taking into consideration factors including: offer price, dilution to outstanding share value, dilution to share voting power, stock option expensing, annual burn rate, executive concentration ratios, pay-for-performance and the presence of any repricing provisions. We support plans that retain tax deductibility through the use of performance goals and oppose plans whose award size exceeds the tax deduction limit.
Taft-Hartley Advisory Services votes FOR option plans that provide legitimately challenging performance targets that truly motivate executives in the pursuit of excellent performance. Likewise, we vote AGAINST plans that offer unreasonable benefits to executives that are not available to any other shareholders.
POOR COMPENSATION PRACTICES: Poor disclosure, the absence or non-transparency of disclosure and poor plan design of compensation payouts lead to excessive executive compensation practices that are detrimental to shareholders. Poorly designed plans or those lacking in transparency can be reflective of a poorly performing compensation committee or board. Taft-Hartley Advisory Services will consider WITHHOLDING votes from compensation committee members and/or the CEO on a CASE-BY-CASE basis if the company has poor compensation practices. In addition, we may consider recommending a WITHHOLD from the entire board if the whole board was involved in and contributed to egregious compensation.
PROPOSALS TO LIMIT EXECUTIVE AND DIRECTOR PAY: Taft-Hartley Advisory Services votes FOR shareholder proposals that seek additional disclosure of executive and director pay information. We vote FOR shareholder proposals that seek to eliminate outside directors' retirement benefits. We review on a case-by-case basis all other shareholder proposals that seek to limit executive and director pay. This includes shareholder proposals that seek to link executive compensation to customer, employee, or stakeholder satisfaction.
GOLDEN PARACHUTES: golden parachutes are designed to protect the senior level employees of a corporation in the event of a change-in-control. Under most golden parachute agreements, senior level management employees receive a lump sum pay-out triggered by a change-in-control at usually two to three times base salary. These severance agreements grant extremely generous benefits to well-paid executives and most often offer no value to shareholders. Taft-Hartley Advisory Services votes FOR shareholder proposals to have all golden parachute agreements submitted for shareholder ratification, and we generally vote AGAINST all proposals to ratify golden parachutes.
OPTIONS BACKDATING: Options backdating has serious implications and has resulted in financial restatements, delisting of companies, and/or the termination of executives or directors. When options backdating has taken place, Taft-Hartley Advisory Services may consider WITHHOLDING votes from the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. We adopt a CASE-BY-CASE approach to the options backdating issue to differentiate companies that had sloppy administration vs. those that had committed fraud, as well as those companies that have since taken corrective action. Instances in which companies have committed fraud are more disconcerting, and Taft-Hartley Advisory Services will look to them to adopt formal policies to ensure that such practices will not re-occur in the future.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS): Taft-Hartley Advisory Services generally votes FOR ESOPs which allow a company's employees to acquire stock in the company at a slight discount. Such plans help link employees' self-interest to the interests of the shareholders, thereby benefiting the company, its customers, and shareholders and creating long-term company value.
VI) SOCIAL AND ENVIRONMENTAL ISSUES Increasingly, shareholders are presenting proposals related to company environmental practices, workplace practices, social issues and sustainability goals. Taft-Hartley Advisory Services provides specific narrative explanations for votes on these types of shareholder proposals. Taft-Hartley Advisory Services evaluates shareholder proposals on a case-by-case basis to determine if they are in the best economic interests of the plan participants and beneficiaries. Taft-Hartley Advisory Services' clients select investment strategies and criteria for their portfolios. Taft-Hartley Advisory Services views its responsibility to protect plan beneficiary economic interests through the use of the proxy. To meet this obligation, Taft-Hartley Advisory Services votes consistent with the economic best interests of the participants and beneficiaries to create "high road" shareholder and economic value.
In most cases, Taft-Hartley Advisory Services supports proposals that request management to report to shareholders information and practices that would help in evaluating the company's operations. In order to be able to intelligently monitor their investments, shareholders often need information best provided by the company itself. Taft-Hartley Advisory Services supports proposals that seek management compliance with shareholder interests to ensure that shareholders are fully informed about actions harmful to society with special attention to the company's legal and ethical obligations, impact on company profitability, and the potential negative publicity for disreputable practices.
CERES PRINCIPLES: The CERES Principles, formulated by the Coalition of Environmentally Responsible Economies, require signing companies to address environmental issues, including protection of the biosphere, sustainable use of natural resources, reduction and disposal of wastes, energy conservation, and employee and community risk reduction. Evidence suggests that environmentally conscious companies may realize long-term savings by implementing programs to pollute less and conserve resources while realizing good public relations and new marketing opportunities. Moreover, the reports that are required of signing companies provide shareholders with more information concerning topics they may deem relevant to their company's financial well-being.
Many companies have voluntarily adopted these principles and proven that environmental sensitivity makes good business sense. Taft-Hartley Advisory Services supports proposals that improve a company's public image, reduce exposure to liabilities, and establish standards so that environmentally responsible companies and markets are not at a competitive financial disadvantage. Taft-Hartley Advisory Services votes FOR the adoption of the CERES Principles and FOR reporting to shareholders on environmental issues.
CORPORATE CONDUCT, HUMAN RIGHTS, AND LABOR CODES: Taft-Hartley Advisory Services generally supports proposals that call for the adoption and/or enforcement of clear principles or codes of conduct relating to countries in which there are systematic violations of human rights. These conditions include the use of slave, child, or prison labor, undemocratically elected governments, widespread reports by human rights advocates, fervent pro-democracy protests, and/or economic sanctions and boycotts.
Many proposals refer to the seven core conventions, commonly referred to as the "Declaration on Fundamental Principles and Rights At Work," ratified by the International Labor Organization (ILO). The seven conventions fall under four broad categories: i) Right to organize and bargain collectively; ii) Non-discrimination in employment; iii) Abolition of forced labor; and iv) End of child labor. Each of the 180 member nations of the ILO body are bound to respect and promote these rights to the best of their abilities. Taft-Hartley Advisory Services supports the principles and codes of conduct relating to company investment in countries with patterns of human rights abuses (Northern Ireland, Columbia, Burma, former Soviet Union, and China). Taft-Hartley Advisory Services votes FOR proposals to implement and report on ILO codes of conduct.
PART II - APPENDIX C
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which the initial sales charge (ISC) and/or the CDSC is waived for the MFS funds' share classes. Some of the following information will not apply to certain funds, depending on which classes of shares are offered by the funds. In order to qualify for a sales charge waiver, you must advise MFS that you are eligible for the waiver at the time of purchase and/or redemption. The funds, MFS, and their affiliates reserve the right to eliminate, modify, and add waivers at any time at their discretion.
In addition, transfers, rollovers or other transactions from one account to the same class of the same fund of another account otherwise subject to a CDSC or an ISC will not be charged a CDSC or ISC so long as each account is held in your name or for your benefit (either individually or collectively) by MFSC or an affiliate. Shares will retain the CDSC schedule in effect based upon a pro rata share of the CDSC from the fund in the first account and the original purchase date of the shares subject to the CDSC.
As used in this Appendix C, the term "ESP" includes employer sponsored plans, the term "SRO" includes salary reduction only plans, and the term "ERISA" refers to the Employment Retirement Income Security Act of 1974, as amended.
In this appendix, all references to Class A Shares shall apply to Class A1 Shares and all references to Class B Shares shall apply to Class B1 Shares.
RETIREMENT PLANS:
-----------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
-----------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS A CLASS A CLASS B CLASS C
ISC CDSC CDSC CDSC
-----------------------------------------------------------------------------------------------------
1. WAIVERS FOR SERVICED PLANS
-----------------------------------------------------------------------------------------------------
o To the extent that redemption proceeds are used V V V
to pay expenses (or certain participant expenses)
of the 401(a) or ESP Plan (e.g., participant
account fees).
-----------------------------------------------------------------------------------------------------
o Shares purchased or redeemed representing V V V V
transfers from, or transfers to, plan investments
other than the MFS funds.
-----------------------------------------------------------------------------------------------------
o Shares acquired pursuant to repayments by V V V V
retirement plan participants of loans from 401(a)
or ESP Plans.
-----------------------------------------------------------------------------------------------------
o By a retirement plan which established an account V
with MFSC on or after July 1, 1996, but before
January 1, 2003 (provided that the plan
establishment paperwork is received by MFSC in good
order on or before December 31, 2002).
-----------------------------------------------------------------------------------------------------
o Transfers from a single account maintained for a V V V
401(a) Plan to multiple accounts maintained by MFSC
on behalf of individual participants of such Plan.
-----------------------------------------------------------------------------------------------------
o All Serviced Plans. V V
-----------------------------------------------------------------------------------------------------
o Transfers due to the eligibility of a Serviced V V V V
Plan to move its investment into a new share class
under certain eligibility criteria established from
time to time by MFD (sales charges waived may vary
depending upon the criteria established by MFD).
-----------------------------------------------------------------------------------------------------
o Transfer or rollover to MFS Prototype IRA from a V V V V
Serviced Plan.
-----------------------------------------------------------------------------------------------------
o Reinvestment of Redemption Proceeds from Class B V V
Shares:
o Shares acquired by a retirement plan whose
account application was received by MFD on or
prior to March 30, 2001 where the purchase
represents the immediate reinvestment of
proceeds from the plan's redemption of its
Class B shares of the MFS funds and is equal to
or exceeds $500,000, either alone or in
aggregate with the current market value of the
plan's existing Class A shares; or
o Shares acquired by a retirement plan whose
account application was received by MFD on or
after April 2, 2001 and before December 31,
2002 where the purchase represents the
immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the
MFS funds and is equal to or exceeds
$1,000,000, either alone or in aggregate with
current market value of the plan's existing
Class A shares.
-----------------------------------------------------------------------------------------------------
2. WAIVERS FOR NON- SERVICED PLANS ("TA PLANS")
-----------------------------------------------------------------------------------------------------
A. 401(A) PLANS AND ESP PLANS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan and/or sponsoring V V
organization demonstrates to the satisfaction of,
and certifies to, MFSC that the retirement plan (or
multiple plans maintained by the same plan sponsor)
has, at the time of certification or will have
pursuant to a purchase order placed with the
certification, a market value of $500,000 or more
(applies only when the certification was received
by MFSC on or prior to March 30, 2001) or
$1,000,000 or more (applies only when the
certification is received by MFSC on or after April
2, 2001), invested in shares of any class or
classes of the MFS funds and aggregate assets of at
least $10 million; provided, however, that the CDSC
will not be waived (i.e., it will be imposed) (a)
with respect to plans which establish an account
with MFSC on or after November 1, 1997, in the
event that the plan makes a complete redemption of
all of its shares in the MFS Family of funds, or
(b) with respect to plans which establish an
account with MFSC prior to November 1, 1997, in the
event that there is a change in law or regulations
which result in a material adverse change to the
tax advantaged nature of the plan, or in the event
that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated
under ERISA or is liquidated or dissolved; or (iii)
is acquired by, merged into, or consolidated with
any other entity.
-----------------------------------------------------------------------------------------------------
o Investment in Class A shares by certain V(1)
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1997 and December 31, 1999;
o The plan records are maintained on a pooled
basis by MFSC; and
o The sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of
purchase, the employer has at least 200
eligible employees and the plan has aggregate
assets of at least $2,000,000.
-----------------------------------------------------------------------------------------------------
3. WAIVERS FOR BOTH SERVICED PLANS AND TA PLANS
-----------------------------------------------------------------------------------------------------
A. BENEFIT RESPONSIVE WAIVERS
-----------------------------------------------------------------------------------------------------
o Distributions made from an IRA or a 403(b) SRO V V V
pursuant to Section 72(t) of the Internal Revenue
Code of 1986, as amended.
-----------------------------------------------------------------------------------------------------
o Death, disability or retirement of 401(a) or ESP V V V
Plan participant, or death or disability of IRA
owner, SRO Plan Participant or SAR-SEP Plan
Participant.
-----------------------------------------------------------------------------------------------------
o Eligible participant distributions, such as V V V
distributions due to death, disability, financial
hardship, retirement and termination of employment
from Serviced Plans and nonqualified deferred
compensation plans (excluding, however, a
termination of a plan).
-----------------------------------------------------------------------------------------------------
o Loan from 401(a) or ESP Plan. V V V
-----------------------------------------------------------------------------------------------------
o Financial hardship (as defined in Treasury V V V
Regulation Section 1.401(k)-l(d)(2), as amended
from time to time) for 401(a) Plans and ESP Plans.
-----------------------------------------------------------------------------------------------------
o Termination of employment of 401(a) or ESP Plan V V V
participant (excluding, however, a termination of
the Plan).
-----------------------------------------------------------------------------------------------------
o Tax-free return of excess 401(a) Plan, ESP Plan V V V
or IRA contributions.
-----------------------------------------------------------------------------------------------------
o Distributions from a 401(a) or ESP Plan that has V V V
invested its assets in one or more of the MFS funds
for more than 10 years from the later to occur of
(i) January 1, 1993 or (ii) the date such 401(a) or
ESP Plan first invests its assets in one or more of
the MFS funds. The sales charges will be waived in
the case of a redemption of all of the 401(a) or
ESP Plan's shares in all MFS funds (i.e., all the
assets of the 401(a) or ESP Plan invested in the
MFS funds are withdrawn), unless immediately prior
to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS funds
(excluding the reinvestment of distributions)
during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets
in the MFS funds, in which case the sales charges
will not be waived.
-----------------------------------------------------------------------------------------------------
o Distributions made on or after the IRA owner, ESP V
participant, SRO Plan participant or 401(a) Plan
participant has attained the age of 591/2 years old.
-----------------------------------------------------------------------------------------------------
o Certain involuntary redemptions and redemptions V V V
in connection with certain automatic withdrawals
from a 401(a) Plan.
-----------------------------------------------------------------------------------------------------
o Distributions made on or after the IRA owner or V V V
the 401(a), ESP, SRO or SAR-SEP Plan participant,
as applicable, has attained the age of 701/2 years
old, but only with respect to the minimum
distribution under Code rules.
-----------------------------------------------------------------------------------------------------
o Investments in Class A shares by certain V(1)
retirement plans subject to ERISA, if, prior to
July 1, 1996,
o The plan had established an account with MFSC;
and
o The sponsoring organization had demonstrated to
the satisfaction of MFD that either:
o The employer had at least 25 employees; or
o The total purchases by the retirement plan of
Class A shares of the MFS funds would be in the
amount of at least $250,000 within a reasonable
period of time, as determined by MFD in its
sole discretion.
-----------------------------------------------------------------------------------------------------
o Investments in Class A shares by certain V(1 )
retirement plans subject to ERISA, if
o The plan established an account with MFSC
between July 1, 1996 and March 30, 2001;
o The plan has, at the time of purchase, either
alone or in aggregate with other plans
maintained by the same plan sponsor, a market
value of $500,000 or more invested in shares of
any class or classes of the MFS funds; and
o The retirement plans will qualify under this
category only if the plans or their sponsoring
organization informs MFSC prior to the
purchases that the plans have a market value of
$500,000 or more invested in shares of any
class or classes of the MFS funds; MFSC has no
obligation independently to determine whether
such plans qualify under this category.
-----------------------------------------------------------------------------------------------------
B. CERTAIN TRANSFERS OF REGISTRATION
-----------------------------------------------------------------------------------------------------
o Transfers to an IRA rollover account where any V V V
sales charges with respect to the shares being
reregistered would have been waived had they been
redeemed.
-----------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
-----------------------------------------------------------------------------------------------------
o Where the retirement plan is, at that time, a V V
party to a retirement plan recordkeeping or
administrative services agreement with MFD or one
of its affiliates pursuant to which certain of
those services are provided by Benefit Services
Corporation or any successor service provider
designated by MFD.
-----------------------------------------------------------------------------------------------------
o Where the retirement plan has established an V V
account with MFSC on or after January 1, 2000, and
is, at that time, a party to a retirement plan
recordkeeping or administrative services agreement
with MFD or one of its affiliates pursuant to which
such services are provided with respect to at least
$10 million in plan assets.
-----------------------------------------------------------------------------------------------------
o Shares acquired by retirement plans or trust V V
accounts whose financial intermediaries have
entered into an administrative services agreement
with MFD or one of its affiliates to perform
certain administrative services, subject to certain
operational and minimum size requirements specified
from time to time by MFD or one or more of its
affiliates.
-----------------------------------------------------------------------------------------------------
1 Purchases of Class A shares are not subject to an initial sales charge; however, a
CDSC of 1% will be deducted from redemption proceeds if the redemption is made within
12 months of purchase.
|
WAIVERS FOR 529 TUITION PROGRAMS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
WAIVER CATEGORY CLASS 529A CLASS 529B CLASS 529C
ISC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. CERTAIN SPONSORED PLANS
---------------------------------------------------------------------------------------------------------
o Shares acquired on behalf of a group, association or V V V
employer sponsored plan, pursuant to guidelines created by
MFD from time to time.
---------------------------------------------------------------------------------------------------------
B. INVESTMENT PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS
A, CLASS B AND CLASS C SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases of Class V V V
529A shares, and the CDSC imposed on certain redemptions
of Class A, Class B and Class C shares, are waived where
Class 529A, Class 529B and Class 529C shares are acquired
following the reinvestment of the proceeds of a redemption
of Class A, Class B and Class C shares, respectively, of
the same fund; provided however, that any applicable CDSC
liability on the Class B or Class C shares redeemed will
carry over to the Class 529B or Class 529C shares acquired
and for purposes of calculating the CDSC, the length of
time you have owned your Class 529B or Class 529C shares
will be measured from the date of original purchase of the
Class B or Class C shares redeemed.
---------------------------------------------------------------------------------------------------------
C. ADMINISTRATIVE SERVICE ARRANGEMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by 529 tuition programs whose sponsors V
or administrators have entered into an administrative
services agreement with MFD or one of its affiliates to
perform certain administrative or investment advisory
services subject to certain operational and minimum size
requirements specified from time to time by MFD or one or
more of its affiliates.
---------------------------------------------------------------------------------------------------------
D. QUALIFIED HIGHER EDUCATION EXPENSES
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the redemption proceeds are used V V
to pay for qualified higher education expenses, which may
include tuition, fees, books, supplies, equipment and room
and board (see the program description for further
information on qualified higher education expenses);
however the CDSC will not be waived for redemptions where
the proceeds are transferred or rolled over to another
tuition program.
---------------------------------------------------------------------------------------------------------
E. SCHOLARSHIP
---------------------------------------------------------------------------------------------------------
o Shares redeemed where the account beneficiary has V V
received a scholarship, up to the amount of the
scholarship.
---------------------------------------------------------------------------------------------------------
F. DEATH OF 529 PLAN BENEFICIARY
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the death of the 529 plan V V
account beneficiary if the shares were held solely for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
GENERAL WAIVERS:
---------------------------------------------------------------------------------------------------------
SALES CHARGE WAIVED
---------------------------------------------------------------------------------------------------------
CLASS A/529A CLASS A CLASS B/529B CLASS C/529C
WAIVER CATEGORY ISC CDSC CDSC CDSC
---------------------------------------------------------------------------------------------------------
A. DIVIDEND REINVESTMENT
---------------------------------------------------------------------------------------------------------
o Shares acquired through dividend or capital V V V V
gain reinvestment.
---------------------------------------------------------------------------------------------------------
o Shares acquired by automatic reinvestment of V V V V
distributions of dividends and capital gains of
any fund in the MFS funds pursuant to the
Distribution Investment Program.
---------------------------------------------------------------------------------------------------------
B. AFFILIATES OF A MFS FUND/CERTAIN FINANCIAL
ADVISERS
---------------------------------------------------------------------------------------------------------
o Shares acquired by officers, eligible V V V V
directors, employees (including former
employees) and agents of MFS, Sun Life, or any
of their subsidiary companies.
---------------------------------------------------------------------------------------------------------
o Shares acquired by trustees and retired V V V V
trustees of any investment company for which
MFD serves as distributor.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees, directors, V V V V
partners, officers and trustees of any
subadviser to any MFS fund.
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain family members of V V V V
any such individual identified above and their
spouses (or legal equivalent under applicable
state law), and certain trusts, pension,
profit-sharing or other retirement plans for
the sole benefit of such persons, provided the
shares are not resold except to the MFS fund
which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by employees or registered V V V V
representatives (including former employees) of
financial intermediaries or an employee's
spouse (or legal equivalent under applicable
state law) or employee's children under the age
of 21. For employees or registered
representatives of financial intermediaries who
established an account with MFS prior to May 1,
2006, shares acquired by certain family
members of employees or registered
representatives of financial intermediaries and
their spouses (or legal equivalent under
applicable state law), and certain trusts,
pension, profit-sharing or other retirement
plans for the sole benefit of such persons,
provided the shares are not resold except to
the MFS Fund which issued the shares.
---------------------------------------------------------------------------------------------------------
o Shares acquired by institutional clients of V V V V
MFS or MFS Institutional Advisors, Inc.
---------------------------------------------------------------------------------------------------------
C. INVOLUNTARY REDEMPTIONS
---------------------------------------------------------------------------------------------------------
o Shares redeemed at a MFS fund's direction due V V V
to the small size of a shareholder's account.
---------------------------------------------------------------------------------------------------------
D. BANK TRUST DEPARTMENTS AND LAW FIRMS
---------------------------------------------------------------------------------------------------------
o Shares acquired by certain bank trust V V
departments or law firms acting as trustee or
manager for trust accounts which have entered
into an administrative services agreement with
MFD and are acquiring such shares for the
benefit of their trust account clients.
---------------------------------------------------------------------------------------------------------
E. INVESTMENT OF PROCEEDS FROM CERTAIN
REDEMPTIONS OF CLASS I SHARES
---------------------------------------------------------------------------------------------------------
o The initial sales charge imposed on purchases V V
of Class A or Class 529A shares and the
contingent deferred sales charge imposed on
certain redemptions of Class A shares, are
waived with respect to Class A or Class 529A
shares acquired of any of the MFS funds through
the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS
funds.
---------------------------------------------------------------------------------------------------------
F. SYSTEMATIC WITHDRAWALS
---------------------------------------------------------------------------------------------------------
o Systematic withdrawals with respect to up to V V
10% per year of the account value (with respect
to Class B and Class 529B shares, determined at
the time of your first withdrawal under the
plan(s) or January 1, 2007, whichever is later
and reset annually thereafter and with respect
to Class C and Class 529 C shares, determined
at the time the plan is established).
---------------------------------------------------------------------------------------------------------
G. DEATH OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on the account of the death V V V
of the account owner (e.g., shares redeemed by
the estate or any transferee of the shares from
the estate) if the shares were held solely in
the deceased individual's name, or for the
benefit of the deceased individual.
---------------------------------------------------------------------------------------------------------
H. DISABILITY OF OWNER
---------------------------------------------------------------------------------------------------------
o Shares redeemed on account of the disability V V
of the account owner if shares are held either
solely or jointly in the disabled individual's
name in a living trust for the benefit of the
disabled individual (in which case a disability
certification form is required to be submitted
to MFSC), or shares redeemed on account of the
disability of the 529 account beneficiary.
---------------------------------------------------------------------------------------------------------
I. WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by investments through V V
certain dealers (including registered
investment advisers and financial planners)
which have established certain operational
arrangements with MFD which include a
requirement that such shares be sold for the
sole benefit of clients participating in a
"wrap" account, mutual fund "supermarket"
account or a similar program under which such
clients pay a fee to such dealer.
---------------------------------------------------------------------------------------------------------
J. INSURANCE COMPANY SEPARATE ACCOUNTS
---------------------------------------------------------------------------------------------------------
o Shares acquired by insurance company separate V V
accounts.
---------------------------------------------------------------------------------------------------------
K. NO COMMISSIONS PAID
---------------------------------------------------------------------------------------------------------
o Shares redeemed where MFD has not paid an up
front commission with respect to the sale of
the shares, provided that such arrangement V V V
meets certain conditions established by MFD
from time to time.
---------------------------------------------------------------------------------------------------------
L. MISCELLANEOUS
---------------------------------------------------------------------------------------------------------
o In connection with settlements reached V
between certain broker/dealers and the NASD,
SEC, and/or other regulatory bodies regarding
sales of Class B and Class C shares in excess
of certain dollar thresholds, the funds will,
at times, permit shareholders who are clients
of these firms to redeem Class B and Class C
shares of the fund and concurrently purchase
Class A shares without paying an initial sales
charge.
---------------------------------------------------------------------------------------------------------
|
PART II - APPENDIX D
FINANCIAL INTERMEDIARY COMPENSATION
Financial intermediaries receive various forms of compensation in connection
with the sale of shares of a Fund and/or the servicing of shareholder accounts.
Financial intermediaries may receive such compensation (i) in the form of
upfront commissions and ongoing asset-based compensation paid by MFD based on
sales charges received and expected to be received by MFD from shareholders, and
Rule 12b-1 ("Distribution Plan") distribution and service payments received by
MFD from the Funds, (ii) in the form of 529 administrative services payments,
retirement plan administrative and service payments, and shareholder servicing
payments paid by MFD and/or one or more of its affiliates (for purposes of this
section only, collectively, "MFD") based on the receipt of such payments by MFD
from the Funds, and (iii) in the form of payments paid from MFD's own additional
resources. In addition, financial intermediaries may benefit from payments made
to other entities for consulting, research, or analytical services.
The types of payments described above are not exclusive. Accordingly, financial intermediaries may receive payments under all or any combination of the above-referenced categories. In addition, the compensation that financial intermediaries receive may vary by class of shares sold and among financial intermediaries. The amount of compensation that MFD pays to a financial intermediary can be significant. Depending upon the arrangements in place at any particular time, financial intermediaries may have a financial incentive to recommend a particular Fund or share class or to recommend MFS Funds instead of other funds that do not pay such compensation or that pay lower amounts of compensation. For calendar year 2006, gross sales of MFS Funds through financial intermediaries who received such compensation from MFD represented 74% of total gross sales of MFS Funds.
Financial intermediaries may charge you additional fees and/or commissions. You can ask your financial intermediary for information about any payments it receives from MFD and any services it provides, as well as about fees and/or commissions it charges. Financial intermediaries may categorize and disclose these arrangements differently than MFD does. Financial intermediaries that sell Fund shares may also act as a broker or dealer in connection with a MFS Fund's purchase or sale of portfolio securities. However, the Funds and MFS do not consider financial intermediaries' sale of shares of a MFS Fund as a factor when choosing brokers or dealers to effect portfolio transactions for the MFS Funds.
COMMISSIONS AND DISTRIBUTION PLAN PAYMENTS
Class A, Class A1, Class 529A, and Class J Shares - General Provisions
For purchases of Class A, Class A1, Class 529A and Class J shares subject to an initial sales charge, MFD generally pays a portion of the initial sales charge to financial intermediaries as an upfront commission of up to the following amounts:
EQUITY/ASSET ALLOCATION/TOTAL RETURN FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 5.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 4.00%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 3.50%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 2.25%
-------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.75%
-------------------------------------------------------------------------------
SHORT-TERM BOND FUNDS:
-------------------------------------------------------------------------------
Upfront Commission as a Percentage of
Amount of Purchase Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Less than $50,000 2.25%
-------------------------------------------------------------------------------
$50,000 but less than $100,000 2.00%
-------------------------------------------------------------------------------
$100,000 but less than $250,000 1.75%
-------------------------------------------------------------------------------
$250,000 but less than $500,000 1.50%
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$500,000 but less than $1,000,000 1.25%
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The difference between the total amount invested and the sum of (a) the net proceeds to the Funds and (b) the financial intermediary commission, is the amount of the initial sales charge retained by MFD. Because of rounding in the computation of offering price, the portion of the sales charge retained by MFD may vary and the total sales charge may be more or less than the sales charge calculated using the sales charge expressed as a percentage of the offering price or as a percentage of the net amount invested as listed in the Prospectus. From time to time, MFD may pay financial intermediaries up to 100% of the applicable initial sales charge of Class A, Class A1, Class 529A and Class J shares of certain specified Funds sold by financial intermediaries during a specified sales period. In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares. Also, at the discretion of MFD, MFD may pay certain financial intermediaries some or all of the Distribution Plan distribution fee payments of up to 0.10% annually of the average daily net assets of the class with respect to such shares.
Class 529A-Specific Provisions
Except as noted below, for purchases of Class 529A shares not subject to an initial sales charge on or after April 1, 2007, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
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On the first $10,000,000 plus 0.50%
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Over $10,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class 529A shares not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class 529A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares not subject to an initial sales charge, MFD may pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
--------------------------------------------------------------------------------
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On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 of Class 529A shares by employer sponsored or payroll deduction 529 plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
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|
In addition, financial intermediaries are generally eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class A and Class A1-Specific Provisions Effective For Purchases on or After April 1, 2007
Except as noted below, for purchases of Class A and Class A1 shares not subject to an initial sales charge on or after April 1, 2007, by retirement plans (other than Serviced Plans and plans for which Heritage Trust serves as a trustee) that are held by MFSC at the plan or omnibus level ("Investment-Only Retirement Plans"), MFD will generally pay financial intermediaries no upfront commission, but financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases of Class A and Class A1 shares by Investment-Only Retirement Plans not subject to an initial sales charge, at the discretion of MFD, MFD may pay certain financial intermediaries an upfront commission of up to 1% of the amount of Class A shares purchased through such financial intermediary instead of the upfront commission described above. In addition, such financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
Except as noted below, for purchases of Class A and Class A1 shares on or after April 1, 2007, by accounts other than Investment-Only Retirement Plans and Serviced Plans not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $10,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $10,000,000 0.25%
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In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases before April 1, 2007 (or with respect to purchases pursuant to a letter of intent signed prior to April 1, 2007) of Class A and Class A1 shares not subject to an initial sales charge other than by Serviced Plans, MFD may pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
-------------------------------------------------------------------------------
Over $25,000,000 0.25%
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|
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established prior to April 1, 2001 (including sales to plans for which account establishment paperwork was received in good order by MFD on or prior to March 31, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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On the first $2,000,000 plus 1.00%
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Over $2,000,000 to $3,000,000 plus 0.80%
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Over $3,000,000 to $50,000,000 plus 0.50%
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Over $50,000,000 0.25%
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|
Except for Serviced Plans described below, for purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's new investment in Class A and Class A1 shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over a 12-month period (commencing from the date of the first such purchase).
In the case of Serviced Plans whose account establishment paperwork was received in good order after December 31, 1999, purchases prior to April 1, 2007 will be aggregated as described above but the cumulative purchase amount will not be re-set after the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
For purchases prior to April 1, 2007 of Class A and Class A1 shares by Serviced Plans established on or after April 1, 2001 (including, sales to plans for which account establishment paperwork was received in good order by MFD on or after April 1, 2001), not subject to an initial sales charge, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
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-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
-------------------------------------------------------------------------------
Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class A shares and Class A1, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase except for purchases by Serviced Plans that trade through Princeton Retirement Group for which financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares.
Class B, Class B1 and Class 529B Shares
Except as noted below, for purchases of Class B, Class B1 and Class 529B shares, MFD will generally pay an upfront commission to financial intermediaries of up to 3.75% of the amount purchased through such financial intermediaries. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B, Class B1 and Class 529B shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan for which account establishment paperwork was received in good order by MFD between July 1, 1996 and December 31, 1998, MFD will generally pay an upfront commission to financial intermediaries equal to 2.75% of the amount of Class B and Class B1 shares purchased through such financial intermediary. MFD will also generally advance to financial intermediaries some or all of the first year Distribution Plan service fee payments of up to 0.25% of the amount of Class B and Class B1 shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class B and Class B1 shares by a Serviced Plan which established its account with MFSC between January 1, 1999, and December 31, 2002 (i.e., plan establishment paperwork is received by MFSC in good order by December 31, 2002) and certain other retirement plans as determined by MFD from time to time, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee). This commission structure is not available with respect to a plan with a pre-existing account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper Plus product.
Class C and Class 529C Shares
Except as noted below, for purchases of Class C and Class 529C shares, MFD will generally pay an upfront commission to financial intermediaries of up to 1% of the amount of Class C and Class 529C shares purchased through such financial intermediary. In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan distribution fee payment of up to 0.75% and some or all of the Distribution Plan service fee payment of up to 0.25% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class C shares by Serviced Plans established between January 1, 2003 and March 31, 2005 (i.e., plan establishment paperwork is received by MFSC in good order on or after January 1, 2003), MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to 1% annually of the average daily net assets of the class attributable to plan assets (of which 0.25% consists of the Distribution Plan service fee).
For purchases of Class C shares by an Alliance Plan, MFD will pay upfront commissions or asset-based compensation to financial intermediaries under either option discussed above, at the financial intermediary's discretion.
Class R, Class R1, Class R2, Class R3 and Class R4 Shares
Except as noted below, for purchases of the following R share classes, MFD pays no upfront commission to financial intermediaries, but, instead, generally pays asset-based compensation to financial intermediaries of up to the following rates annually of the average daily net assets of the Funds attributable to plan assets (of which up to 0.25% consists of the Distribution Plan service fee), as follows:
------------------------------------------------------------------------------- Class Annual Rate ------------------------------------------------------------------------------- Class R1 0.75% ------------------------------------------------------------------------------- Class R, Class R2, Class R3 0.50% ------------------------------------------------------------------------------- Class R4 0.25% ------------------------------------------------------------------------------- |
In addition, MFD may pay financial intermediaries who sell Class R4 shares an upfront commission of up to 0.25% of up to $25 million of a Serviced Plan's initial investment. MFD generally will not pay financial intermediaries receiving this upfront commission an upfront commission with respect to any subsequent sale of Class R4 shares (subject to MFD waiving this limitation from time to time).
For purchases of Class R shares prior to April 1, 2007 by a Serviced Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to the following:
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Upfront Commission as a Percentage of
Cumulative Purchase Amount Offering Price
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
On the first $4,000,000 plus 1.00%
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Over $4,000,000 to $25,000,000 plus 0.50%
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Over $25,000,000 0.25%
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|
For purposes of determining the level of commissions to be paid to financial intermediaries with respect to a shareholder's investment in Class R shares, purchases for each shareholder account (and certain other accounts for which the shareholder is a record or beneficial holder) will be aggregated over an initial 12 month period commencing from the date of the first such purchase.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
For purchases of Class R shares prior to April 1, 2007 by an Alliance Plan whose account establishment paperwork was received in good order between December 31, 2002 and March 31, 2005, MFD will generally pay financial intermediaries an upfront commission of up to 0.60% of the amount of Class R shares purchased through such financial intermediary.
In addition, financial intermediaries will generally become eligible to receive some or all of the Distribution Plan service fee payments of up to 0.50% annually of the average daily net assets of the class with respect to such shares commencing in the 13th month following purchase.
529 ADMINISTRATIVE SERVICES FEES, RETIREMENT PLAN ADMINISTRATIVE AND SERVICES FEES, AND SHAREHOLDER SERVICING PAYMENTS
Financial intermediaries may receive all or a portion of the following payments: 529 administrative services fees as described in "Management of the Fund - Program Manager"; retirement plan administrative and service fees as described in "Management of the Fund - Administrator"; and shareholder servicing payments as described in "Management of the Fund - Shareholder Servicing Agent."
OTHER MFD PAYMENTS
Financial intermediaries may receive payments from MFD from MFD's own additional resources as incentives to market the MFS Funds, to cooperate with MFD's promotional efforts, and/or in recognition of their marketing, administrative services, and/or processing support. MFD compensates financial intermediaries based on criteria established by MFD from time to time that consider, among other factors, the level and/or type of marketing and administrative support provided by the financial intermediary, the level of assets attributable to and/or sales by the financial intermediary, and the quality of the overall relationship with the financial intermediary.
MFD may make marketing support and/or administrative services payments to financial intermediaries that sell Fund shares or provide services to MFD, the Funds or shareholders of the Funds through the financial intermediary's retail distribution channel and/or through programs such as retirement programs, qualified tuition programs, fund supermarkets, fee-based advisory or wrap fee programs, bank trust programs, and insurance (e.g., individual or group annuity) programs. In addition to the opportunity to participate in a financial intermediary's retail distribution channel or program, payments may include one or more of the following: business planning assistance; educating financial intermediary personnel about the various MFS Funds; assistance with Fund shareholder financial planning; placement on the financial intermediary's preferred or recommended fund list; access to sales representatives and management representatives of the financial intermediary; administrative and account maintenance services.; participant or shareholder record-keeping; reporting or transaction processing; program administration; fund/investment selection and monitoring; enrollment; and education. A financial intermediary may perform the services itself or may arrange with a third party to perform the services.
MFD may make payments to certain financial intermediaries that sell Fund shares to help offset the financial intermediaries' costs associated with client account maintenance support, statement preparation, and transaction processing. The types of payments that MFD may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a financial intermediary, payment of networking fees of up to $6 per shareholder account maintained on certain mutual fund trading systems, or one-time payments for ancillary services such as setting up funds on a financial intermediary's mutual fund trading system.
NASD Member Broker/Dealers Receiving Such Payments from MFD's Own Additional Resources
Set forth below is a list of the member firms of the NASD to which MFD expects as of June 4, 2007 to make such payments from its own additional resources with respect to the Funds. Payments may also be made to affiliates of these firms. Any additions, modifications, or deletions to the broker/dealers identified in this list that have occurred since June 4, 2007 are not reflected. In addition to member firms of the NASD, MFD also makes such payments to other financial intermediaries that sell or provide services to the Funds and shareholders, such as banks, insurance companies, and plan administrators. These firms are not included in this list and may include affiliates of MFD. You should ask your financial intermediary if it receives such payments from MFD.
INTERMEDIARY FIRM NAME: INTERMEDIARY FIRM NAME: 401(K) Investment Services, Inc. Linsco/Private Ledger Corp. AG Edwards & Sons, Inc. Merrill Lynch, Pierce, Fenner & Smith Inc. ADP Broker-Dealer, Inc. Metlife Securities Inc. AIG Financial Advisors, Inc. Mid-Atlantic Securities, Inc. Ameriprise Financial Services, Inc. Morgan Stanley DW Inc. American General Securities Incorporated MSCS Financial Services, LLC Bear, Stearns Securities Corp Multi Financial Services, Inc. Becker & Suffern, LTD. Northwestern Mutual Investment Services Charles Schwab & Co., Inc. Paychex Securities Corporation Chase Investment Services Corp. Piper Jaffray & Co. Citigroup Global Markets Inc. Primevest Financial Services, Inc. Clark Securities, Inc. Princor Financial Services Corporation Commonwealth Financial Network Prudential Investment Management Services LLC CUNA Brokerage Services, Inc. Raymond James & Associates, Inc. Fidelity Brokerage Services LLC Raymond James Financial Services, Inc. Financial Network Investment Corp. RBC Dain Rauscher Inc. H.D. Vest Investment Services State Street Global Markets, LLC Hewitt Financial Services LLC SunTrust Investment Services, Inc. ICMA - RC Services, LLC UBS Financial Services Inc. IFMG Securities, Inc. Wachovia Securities, LLC ING Financial Partners, Inc. Wells Fargo Investments LLC Legg Mason Investor Services, LLC |
From time to time, MFD, from MFD's own additional resources, may make additional payments to financial intermediaries that sell or provide services in connection with the sale of MFS Fund shares or the servicing of shareholder accounts. Such payments by MFD may include payment or reimbursement to, or on behalf of, financial intermediaries for costs associated with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and events, and other sponsored events, and travel expenses, including lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting, retention, and due diligence trips. Other compensation may be offered, including goodwill payments relating to servicing, to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. MFD makes payments for entertainment events it deems appropriate, subject to MFD's policies and applicable law. These payments may vary depending upon the nature of the event.
PART II - APPENDIX E
INVESTMENT STRATEGIES AND RISKS
In addition to the principal investment strategies and the principal risks described in the prospectus, your Fund may employ other investment practices and may be subject to other risks, which are described below. Because the following is a combined description of the investment strategies and risks for all MFS Funds, certain matters described herein may not apply to your Fund.
ASSET-BACKED SECURITIES. Asset-backed securities are securities that represent a participation in, or are secured by and payable from, pools of underlying assets such as debt securities, bank loans, motor vehicle installment sales contracts, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (i.e., credit card) agreements and other receivables. These underlying assets are securitized through the use of trusts and special purpose entities. Payment of interest and repayment of principal on asset-backed securities may be largely dependent upon the cash flows generated by the underlying assets backing the securities and, in certain cases, may be supported by letters of credit, surety bonds, or other credit enhancements.
Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate, as a result of the pass-through of prepayments of principal on the underlying assets. The rate of principal payments on asset-backed securities is related to the rate of principal payments on the underlying asset pool and related to the priority of payment of the security with respect to the asset pool. The occurrence of prepayments is a function of several factors, such as the level of interest rates, general economic conditions, the location, and age of the underlying obligations, asset default and recovery rates, and other social and demographic conditions. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, asset-backed securities may have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
The credit quality of asset-backed securities depends primarily on the quality of the underlying assets, the level of credit enhancement, if any, provided for the securities, and the credit quality of the credit-support provider, if any. The value of asset-backed securities may be affected by the various factors described above and other factors, such as changes in interest rates, the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets, or the entities providing the credit enhancement. Because asset-backed securities may not have the benefit of a security interest in the underlying assets that is comparable to a mortgage, asset-backed securities present certain additional risks that are not present with mortgage-backed securities.
BORROWING. If the Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage and may cause a Fund to liquidate investments when it would not otherwise do so. Money borrowed will be subject to interest charges and may be subject to other fees or requirements which would increase the cost of borrowing above the stated interest rate.
COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the claims of those who own common stock.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes, or other securities that may be converted into or exchanged for (by the holder or by the issuer) shares of stock (or cash or other securities of equivalent value) of the same or a different issuer at a stated exchange ratio. A convertible security may also be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue.
Convertible securities generally have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities generally sell at prices above their "conversion value," which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow, which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
COUNTRY LOCATION. The issuer of a security or other investment is generally
deemed to be economically tied to a particular country if: (a) the security or
other investment is issued or guaranteed by the government of that country or
any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; (e) the issuer has 50% or more of its assets in that
country; (f) the issuer is included in an index which is representative of that
country; or (g) the issuer is exposed to the economic fortunes and risks of that
country.
DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs, EDRs, or GDRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and may be offered privately in the United States and are generally designed for use in securities markets outside the U.S. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders.
With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and financial information to the depositary receipt holders at the underlying issuer's request.
Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
EMERGING MARKETS. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign markets. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; the risk that a judgment against a foreign government may be unenforceable; and greater price volatility, less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
EQUITY SECURITIES: Equity securities represent an ownership interest, or the right to acquire an ownership interest, in a company or other issuer. Different types of equity securities provide different voting and dividend rights and priorities in the event of bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, securities convertible into stocks, depository receipts for those securities, securities of investment companies, and other similar interests in an issuer.
FOREIGN CURRENCIES. Foreign securities may be denominated in foreign currencies and international currency units and foreign currencies may be purchased directly. Accordingly, the weakening of these currencies and units against the U.S. dollar would result in a decline in the value of securities denominated in that currency or the value of the currency itself.
While holding currencies permits an investor to take advantage of favorable movements in the applicable exchange rate, this strategy also exposes the investor to risk of loss if exchange rates move in a direction adverse to the investor's position. Such losses could reduce any profits or increase any losses sustained by the investor from the sale or redemption of securities and could reduce the dollar value of interest or dividend payments received.
Some foreign countries have managed currencies, which are not free floating against the U.S. dollar. Managed currencies can experience a steep devaluation relative to the U.S. dollar.
In addition, there is risk that certain foreign countries may restrict the free conversion of their currencies into other currencies. Further, certain currencies may not be internationally traded.
Foreign currency transactions can be made on a spot (i.e., cash) or forward basis (i.e., by entering into forward contracts to purchase or sell foreign currencies). Although foreign exchange dealers generally do not charge a fee for such conversions, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency at one rate, while offering a lesser rate of exchange should the counterparty desire to resell that currency to the dealer. Forward contracts are customized transactions that require a specific amount of a currency to be delivered at a specific exchange rate on a specific date or range of dates in the future. Forward contracts are generally traded in an interbank market directly between currency traders (usually large commercial banks) and their customers. The parties to a forward contract may agree to offset or terminate the contract before its maturity, or may hold the contract to maturity and complete the contemplated currency exchange.
A "settlement hedge" or "transaction hedge" attempts to protect against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the security. Forward contracts to purchase or sell a foreign currency may also be used in anticipation of future purchases or sales of securities denominated in foreign currency, even if the specific investments have not yet been selected.
Forward contracts can be used to hedge against a decline in the value of existing investments denominated in foreign currency. For example, if an investor owned securities denominated in pounds sterling, the investor could enter into a forward contract to sell pounds sterling in return for U.S. dollars to hedge against possible declines in the pound's value. Such a hedge, sometimes referred to as a "position hedge," would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. An investor could also hedge the position by selling another currency expected to perform similarly to the pound sterling. This type of hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Forward contracts can also be used to shift investment exposure from one currency into another. This may include shifting exposure from U.S. dollars to a foreign currency or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is purchased, much as if a Fund had sold a security denominated in one currency and purchased an equivalent security denominated in another. Cross-hedges protect against losses resulting from a decline in the hedged currency, but will cause a Fund to assume the risk of fluctuations in the value of the currency it purchases.
Swap agreements, indexed securities, hybrid securities and options and futures contracts relating to foreign currencies can be used for the same purposes.
Successful use of currency management strategies will depend on MFS' skill in analyzing currency values. Currency management strategies may increase the volatility of a Fund's returns and could result in significant losses to a Fund if currencies do not perform as MFS anticipates. For example, if a currency's value rose at a time when MFS had hedged a Fund by selling that currency in exchange for dollars, a Fund would not participate in the currency's appreciation. If MFS hedges currency exposure through proxy hedges, a Fund could realize currency losses from both the hedge and the security position if the two currencies do not move in tandem. Similarly, if MFS increases a Fund's exposure to a foreign currency and that currency's value declines, a Fund will realize a loss. There is no assurance that MFS' use of currency management strategies will be advantageous to a Fund or that it will hedge at appropriate times.
FOREIGN MARKETS. Foreign securities and foreign currencies, as well as any securities issued by U.S. entities with substantial foreign operations, may involve significant risks in addition to the risks inherent in U.S. investments. Foreign investments involve risks relating to local political, economic, regulatory, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars, or other government intervention. The debt instruments of foreign governments and their agencies and instrumentalities may or may not be supported by the full faith and credit of the foreign government. Additionally, governmental issuers of foreign debt securities may be unwilling to pay interest and repay principal when due and may require that the conditions for payment be renegotiated. In addition, the value of securities denominated in foreign currencies and of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar.
Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading, settlement and custodial practices (including those involving securities settlement where Fund assets may be released prior to receipt of payment) are often less developed than those in U.S. markets, and may result in increased risk or substantial delays in the event of a failed trade or the insolvency of, or breach of duty by, a foreign broker-dealer, securities depository, or foreign subcustodian. In addition, the costs associated with foreign investments, including withholding taxes, brokerage commissions, and custodial costs, are generally higher than with U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers. Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated. Regulatory enforcement may be influenced by economic or political concerns, and investors may have difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions.
FUTURES CONTRACTS. A futures contract is a standardized agreement between two parties to buy or sell in the future a specific quantity of an asset, currency, interest rate, index, instrument or other indicator at a specific price and time. The value of a futures contract typically fluctuates in correlation with the increase or decrease in the value of the underlying indicator. The buyer of a futures contract enters into an agreement to purchase the underlying indicator on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying indicator on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying indicator or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. In the case of physically settled futures, it may not be possible to liquidate or close out the futures contract at any particular time or at an acceptable price. Other financial futures contracts (such as those relating to interest rates, foreign currencies and securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying indicator unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market."
The risk of loss in trading futures contracts can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. Thus, a purchase or sale of a futures contract may result in unlimited losses. In the event of adverse price movements, an investor would continue to be required to make daily cash payments to maintain its required margin. In addition, on the settlement date, an investor may be required to make delivery of the indicators underlying the futures positions it holds.
An investor could suffer losses if it is unable to close out a futures contract because of an illiquid secondary market. Futures contracts may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures position, and an investor would remain obligated to meet margin requirements until the position is closed. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment.
An investor could lose margin payments it has deposited with its futures commission merchant (FCM), if, for example, the FCM breaches its agreement with the investor or becomes insolvent or goes into bankruptcy. In that event, the investor may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the investor.
If MFS attempts to use a futures contract as a hedge against, or as a substitute for, a portfolio investment, the futures position may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Pursuant to a claim of exemption filed with the Commodity Futures Trading Commission (CFTC) on behalf of the MFS Funds that are permitted by their investment objectives and policies to use futures and options on futures contracts, each such MFS Fund is not deemed to be a "commodity pool" or "commodity pool operator" under the Commodity Exchange Act and is not subject to registration or regulation as such under the Commodity Exchange Act.
HYBRID INSTRUMENTS. Hybrid instruments are generally considered derivatives and combine the elements of swaps, futures contracts, or options with those of debt, preferred equity or a depository instrument. A hybrid instrument may be a debt instrument, preferred stock, warrant, convertible security, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, commodities, indexes, economic factors or other measures, including interest rates, currency exchange rates, or commodities or securities indices, or other indicators (collectively, "indicators").
The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, swaps, options, futures and currencies. An investment in a hybrid instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published benchmark. The risks of a particular hybrid instrument will depend upon the terms of the instrument, but may include the possibility of significant changes in the benchmark(s) or the prices of the underlying indicators to which the instrument is linked. Such risks generally depend upon factors unrelated to the operations or credit quality of the issuer of the hybrid instrument, which may not be foreseen by the purchaser, such as economic and political events, the supply and demand of the underlying indicators and interest rate movements. Hybrid instruments may be highly volatile.
Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular hybrid instrument, changes in a benchmark, underlying asset or indicator may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument. Also, the prices of the hybrid instrument and the benchmark, underlying asset or indicator may not move in the same direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, hybrid instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain). The latter scenario may result if "leverage" is used to structure the hybrid instrument. Leverage risk occurs when the hybrid instrument is structured so that a given change in a benchmark or underlying indicator is multiplied to produce a greater value change in the hybrid instrument, thereby magnifying the risk of loss as well as the potential for gain.
If MFS attempts to use a hybrid instrument as a hedge against, or as a substitute for, a portfolio investment, the hybrid instrument may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving hybrid instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Hybrid instruments may also carry liquidity risk since the instruments are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt instruments. Under certain conditions, the redemption value of such an investment could be zero. In addition, because the purchase and sale of hybrid investments could take place in an over-the-counter market without the guarantee of a central clearing organization, or in a transaction between the Fund and the issuer of the hybrid instrument, hybrid instruments are subject to the creditworthiness of the issuer of the hybrid instrument, and their values may decline substantially if the issuer's creditworthiness deteriorates. Hybrid instruments also may not be subject to regulation by the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.
INFLATION-INDEXED BONDS. Inflation-indexed bonds are debt instruments whose principal value is adjusted periodically according to a rate of inflation (usually a consumer price index). Two structures are most common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the inflation accruals as part of a semiannual coupon.
U.S. Treasury Inflation Protected Securities (TIPS) currently are issued with maturities of five, ten, or thirty years, although it is possible that securities with other maturities will be issued in the future. The principal amount of TIPS adjusts for inflation, although the inflation-adjusted principal is not paid until maturity. Semi-annual coupon payments are determined as a fixed percentage of the inflation-adjusted principal at the time the payment is made.
If the rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. At maturity, TIPS are redeemed at the greater of their inflation-adjusted principal or at the par amount at original issue. If an inflation-indexed bond does not provide a guarantee of principal at maturity, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. For example, if inflation were to rise at a faster rate than nominal interest rates, real interest rates would likely decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates would likely rise, leading to a decrease in value of inflation-indexed bonds.
While these securities, if held to maturity, are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If nominal interest rates rise due to reasons other than inflation (for example, due to an expansion of non-inflationary economic activity), investors in these securities may not be protected to the extent that the increase in rates is not reflected in the bond's inflation measure.
The inflation adjustment of TIPS is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of price changes in the cost of living, made up of components such as housing, food, transportation, and energy. There can be no assurance that the CPI-U will accurately measure the real rate of inflation in the prices of goods and services.
INVERSE FLOATING RATE OBLIGATIONS. Inverse floating rate obligations have variable interest rates that typically move in the opposite direction from movements in prevailing interest rates, most often short-term rates. Accordingly, the value of inverse floating rate obligations or other obligations or certificates structured to have similar features generally moves in the opposite direction as interest rates. The value of an inverse floating rate instrument can be considerably more volatile than the value of other debt instruments of comparable maturity and quality. Inverse floating rate obligations incorporate varying degrees of leverage. Generally, greater leverage results in greater price volatility for any given change in interest rates. Inverse floating rate obligations may be subject to legal or contractual restrictions on resale and therefore may be less liquid than other types of securities.
LENDING OF PORTFOLIO SECURITIES. Portfolio securities will be lent to qualified investors such as member firms of the New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the Federal Reserve System, and would be required to be secured by collateral in cash, an irrevocable letter of credit, or U.S. Government securities maintained on a current basis at an amount at least equal to the market value of the securities loaned. When one party lends portfolio securities to another party, the lender has the right to call the loan and obtain the securities loaned at any time on customary industry settlement notice (which will not usually exceed five business days). For the duration of a loan, the borrower pays the lender an amount equal to any interest or dividends received on the securities loaned. The lender also receives a fee from the borrower or compensation from the investment of the collateral, less a fee paid to the borrower (if the collateral is in the form of cash). The lender does not, however, have the right to vote any securities having voting rights during the existence of the loan, but it can 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. A Fund's performance will continue to reflect changes in the value of the securities loaned and will also reflect the receipt of interest, through investment of cash collateral by the Fund or a fee. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, the lender could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If the lender is not able to recover the securities loaned, the lender may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased.
LOANS AND OTHER DIRECT INDEBTEDNESS. Loans and other direct indebtedness are interests in amounts owed by corporations, governmental or other borrowers to lenders or lending syndicates (loans and loan participations), to suppliers of goods and services (trade claims and other receivables), or to other parties. Some loans may be unsecured in part or in full. Loans may be in default at the time of purchase. Loans that are fully secured should protect the purchaser to a greater extent than unsecured loans in the event of nonpayment of scheduled interest or principal. However, there can be no assurance that the liquidation of collateral acquired in connection with the default of a secured loan would satisfy the borrower's obligation, or that such collateral could be liquidated.
Loans generally are made to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs or other corporate activities. Such loans typically are originated, negotiated and structured by a syndicate of lenders represented by an agent lender that has negotiated and structured the loan and that is responsible for collecting interest and principal payments and other amounts due on behalf of all of the lenders in the syndicate, and for enforcing the lenders' rights against the borrower. Typically, the agent is given broad discretion in monitoring the borrower's performance and is obligated to use the same care it would use in the management of its own property. Upon an event of default, the agent typically will enforce the loan agreement after instruction from the lenders. The borrower compensates the agent for these services. This compensation may include special fees paid when the loan is structured or funded and other fees paid on a continuing basis. The typical practice of an agent or a lender to rely exclusively or primarily on reports from the borrower involves a risk of fraud by the borrower.
If an agent becomes insolvent, or has a receiver, conservator or similar official appointed for it by an appropriate authority, or if it becomes a debtor in a bankruptcy proceeding, the agent's appointment may be terminated, and a successor agent typically may be appointed by the lenders. If an appropriate authority determines that assets held by the agent for the benefit of lenders or purchasers of loans are subject to the claims of the agent's general or secured creditors, then such lenders or purchasers might incur certain costs and delays in realizing payment on a loan or suffer a loss of principal and/or interest. Furthermore, in the event of the borrower's bankruptcy or insolvency, the borrower's obligation to repay a loan may be subject to certain defenses that the borrower can assert as a result of improper conduct by the agent.
Loans may be acquired by participating directly in a lending syndicate as a lender. Alternatively, loans or an interest in loans may be acquired by novation, by assignment or by participation from members of the lending syndicate or from other participants. In a novation or an assignment, the acquirer assumes all of the rights of the lender in the loan or of the participant in the participants' portion of the loan and, in the case of a novation or an assignment from a member of the lending syndicate, becomes a party of record with respect to the loan. In a participation, the acquirer purchases a portion of the lender's or the participants' interest in the loan, but has no direct contractual relationship with the borrower. An investment in a loan by participation gives rise to several risks. The acquirer must rely on another party not only for the enforcement of the acquirer's rights against the borrower, but also for the receipt and processing of principal, interest or other payments due under the loan and may be subject to the credit risk of the other party in addition to the borrower. The acquirer may be subject to delays, expenses, and risks that are greater than those that would be involved if the acquirer could enforce its rights directly against the borrower. In addition, under the terms of a participation agreement, the acquirer may be regarded as a creditor of the seller of the participation interest (rather than of the borrower), so that the acquirer also may be subject to the risk that such seller could become insolvent. A participation agreement also may limit the rights of the acquirer to vote on changes that may be made to the underlying loan agreement, such as waiving a breach of a covenant.
Direct indebtedness includes trade or other claims against companies, which generally represent monies owed by such companies to suppliers of goods or services. Such claims may be purchased when such companies are in default.
The ability to receive payments of principal and interest on loans and other direct indebtedness will depend primarily on the financial condition of the borrower. Because an acquirer may be required to rely on another party to collect and to pass on to it amounts payable with respect to the loan or other direct indebtedness and to enforce the acquirer's rights under the loan or other direct indebtedness, an insolvency, bankruptcy or reorganization of such other party may delay or prevent the acquirer from receiving such amounts. The highly leveraged nature of many loans and other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions.
Revolving credit facilities and other standby financing commitments obligate the purchaser to fund additional cash on a certain date or on demand. A revolving credit facility differs from other types of financing commitments in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit facility. These commitments may have the effect of requiring a purchaser to increase its investment in a company at a time when the purchaser 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).
Floating rate loans generally are subject to legal or contractual restrictions on resale. Floating rate loans currently are not listed on any securities exchange or automatic quotation system. As a result, no active market may exist for some floating rate loans, and to the extent a secondary market exists for other floating rate loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Additionally, the supply of floating rate loans may be limited from time to time due to a lack of sellers in the market for existing floating rate loans or to the number of new floating rate loans currently being issued. As a result, the floating rate loans available for purchase may be of lower quality or may have a higher price.
With respect to its management of investments in bank loans, MFS will normally seek to avoid receiving material, non-public information ("MNPI") about the issuers of bank loans being considered for acquisition by the Fund or held in the Fund's portfolio. In many instances, borrowers may offer to furnish MNPI to prospective investors, and to holders, of the issuer's loans. MFS' decision not to receive MNPI may place MFS at a disadvantage relative to other investors in loans (which could have an adverse effect on the price the Fund pays or receives when buying or selling loans). Also, in instances where holders of loans are asked to grant amendments, waivers or consent, MFS' ability to assess their significance or desirability may be adversely affected. For these and other reasons, it is possible that MFS' decision not to receive MNPI under normal circumstances could adversely affect the Fund's investment performance.
Notwithstanding its intention generally not to receive MNPI with respect to its management of investments in loans, MFS may from time to time come into possession of MNPI about the issuers of loans that may be held in the Fund's portfolio. Possession of such information may in some instances occur despite MFS' efforts to avoid such possession, but in other instances MFS may choose to receive such information (for example, in connection with participation in a creditors' committee with respect to a financially distressed issuer). As, and to the extent, required by applicable law, MFS' ability to trade in these loans for the account of the Fund could potentially be limited by its possession of such information. Such limitations on MFS' ability to trade could have an adverse effect on the Fund by, for example, preventing the Fund from selling a loan that is experiencing a material decline in value. In some instances, these trading restrictions could continue in effect for a substantial period of time.
LOWER QUALITY DEBT INSTRUMENTS. Lower quality debt instruments are considered speculative with respect to the issuer's continuing ability to meet principal and interest payments and, while generally expected to provide greater income than investments in higher quality debt instruments, will involve greater risk of principal and income (including the possibility of default or bankruptcy of the issuers of such instruments) and may involve greater volatility of price (especially during periods of economic uncertainty or change) than higher quality debt instruments. In addition, because yields vary over time, no specific level of income can ever be assured. These lower quality debt instruments generally tend to reflect economic changes (and the outlook for economic growth), short-term corporate and industry developments and the market's perception of their credit quality to a greater extent than higher quality debt instruments, which react primarily to fluctuations in the general level of interest rates (although these lower quality debt instruments are also affected by changes in interest rates). In the past, economic downturns or an increase in interest rates have, under certain circumstances, resulted in a higher incidence of default by the issuers of these instruments and may do so in the future, especially in the case of highly leveraged issuers. The prices for these instruments may be affected by legislative and regulatory developments. The market for these lower quality debt instruments may be less liquid than the market for investment grade debt instruments. Furthermore, the liquidity of these lower quality debt instruments may be affected by the market's perception of their credit quality.
Instruments in the lowest tier of investment-grade debt instruments, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade securities.
See Appendix H for a description of bond ratings.
MONEY MARKET INSTRUMENTS. Money market instruments, or short-term debt instruments, consist of obligations such as commercial paper, bank obligations (e.g., certificates of deposit and bankers' acceptances), repurchase agreements, and various government obligations, such as Treasury bills. Money market instruments may be structured to be, or may employ a trust or other form so that they are, eligible investments for money market funds. For example, put features can be used to modify the maturity of a security or interest rate adjustment features can be used to enhance price stability. If a structure fails to function as intended, adverse tax or investment consequences may result. Neither the Internal Revenue Service (IRS) nor any other regulatory authority has ruled definitively on certain legal issues presented by certain structured securities. Future tax or other regulatory determinations could adversely affect the value, liquidity, or tax treatment of the income received from these securities. Commercial paper is a money market instrument issued by banks or companies to raise money for short-term purposes. Unlike some other debt obligations, commercial paper is typically unsecured. Commercial paper may be issued as an asset-backed security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that represent direct or indirect participation in, or are collateralized by and payable from, mortgage loans secured by real property or instruments derived from such loans. Mortgage-backed securities include various types of securities such as pass-throughs, stripped mortgage-backed securities, and collateralized mortgage obligations. There are a wide variety of mortgage types underlying these securities, including mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
Generally, mortgage-backed securities represent interests in pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association (GNMA), by government-related organizations, such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), as well as by private issuers, such as commercial banks, savings and loan institutions and mortgage bankers. Government mortgage-backed securities are backed by the full faith and credit of the United States as to payment of principal and interest. GNMA, the principal U.S. guarantor of these securities, is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Government-related mortgage-backed securities are not backed by the full faith and credit of the United States. Issuers of government-related mortgage-backed securities include FNMA and FHLMC. FNMA is a congressionally chartered corporation owned entirely by private stockholders, and is subject to general regulation by the Secretary of Housing and Urban Development. Private mortgage-backed securities may be less liquid than government or government-related mortgage-backed securities.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. FHLMC is a stockholder-owned government-sponsored enterprise established by Congress. Participation certificates representing interests in mortgages from FHLMC's national portfolio are guaranteed as to the timely payment of interest and principal by FHLMC. Private mortgage-backed securities represent interest in pass-through pools consisting principally of conventional residential mortgage loans created by non-government issuers, such as commercial banks and savings and loan associations and private mortgage insurance companies. Private, government, or government-related entities may create mortgage loan pools offering pass-through investments in addition to those described above. Interests in pools of mortgage-related securities differ from other forms of debt instruments, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities typically provide a monthly payment which consists of both interest and principal payments. In effect, these payments generally are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs incurred.
Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. Prepayments of principal by mortgagors or mortgage foreclosures shorten the term of the mortgage pool underlying the mortgage-backed security. The occurrence of prepayments is a function of several factors, including interest rates, general economic conditions, the location of the mortgaged property, the age of the mortgage or other underlying obligations, and other social and demographic conditions. Because prepayment rates of individual mortgage pools vary widely, the average life of a particular pool is difficult to predict. A Fund's ability to maintain positions in mortgage-backed securities is affected by the reductions in the principal amount of such securities resulting from prepayments. The values of mortgage-backed securities vary with changes in market interest rates generally and the differentials in yields among various kinds of U.S. government securities, mortgage-backed securities, and asset-backed securities. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgages supporting a mortgage-backed security. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase thereby shortening the average life of such a pool. Because prepayments of principal generally occur when interest rates are declining, an investor generally has to reinvest the proceeds of such prepayments at lower interest rates than those at which its assets were previously invested. Therefore, mortgage-backed securities typically have less potential for capital appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
Collateralized mortgage obligations (CMOs) are mortgage-backed securities that are collateralized by whole loan mortgages or mortgage pass-through securities. The bonds issued in a CMO transaction are divided into groups, and each group of bonds is referred to as a "tranche." Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the CMO bondholders. The bonds issued under a traditional CMO structure are retired sequentially as opposed to the pro-rata return of principal found in traditional pass-through obligations. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds. Under a CMO structure, the repayment of principal among the different tranches is prioritized in accordance with the terms of the particular CMO issuance. The "fastest-pay" tranches of bonds, as specified in the prospectus for the issuance, would initially receive all principal payments. When those tranches of bonds are retired, the next tranche, or tranches, in the sequence, as specified in the prospectus, receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate, and long final maturities, as well as varied expected average lives and risk characteristics. In recent years, new types of CMO tranches have evolved. These include floating rate CMOs, parallel pay CMOs planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these new structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-backed securities.
A primary risk of CMOs is the uncertainty of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) will affect the yield, average life, and price of CMOs. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other securities.
Stripped mortgage-backed securities (SMBSs) are derivative multi-class mortgage-backed securities. SMBSs may be issued by agencies or instrumentalities of the U.S. 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 entities formed or sponsored by any of the foregoing. SMBSs may be less liquid than other types of mortgage-backed securities.
SMBSs are usually structured with two classes that receive different proportions of the interest and principal distributions on 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 price and yield-to-maturity on an IO class 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 a Fund's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to recoup some or all of its initial investment in these securities, even if the security is in one of the highest rating categories. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may be shorter than customary.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. In mortgage "dollar roll" transactions, the investor sells mortgage-backed securities for delivery in the future and simultaneously contracts to repurchase substantially similar securities on a specified future date. During the roll period, the investor foregoes principal and interest paid on the mortgage-backed securities. The lost interest is compensated by the difference between the current sales price and the lower price for the future purchase (often referred to as the "drop") as well as by the interest earned on, and gains from, the investment of the cash proceeds of the initial sale. A commitment fee may also be received for participation in such transaction.
If the income and capital gains from the investment of the cash from the initial sale do not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will result in a lower return than would have been realized without the use of the dollar rolls. Dollar roll transactions involve the risk that the market value of the securities that are required to be purchased in the future may decline below the agreed upon repurchase price of those securities. If the party to whom the securities are sold becomes insolvent, the right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the investor's ability to correctly predict interest rates and prepayments.
A dollar roll can be viewed as a borrowing. If a Fund makes additional investments while a dollar roll is outstanding, this may be considered a form of leverage.
MUNICIPAL INSTRUMENTS. Debt instruments issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies or instrumentalities, are known as "municipal instruments." Generally, interest received on municipal instruments is exempt from federal income tax. The tax-exempt nature of the interest on a municipal instrument is generally the subject of a bond counsel opinion delivered in connection with the issuance of the instrument. There is no assurance that the IRS will agree with bond counsel's opinion that such interest is tax-exempt or that the interest payments on such municipal instruments will continue to be tax exempt for the life of the municipal instrument. Issuers or other parties generally enter into covenants requiring continuing compliance with federal tax requirements to preserve the tax-free status of interest payments over the life of the municipal instrument. If at any time the covenants are not complied with, or if the IRS otherwise determines that the issuer did not comply with relevant tax requirements, interest payments from a municipal instrument could become federally taxable, possibly retroactively to the date the municipal instrument was issued and an investor may need to file an amended income tax return. Certain types of structured securities are designed so that tax exempt interest from municipal instruments held by the underlying entity will pass through to the holders of the structured security. There is no assurance that the IRS will agree that such interest is tax exempt.
The value of municipal instruments can be affected by changes in their actual or perceived credit quality. The credit quality of municipal instruments can be affected by, among other things, the financial condition of the issuer or guarantor, the issuer's future borrowing plans and sources of revenue, the economic feasibility of the revenue bond project or general borrowing purpose, political or economic developments in the region where the instrument is issued and the liquidity of the security. Municipal instruments generally trade in the over-the-counter market.
General obligation bonds are backed by the issuer's pledge of its full faith and credit and taxing power for the repayment of principal and the payment of interest. Issuers of general obligation bonds include states, counties, cities, towns, and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads, and water and sewer systems. The rate of taxes that can be levied for the payment of debt service on these bonds may be limited. Additionally, there may be limits as to the rate or amount of special assessments or taxes that can be levied to meet these obligations.
Some general obligation bonds are backed by both a pledge of a specific revenue source, such as a special assessment or tax and an issuer's pledge of its full faith and credit and taxing power. Debt service from these general obligation bonds is typically paid first from the specific revenue source and second, if the specific revenue source is insufficient, from the general taxing power.
Revenue bonds are generally backed by the net revenues derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source, such as a state's or local government's proportionate share of the payments from the Tobacco Master Settlement Agreement. Revenue bonds are issued to finance a wide variety of capital projects. Examples include electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Industrial development bonds, a type of revenue bond, are issued by or on behalf of public authorities to raise money to finance various privately operated facilities for a variety of purposes, including economic development, solid waste disposal, transportation, and pollution control. Although the principal security for revenue bonds is typically the revenues of the specific facility, project, company or system, many revenue bonds are secured by additional collateral in the form of a mortgage on the real estate comprising a specific facility, project or system, a lien on receivables and personal property, as well as the pledge of various reserve funds available to fund debt service, working capital, capital expenditures or other needs. Net revenues and other security pledged may be insufficient to pay principal and interest due which will cause the price of the bonds to decline. In some cases, revenue bonds issued by an authority are backed by a revenue stream unrelated to the issuer, such as a hotel occupancy tax, a sales tax, or a special assessment. In these cases, the ability of the authority to pay debt service is solely dependent on the revenue stream generated by the special tax. Furthermore, the taxes supporting such issues may be subject to legal limitations as to rate or amount.
Municipal insurance policies typically insure, subject to the satisfaction of the policy conditions, timely and scheduled payment of all principal and interest due on the underlying municipal instruments. The insurance may be obtained by either (i) the issuer at the time the municipal instrument is issued, commonly referred to as primary market insurance or (ii) another party after the municipal instrument has been issued, commonly referred to as secondary market insurance. The financial strength of the companies issuing the bond insurance can vary.
In general, municipal insurance does not insure any risk other than nonpayment.
Municipal insurance does not insure against market fluctuations which affect the
price of a security. In addition, a municipal insurance policy will not insure
(i) the payment of regularly scheduled debt service payments until maturity if
an issuer redeems the municipal bonds prior to maturity in accordance with the
call provisions of the municipal instrument; (ii) over the loss of prepayment or
other acceleration payment which at any time may become due in respect of any
instrument, (except for a mandatory sinking fund redemption; (iii) the payment
of a prepayment or acceleration premium; or (iv) nonpayment of principal or
interest caused by negligence or bankruptcy of the paying agent. A municipal
insurance policy often reserves to the insurer the exclusive right to accelerate
the instruments upon a payment default.
Because a significant portion of the municipal instruments issued and outstanding are insured by a small number of insurance companies, an event involving one or more of these insurance companies could have a significant adverse effect on the value of the securities insured by that insurance company and on the municipal market as a whole.
Education. In general, there are two types of education-related bonds: (i) those issued to finance projects for public and private colleges and universities, charter schools and private schools, and (ii) those representing pooled interests in student loans. Bonds issued to supply educational institutions with funding are subject to many risks, including the risks of unanticipated revenue decline, primarily the result of decreasing student enrollment, decreasing state and federal funding, or a change in general economic conditions. Additionally, higher than anticipated costs associated with salaries, utilities, insurance or other general expenses could impair the ability of a borrower to make annual debt service payments. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which may be supported by reserves or other forms of credit enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous factors, including the rate of student loan defaults, seasoning of the loan portfolio, and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Electric Utilities. The electric utilities industry has been experiencing increased competitive pressures. Federal and state legislation in recent years has been moving the industry toward opening transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel, (b) the availability and cost of capital, (c) the effects of conservation on energy demand, (d) the effects of rapidly changing environmental, safety, and licensing requirements, and other federal, state, and local regulations, (e) timely and sufficient rate increases thereby assisting utilities in recovering increasing energy costs, and (f) opposition to nuclear power.
Health Care. The health care industry is subject to regulatory action by a number of governmental agencies, including federal, state, and local governmental agencies. A major source of revenues for the health care industry is payments from the Medicare and Medicaid programs. As a result, the industry is sensitive to legislative changes and reductions in governmental spending for such programs. A second major source of revenues for the health care industry is payments from private insurance companies and health maintenance organizations. As such, any changes to and reductions in reimbursement rates from these entities for services provided could be detrimental to the revenues of the providers. Numerous other factors may affect the industry, such as general and local economic conditions; demand for services; expenses (including for example, labor, malpractice insurance premiums and pharmaceutical products); and competition among health care providers. In the future, the following factors may adversely affect health care facility operations: adoption of legislation proposing a national health insurance program; other state or local health care reform measures; medical and technological advances which dramatically alter the need for health services or the way in which such services are delivered; changes in medical coverage which alter the traditional fee-for-service revenue stream; and efforts by employers, insurers, and governmental agencies to reduce the costs of health insurance and health care services.
Housing. Housing revenue bonds typically are issued by a state, county, or local housing authority and are secured by the revenues of mortgages originated by the authority using the proceeds of the bond issue. These bonds may be used to make mortgage loans for single-family housing, multi-family housing, or a combination of the two. Because of the impossibility of precisely predicting demand for mortgages from the proceeds of such an issue, there is a risk that the proceeds of the issue will be in excess of demand, which would result in early retirement of the bonds by the issuer. Moreover, such housing revenue bonds depend for their repayment upon the cash flow from the underlying mortgages, which cannot be precisely predicted when the bonds are issued. Any difference in the actual cash flow from such mortgages from the assumed cash flow could have an adverse impact upon the ability of the issuer to make scheduled payments of principal and interest on the bonds, or could result in early retirement of the bonds. Additionally, such bonds depend in part for scheduled payments of principal and interest upon reserve funds established from the proceeds of the bonds, assuming certain rates of return on investment of such reserve funds. If the assumed rates of return are not realized because of changes in interest rate levels or for other reasons, the actual cash flow for scheduled payments of principal and interest on the bonds may be inadequate. The financing of multi-family housing projects is affected by a variety of factors which may impact the borrower's ability to pay debt service and may impair the value of the collateral securing the bonds, if any. These factors include 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. Some authorities provide additional security for the bonds in the form of insurance, subsidies, additional collateral, or state pledges (without obligation) to make up deficiencies.
Transportation. Transportation debt may be issued to finance the construction of airports, toll roads, highways, or other transit facilities. Airport bonds are dependent on the economic conditions of the airport's service area and may be affected by the business strategies and fortunes of specific airlines. They may also be subject to competition from other airports and modes of transportation. Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs, transportation taxes and fees, and availability of fuel also affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public transportation.
Tobacco Settlement Revenue Bonds. Tobacco settlement revenue bonds are secured by a single source of revenue --a state or jurisdiction's proportionate share of periodic payments made by tobacco companies under the Master Settlement Agreement (the "MSA") entered into by participating cigarette manufacturers, 46 states, and other jurisdictions in November of 1998 in settlement of certain smoking-related litigation. Annual payments on the bonds are dependent on the receipt by the issuer of future settlement payments under the MSA. These annual payments are subject to numerous adjustments. The actual amount of future settlement payments depends on annual domestic cigarette shipments, inflation, market share gains by non-participating cigarette manufacturers, and other factors. MSA adjustments may cause bonds to be repaid faster or slower than originally projected. Tobacco bonds are subject to additional risks, including the risk that cigarette consumption declines, that a tobacco company defaults on its obligation to make payments to the state or that the MSA or state legislation enacted pursuant to the MSA is void or unenforceable.
Water and Sewer. Water and sewer revenue bonds are generally secured by the fees charged to each user of the service. The issuers of water and sewer revenue bonds generally enjoy a monopoly status and latitude in their ability to raise rates. However, lack of water supply due to insufficient rain, run-off, or snow pack can be a concern and has led to past defaults. Further, public resistance to rate increases, declining numbers of customers in a particular locale, costly environmental litigation, and Federal environmental mandates are challenges faced by issuers of water and sewer bonds.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations and participations in municipal leases are undivided interests in a portion of an obligation in the form of a lease or installment purchase or conditional sales contract which is issued by a state, local government, or a municipal financing corporation to acquire land, equipment, and/or facilities (collectively hereinafter referred to as "lease obligations"). Generally lease obligations do not constitute general obligations of the municipality for which the municipality's taxing power is pledged. Instead, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate, and make the payments due under the lease obligation. As a result of this structure, municipal lease obligations are generally not subject to state constitutional debt limitations or other statutory requirements that may apply to other municipal securities.
Lease obligations may contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. If the municipality does not appropriate in its budget enough to cover the payments on the lease obligation, the lessor may have the right to repossess and relet the property to another party. Depending on the property subject to the lease, the value of the property may not be sufficient to cover the debt.
In addition to the risk of "non-appropriation," municipal lease securities may not have as highly liquid a market as conventional municipal bonds. Furthermore, municipal lease obligations have the same risk characteristics as Municipal Instruments do generally.
OPTIONS. An option is a contract which conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific amount or value of a particular underlying interest at a specific price (called the "exercise" or "strike" price) at one or more specific times before the option expires. The underlying interest of an option contract can be a security, currency, index, future, swap or other type of financial instrument. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option purchaser is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date.
Options can be traded either through established exchanges ("exchange traded options") or privately negotiated transactions (over-the-counter or "OTC options"). Exchange traded options are standardized with respect to, among other things, the underlying interest, expiration date, contract size and strike price. The terms of OTC options are generally negotiated by the parties to the option contract which allows the parties greater flexibility in customizing the agreement, but OTC options are generally less liquid than exchange traded options.
All option contracts involve credit risk if the counterparty to the option contract fails to perform. Credit risk is low in exchange traded options because the performance of the contract by the counterparty is backed by the clearing agency for the exchange on which the options are traded. The credit risk in OTC options is dependent on the credit worthiness of the individual counterparty to the contract and may be greater than the credit risk associated with exchange traded options.
When purchasing a put option, the purchaser obtains the right (but not the obligation) to sell a specific amount or value of a particular interest to the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical put option can expect to realize a gain if the price of the underlying interest falls. However, if the underlying interest's price does not fall enough to offset the cost of purchasing the option, the purchaser of a put option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The purchaser of a put option may terminate its position by allowing the option to expire, exercising the option or closing out its position in the secondary market at the option's current price, if a liquid secondary markets exists. If the option is allowed to expire, the purchaser will lose the entire premium. If the option is exercised, the purchaser would complete the sale of the underlying interest to the option writer at the strike price.
When purchasing a call option, the purchaser obtains the right (but not the obligation) to purchase a specified amount or value of a particular interest from the option writer at a fixed strike price. In return for this right, the purchaser pays the option premium. The purchaser of a typical call option can expect to realize a gain if the price of the underlying interest rises. However, if the underlying interest's price does not rise enough to offset the cost of purchasing the option, the buyer of a call option can expect to suffer a loss (limited to the amount of the premium, plus related transaction costs).
The writer of a put or call option takes the opposite side of the transaction from the option's purchaser. In return for receipt of the premium, the writer assumes the obligation to buy or sell (depending on whether the option is a put or a call) a specified amount or value of a particular interest at the strike price if the purchaser of the option chooses to exercise it.
Generally, an option writer sells options with the goal of obtaining the premium paid by the option purchaser. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" when the option is exercised. A call option is in-the-money if the value of the underlying interest exceeds the strike price of the option. A put option is in-the-money if the strike price of the option exceeds the value of the underlying interest. Generally, any profit realized by an option purchaser represents a loss for the option writer. The writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option in the same manner as if the writer were entering into a futures contract.
The writer of a put option may seek to terminate a position in the put option before exercise by closing out the option in the secondary market at its current price. If the secondary market is not liquid for a put option, however, the writer must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes.
A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put) of the underlying interest when the option is exercised. A cash-settled option gives its owner the right to receive a cash payment based on the difference between a determined value of the underlying interest at the time the option is exercised and the fixed exercise price of the option. In the case of physically settled options, it may not be possible to terminate the position at any particular time or at an acceptable price. A cash-settled call conveys the right to receive a cash payment if the determined value of the underlying interest at exercise exceeds the exercise price of the option, and a cash-settled put conveys the right to receive a cash payment if the determined value of the underlying interest at exercise is less than the exercise price of the option.
Combination option positions are positions in more than one option at the same time. A spread involves being both the buyer and writer of the same type of option on the same underlying interest but different exercise prices and/or expiration dates. A straddle consists of purchasing or writing both a put and a call on the same underlying interest with the same exercise price and expiration date.
The principal factors affecting the market value of a put or call option include supply and demand, interest rates, the current market price of the underlying interest in relation to the exercise price of the option, the volatility of the underlying interest and the remaining period to the expiration date.
If a trading market in particular options were to become unavailable, investors in those options would be unable to close out their positions until trading resumes, and option writers may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. Exchanges or other facilities on which options are traded may establish limitations on options trading, may order the liquidation of positions in excess of these limitations, or may impose other sanctions that could adversely affect parties to an options transaction.
Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a Fund.
PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer and is therefore subject to the same risks as other equity securities. Preferred stock has precedence over common stock in the event the issuer is liquidated or declares bankruptcy, but is junior to the interests of the debt instruments of the issuer. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. The value of preferred stock is sensitive to changes in interest rates and to changes in the issuer's credit quality.
REAL ESTATE RELATED INVESTMENTS. Investment in real estate related investments are subject to similar risks to those associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning or applicable tax law; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; and changes in interest rates.
Real estate investment trusts ("REITs") are pooled investment vehicles that invest primarily in income producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs, or a combination of equity and mortgage REITs. Equity REITs invest most of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest most of their assets in real estate mortgages and derive income from interest payments. An investor will indirectly bear its proportionate share of any expenses (such as operating expenses and advisory fees) paid by REITs in which it invests in addition to the expenses paid by the investor.
Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skills of the REIT's manager and generally are not diversified. Equity and mortgage REITs are also subject to heavy cash flow dependency, borrower default, and self-liquidation.
Mortgage REITs are also subject to different combinations of prepayment, extension, interest rate and other market risks. The real estate mortgages underlying mortgage REITs are generally subject to a faster rate of principal repayments in a declining interest rate environment and to a slower rate of principal repayments in an increasing interest rate environment.
In addition, a REIT may be unable to obtain financing to satisfy income and gain distributions required by federal tax law, may fail to qualify for the federal tax exemption for distributed income, or may be adversely affected by changes in federal tax law, for example, by limiting their permissible businesses or investments.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a buyer would acquire a security for a relatively short period of time (usually not more than a week) subject to the obligation of the seller to repurchase and the buyer to resell such security at a fixed time and price (representing the buyer's cost plus interest). The buyer bears the risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the buyer is delayed or prevented from exercising its rights to dispose of the collateral. This risk includes the risk of procedural costs or delays in addition to a loss on the securities if their value should fall below their repurchase price.
RESTRICTED SECURITIES. Restricted securities are securities that are subject to legal restrictions on their re-sale. Difficulty in selling securities may result in a loss or be costly to an investor. Restricted securities generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, the holder of a registered security may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the holder might obtain a less favorable price than prevailed when it decided to seek registration of the security.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, an investor sells securities and receives cash proceeds, subject to its agreement to repurchase the securities at a later date for a fixed price reflecting a market rate of interest. There is a risk that the counter party to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the investor. Unless the appreciation and income on assets purchased with proceeds from reverse repurchase agreements exceed the costs associated with them, the investor's performance is lower than it otherwise would have been. A reverse repurchase agreement can be viewed as a borrowing. If a Fund makes additional investments while a reverse repurchase agreement is outstanding, this may be considered a form of leverage.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment companies include shares of closed-end investment companies, unit investment trusts, exchange-traded funds, and open-end investment companies, represent interests in professionally managed portfolios that may invest in any type of interest. Investing in other investment companies involves substantially the same risks as investing directly in the underlying interests, but involve additional expenses at the investment company-level, such as a proportionate share of portfolio management fees and operating expenses. Certain types of investment companies, such as closed-end investment companies and exchange-traded funds, trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value (NAV) per share. The extent to which a Fund can invest in securities of other investment companies is limited by the Investment Company Act of 1940.
SHORT SALES. A seller may make short sales that are made "against the box" and also those that are not made "against the box." A short sale that is not made "against the box" is a transaction in which a party sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the seller must borrow the security to make delivery to the buyer. The seller then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. It may not be possible to liquidate or close out the short sale at any particular time or at an acceptable price. The price at such time may be more or less than the price at which the security was sold by the seller. Until the security is replaced, the seller is required to repay the lender any dividends or interest which accrue during the period of the loan. To borrow the security, the seller also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. The seller also will incur transaction costs in effecting short sales.
The seller will incur a loss as a result of the short sale if the price of the security or index increases between the date of the short sale and the date on which the seller replaces the borrowed security. Such loss may be unlimited. The seller will realize a gain if the price of the security declines between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends or interest the seller may be required to pay in connection with a short sale.
A seller may also make short sales "against the box," i.e., when a security identical to one owned by the seller is borrowed and sold short. If the seller enters into a short sale against the box, it is required to hold securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) while the short sale is outstanding. The seller will incur transaction costs, including interest, in connection with opening, maintaining, and closing short sales against the box and will forgo an opportunity for capital appreciation in the security.
SOVEREIGN DEBT OBLIGATIONS. Sovereign debt obligations are issued or guaranteed by foreign governments or their agencies, including debt of developing countries. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of developing countries may involve a high degree of risk, and may be in default or present the risk of default. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and pay interest when due, and may require renegotiation or rescheduling of debt payments. In addition, prospects for repayment of principal and payment of interest may depend on political as well as economic factors. Although some sovereign debt, such as Brady Bonds, is collateralized by U.S. Government securities, repayment of principal and payment of interest is not guaranteed by the U.S. Government.
SWAPS AND RELATED DERIVATIVES. A swap is an agreement between two parties pursuant to which each party agrees to make one or more payments to the other, based on different interest rates, currency exchange rates, security or commodity prices, the prices or rates of other types of financial instruments, assets, the levels of specified indices, or other indicators. Swaps can be closed out by physical delivery of the underlying indicator(s) or payment of the cash settlement on settlement date, depending on the terms of the particular agreement. For example, in a typical credit default swap on a specific security, in the event of a credit event one party agrees to pay par on the security while the other party agrees to deliver the security. In the case of physically settled swaps, it may not be possible to close out the swap at any particular time or at an acceptable price. For example, in a typical interest rate swap, one party agrees to pay a fixed rate of interest determined by reference to a specified interest rate or index multiplied by a specified amount (the "notional amount"), while the other party agrees to pay an amount equal to a floating rate of interest determined by reference to an interest rate or index which is reset periodically and multiplied by the same notional amount. On each payment date, the obligations of parties are netted against each other, with only the net amount paid by one party to the other.
Swap agreements are typically individually negotiated and structured to provide exposure to a variety of different types of investments or market factors. Swap agreements may be entered into for hedging or non-hedging purposes. Swap agreements can take many different forms and are known by a variety of names and other types of swap agreements may be available.
Other types of over-the-counter derivatives, such as "caps," "floors," "collars" and options on swaps, or "swaptions," may be entered into for the same types of hedging or non-hedging purposes as swaps. A "cap" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the amount by which a specified fixed or floating rate or other indicator exceeds another rate or indicator (multiplied by a notional amount). A "floor" transaction is one in which one party pays a single or periodic fixed amount and the other party pays a floating amount equal to the excess, if any, of a specified rate or other indicator over a different rate or indicator (multiplied by a notional amount). A "collar" transaction is a combination of a cap and a floor in which one party pays the floating amount on the cap and the other party pays the floating amount on the floor. A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into the underlying swap on the agreed-upon terms.
The most significant factor in the performance of swaps, caps, floors, and collars is the change in the underlying price, rate, index level or other indicator that determines the amount of payments to be made under the arrangement.
If MFS attempts to use a swap or related investment as a hedge against, or as a substitute for, a portfolio investment, the swap or related derivative may not correlate as expected with the portfolio investment, resulting in losses to the Fund. While hedging strategies involving swaps and related derivatives can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.
Swaps and related derivatives may also be subject to liquidity risk since the derivatives are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such derivatives in the secondary market may be smaller than that for more traditional debt instruments. The swaps market is largely unregulated. It is possible that developments in the swaps market, including potential government regulations, could adversely affect an investor's ability to terminate its existing swap agreements or to realize amounts received under such agreements.
In addition, because the purchase and sale of swap and related derivatives takes place in an over-the-counter market, swaps and related derivatives are subject to the creditworthiness of the counterparty to the swap or related derivative, and their values may decline substantially if the counterparty's creditworthiness deteriorates. If the counterparty defaults, the other party's risk of loss consists of the net amount of payments that the non-defaulting party is contractually entitled to receive. The counterparties may be able to eliminate or reduce their exposure under these arrangements by assignment or other disposition or by entering into an offsetting agreement with the same or another counterparty.
TEMPORARY DEFENSIVE POSITIONS. In response to market, economic, political, or other conditions, MFS may depart from its investment strategies for a Fund by temporarily investing for defensive purposes. MFS may invest a large portion or all of a Fund's assets in cash (including foreign currency) or cash equivalents, including, but not limited to, obligations of banks (including certificates of deposit, bankers' acceptances, time deposits and repurchase agreements), commercial paper, short-term notes, U.S. Government Securities and related repurchase agreements.
TENDER OPTION BONDS. Tender option bonds, also known as put bonds or puttable securities, give the bondholder the right to require the issuer or a specified third party acting as agent for the issuer to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. These securities may be floating or variable rate securities. The issuer or third party agent may be unable to purchase the bonds on the purchase date due to a variety of circumstances, which may result in a loss of value of the bonds.
WARRANTS. Warrants are instruments which entitle the holder to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued or delivered as anticipated. If a Fund makes additional investments while a delayed delivery purchase is outstanding, this may result in a form of leverage.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate securities are debt instruments that provide for periodic adjustments in the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that may change with changes to the level of prevailing interest rates or the issuer's credit quality. There is a risk that the current interest rate on variable and floating rate securities may not accurately reflect current market interest rates or adequately compensate the holder for the current creditworthiness of the issuer. Some variable or floating rate securities are structured with liquidity features such as (1) put options or tender options that permit holders (sometimes subject to conditions) to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries or (2) auction rate features, remarketing provisions, or other maturity-shortening devices designed to enable the issuer to refinance or redeem outstanding debt securities (market-dependent liquidity features). The market-dependent liquidity features may not operate as intended as a result of the issuer's declining creditworthiness, adverse market conditions, or other factors or the inability or unwillingness of a participating broker-dealer to make a secondary market for such securities. As a result, variable or floating rate securities that include market-dependent liquidity features may lose value and the holders of such securities may be required to retain them for an extended period of time or until maturity.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS. Zero coupon and deferred interest bonds are debt instruments which are issued at a discount from face value. The discount approximates the total amount of interest the instruments 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 instrument 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. Bonds on which the interest is payable in kind are known as "PIK bonds." PIK bonds are debt instruments which provide that the issuer may, at its option, pay interest on such instruments in cash or in the form of additional debt instruments. Such instruments 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 instruments may experience greater volatility in market value than debt instruments which make regular payments of interest.
PART II - APPENDIX F
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions which cannot be changed without the approval of a Majority Shareholder Vote.
As fundamental investment restrictions, the Fund may not:
(1) borrow money except to the extent such borrowing is not prohibited by the Investment Company Act of 1940, as amended (the "1940 Act") and exemptive orders granted under such Act;
(2) underwrite securities issued by other persons, except that all or any portion of the assets of the Fund may be invested in one or more investment companies, to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act, and except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933, as amended, in selling a portfolio security;
(3) issue any senior securities except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; for purposes of this restriction, collateral arrangements with respect to any type of swap, option, Forward Contracts and Futures Contracts and collateral arrangements with respect to initial and variation margin are not deemed to be the issuance of a senior security;
(4) make loans except to the extent not prohibited by the 1940 Act and exemptive orders granted under such Act; and
(5) purchase or sell real estate (excluding securities secured by real estate or interests therein and securities of companies, such as real estate investment trusts, which deal in real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (excluding currencies and any type of option, Futures Contracts and Forward Contracts) in the ordinary course of its business; the Fund reserves the freedom of action to hold and to sell real estate, mineral leases, commodities or commodity contracts (including currencies and any type of option, Futures Contracts and Forward Contracts) acquired as a result of the ownership of securities.
* * * * * *
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that this restriction shall not apply to securities or obligations issued or guaranteed by banks or bank holding companies, finance companies or utility companies.
FOR THE MFS FLOATING RATE HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry. For purposes of this restriction, loan participations will be considered investments in the industry of the underlying borrower, rather than that of the seller of the loan participation.
FOR THE MFS HIGH INCOME FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund may invest up to 40% of the value of its assets in each of the electric utility and telephone industries.
FOR THE MFS UTILITIES FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the utilities industry.
FOR THE MFS TECHNOLOGY FUND:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry, provided however, that the Fund will invest at least 25% of its total assets in the securities of issuers principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements.
FOR ALL OTHER FUNDS:
(6) purchase any securities of an issuer in a particular industry if as a result 25% or more of its total assets (taken at market value at the time of purchase) would be invested in securities of issuers whose principal business activities are in the same industry.
* * * * * *
In addition, the Funds have adopted the following non-fundamental policies, which may be changed without shareholder approval.
FOR THE MFS CASH RESERVE FUND, MFS GOVERNMENT MONEY MARKET FUND AND THE MFS MONEY MARKET FUND:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 10% of the Fund's net assets (taken at market value) would be invested in such securities; repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities; securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 10% limitation.
FOR ALL OTHER FUNDS:
The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or contractual restrictions on resale or for which there is no readily available market (e.g., trading in the security is suspended, or, in the case of unlisted securities, where no market exists), if more than 15% of the Fund's net assets (taken at market value) would be invested in such securities. Repurchase agreements maturing in more than seven days will be deemed to be illiquid for purposes of the Fund's limitation on investment in illiquid securities. Securities that are not registered under the Securities Act of 1933 but are determined to be liquid by the Trust's Board of Trustees (or its delegee) will not be subject to this 15% limitation.
* * * * * *
FOR ALL FUNDS:
Except for investment restriction no. 1 and the Fund's non-fundamental policy on investing in illiquid securities, these investment restrictions are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy. In the event the investments exceed the percentage specified in the Fund's non-fundamental policy on illiquid investments, the Fund will reduce the percentage of its assets invested in illiquid investments in due course, taking into account the best interests of shareholders.
For purposes of investment restriction no. 6, investments in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and tax-exempt obligations issued or guaranteed by a U.S. territory or possession, a state or local government, or a political subdivision of any of the foregoing, are not considered an investment in any particular industry.
For purposes of investment restriction no. 6, investments in other investment companies are not considered an investment in any particular industry and portfolio securities held by an underlying fund in which the Fund may invest are not considered to be securities purchased by the Fund.
For purposes of investment restriction no. 6 for MFS Technology Fund, MFS considers an issuer to be principally engaged in offering, using or developing products, processes, or services that will provide or will benefit significantly from technological advances and improvements if at least 50% of any issuer's assets, income, sales, or profits are committed to, or derived from, such activities, or a third party has given the issuer an industry or sector classification consistent with such activities.
FOR MFS LIFETIME RETIREMENT INCOME FUND, MFS LIFETIME 2010 FUND, MFS LIFETIME 2020 FUND, MFS LIFETIME 2030 FUND, MFS LIFETIME 2040 FUND, MFS INTERNATIONAL DIVERSIFICATION FUND, MFS AGGRESSIVE GROWTH ALLOCATION FUND, MFS CONSERVATIVE ALLOCATION FUND, MFS GROWTH ALLOCATION FUND AND MFS MODERATE ALLOCATION FUND:
In accordance with the Fund's investment program as set forth in its Prospectus, the Fund may invest more than 25% of its assets in any one underlying fund. Although the Fund does not have a policy to concentrate its investments in a particular industry, 25% or more of the Fund's total assets may be indirectly exposed to a particular industry or group of related industries through its investment in one or more underlying funds.
PART II - APPENDIX G
RECIPIENTS OF NON-PUBLIC PORTFOLIO HOLDINGS ON AN ONGOING BASIS NAME OF RECIPIENT PURPOSE OF DISCLOSURE MSCI BARRA, Inc. Analytical Tool Bloomberg L.P. Analytical Tool Board of Trustees Fund Governance Bowne Typesetting and Printing Services CDS/Computer Software Vendor Checkfree Software Vendor eA Data Automation Services, LLC Data Formatting and Organization Service Eagle Investment Systems Corp. Accounting System Ernst & Young LLP Independent Registered Public Accounting Firm FactSet Research Systems Inc. Analytical Tool GainsKeeper, Inc. Accounting System GFP Acquisition Company, Inc. D.B.A. GCom2 Solutions Software Vendor G.H. Dean Co. Typesetting and Printing Services Institutional Shareholder Services Inc. Proxy Service Provider Investor Tools Perform Analytical Tool ITG, Inc. Analytical Tool JPMorgan Chase Bank Fund Custodian Lipper Inc. Publication Preparation The MacGregor Group Software Vendor Massachusetts Financial Services Co. Fund Management MFS Fund Distributors, Inc. Fund Distribution OMGEO LLC Software Vendor Plexus Analytical Tool Radianz Software Vendor Ropes & Gray LLP Legal Counsel Saloman Analytics Inc. Analytical Tool Siemens Business Services, Inc. IT Client Services and Desktop Architecture Sir Speedy Printing/Copying Services Standard & Poor's Securities Evaluations Services Fund Pricing State Street Bank and Trust Company Custodian Sun Capital Advisers LLC* Fund Management Wilshire Analytics/Axiom Analytical Tool Valley Forge Capital Advisors, Inc.** Fund Management * Sun Capital Advisers LLC receives non-public portfolio holdings disclosure regarding the portion of the MFS Diversified Income Fund for which it serves as sub-adviser. ** Valley Forge Capital Advisors, Inc., receives non-public portfolio holdings disclosure regarding the MFS Sector Rotational Fund for which it serves as sub-adviser. |
This list is current as of May 31, 2007, and any additions, modifications or deletions to the list that have occurred since May 31, 2007 are not reflected.
PART II - APPENDIX H
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of various debt instruments. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE
Moody's long-term obligation ratings are opinions of the relative credit risk of fixed income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.
AAA: Obligations rated "Aaa" are judged to be of the highest quality, with minimal credit risk.
AA: Obligations rated "Aa" are judged to be of high quality and are subject to very low credit risk.
A: Obligations rated "A" are considered upper-medium grade and are subject to low credit risk.
BAA: Obligations rated "Baa" are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
BA: Obligations rated "Ba" are judged to have speculative elements and are subject to substantial credit risk.
B: Obligations rated "B" are considered speculative and are subject to high credit risk.
CAA: Obligations rated "Caa" are judged to be of poor standing and are subject to very high credit risk.
CA: Obligations rated "Ca" are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations rated "C" are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody's applies numerical modifiers "1", "2" and "3" to each generic rating classification from "Aa" through "Caa." The modifier "1" indicates that the obligation ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
Issue credit ratings are based, in varying degrees, on the following considerations: (1) likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, AND C: Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the applicable rating category.
N.R.: Not rated.
FITCH RATINGS
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR).
Investment Grade
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. "A" ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. "BB" ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC: Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.
CC: Default of some kind appears probable.
C: Default is imminent.
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D: Indicates an entity or sovereign that has defaulted on all of its financial obligations. Default generally is defined as one of the following:
o Failure of an obligor to make timely payment of principal and/or interest under the contractual terms of any financial obligation;
o The bankruptcy filings, administration, receivership, liquidation, or other winding-up or cessation of business of an obligor; or
o The distressed or other coercive exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated "D" upon a default. Defaulted and distressed obligations typically are rated along the continuum of "C" to "B" ratings categories, depending upon their recovery prospects and other relevant characteristics.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch's published definition of default are the most appropriate ratings to assign.
The modifiers "+" or "-`' may be appended to a rating to denote relative status within major ratings categories. Such suffixes are not added to the "AAA" Long-term ratings category, to categories below "CCC," or to Short-term ratings other than "F1." (The +/- modifiers are only used to denote issues within the "CCC" category, whereas issuers are only rated "CCC" without the use of modifiers.)
INVESTMENT ADVISER
MFS Investment Management
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 55824, Boston, MA 02205-5824
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street, Boston, MA 02116 MFS-PART2-SAI-7/07
MFS SERIES TRUST X
MFS(R) AGGRESSIVE GROWTH ALLOCATION FUND
MFS(R) CONSERVATIVE ALLOCATION FUND
MFS(R) EMERGING MARKETS EQUITY FUND
MFS(R) GROWTH ALLOCATION FUND
MFS(R) INTERNATIONAL DIVERSIFICATION FUND
MFS(R) INTERNATIONAL GROWTH FUND
MFS(R) INTERNATIONAL VALUE FUND
MFS(R) MODERATE ALLOCATION FUND
PART C
ITEM 23. EXHIBITS
1 (a) Amended and Restated Declaration of Trust, dated December 16, 2004. (20)
(b) Amendment, dated February 1, 2005, to the Declaration of Trust to terminate MFS Gemini U.K. Fund. (20)
(c) Amendment, dated February 1, 2005, to the Declaration of Trust to terminate MFS Global Value Fund. (20)
(d) Amendment, dated November 23, 2004, to the Declaration of Trust to terminate MFS Government Mortgage Fund. (20)
(e) Amendment, dated March 9, 2005, to the Declaration of Trust designating MFS Bond Diversification Fund as a new series of the Trust. (20)
(f) Amendment, dated March 10, 2005, to the Declaration of Trust - Establishment and Designation of Class R Shares, Class R3 Shares, Class R4 Shares and Class R5 Shares for MFS Aggressive Growth Allocation Fund, MFS Conservative Allocation Fund, MFS Growth Allocation Fund, MFS International Diversification Fund, MFS Moderate Allocation Fund, MFS New Endeavor Fund and MFS Strategic Value Fund. (5)
(g) Amendment, dated April 1, 2005, to the Declaration of Trust - Redesignation of Class R1 Shares as Class R Shares and of Class R2 Shares as Class R3 Shares for MFS Aggressive Growth Allocation Fund, MFS Conservative Allocation Fund, MFS Growth Allocation Fund, MFS International Diversification Fund, MFS Moderate Allocation Fund, MFS New Endeavor Fund and MFS Strategic Value Fund. (5)
(h) Amendment, dated May 23, 2005, to the Declaration of Trust to terminate MFS Bond Diversification Fund. (19)
(i) Amendment, dated April 18, 2006, to the Declaration of Trust - designation of Class W Shares for MFS Emerging Markets Debt Fund, MFS International Growth Fund and MFS International Value Fund. (26)
(j) Amendment, dated April 27, 2007, to the Declaration of Trust to terminate Classes 529A, 529B and 529C Shares of MFS Strategic Value Fund; filed herewith.
2 (a) Amended and Restated By-Laws, dated January 1, 2002, as revised through August 22, 2007. (24)
(b) Appendix A as revised through July 24, 2007, to the Master Amended and Restated By-Laws, dated January 1, 2002. (24)
3 Copies of instruments defining the rights of shareholders,
including the relevant portions of: the Declaration of Trust,
dated December 16, 2004, as amended through April 27, 2007 (see
Section 6.10), and the Amended and Restated By-Laws, dated
January 1, 2002 as revised July 24, 2007 (see Article III). (1)
4 (a) Investment Advisory Agreement for the Trust, dated January 1, 2002. (7)
(b) Appendix A and B to the Investment Advisory Agreement for the trust to include MFS Floating Rate High Income Fund. (17)
(c) Amendment, dated January 1, 2004, to the Investment Advisory Agreement, dated January 1, 2002, for MFS International Growth Fund, MFS International Value Fund and MFS Emerging Markets Equity Fund. (20)
(d) Amendment, dated November 1, 2003, to the Investment Advisory Agreement, dated January 1, 2002, for the MFS Aggressive Growth Allocation Fund, MFS Conservative Allocation Fund, MFS Growth Allocation Fund and MFS Moderate Allocation Fund. (20)
(e) Amendment, dated June 1, 2002, to the Investment Advisory Agreement, dated January 1, 2002 for MFS Emerging Markets Debt Fund. (20)
(f) Appendix A and B to the Investment Advisory Agreement for the Trust to include MFS International Diversification Fund, dated September 30, 2004. (13)
5 (a) Distribution Agreement between MFS Series Trust X and MFS Fund Distributors, Inc., dated September 1, 1995. (2)
(b) Dealer Agreement between MFS Fund Distributions, Inc. ("MFD") and a dealer as of September, 2004; The Mutual Fund Agreement between MFD and a trust institution effective May 2002; Mutual Fund Agreement; Supplement to Mutual Fund Agreement; Amended and Restated MFS Serviced Plan Supplement to Dealer or Mutual Fund Agreement; Notice of Amendment to Dealer or Mutual Fund Agreement effective March 2005; and Rule 22c-2 Supplement to Dealer Agreement or Mutual Fund Agreement. (22)
6 (a) Retirement Plan for Non-Interested Person Trustees, as amended and restated February 17, 1999. (10)
(b) Amendment to the Master Retirement Plan for Non-Interested Person Trustees, dated July 1, 2002. (9)
(c) Retirement Benefit Deferral Plan, dated July 1, 2002. (9)
7 (a) Master Custodian Agreement between the Registrant and State Street Bank & Trust Company, dated December 18, 2006; (15)
(b) Fund Accounting Agreement between the Registrant and State Street Bank & Trust Company, dated December 18, 2006. (15)
8 (a) Shareholder Servicing Agent Agreement between Registrant and Massachusetts Financial Service Center, dated September 1, 1995.
(b) Amendment to Exhibit B Shareholder Servicing Agent Agreement to amend Fee Schedule, dated April 1, 2003. (18)
(c) Amendment to Shareholder Servicing Agent Agreement, February 22, 2005. (20)
(d) Master Administrative Services Agreement, dated March 1, 1997, as amended and restated August 1, 2006. (25)
(e) Exhibit A, as revised August 1, 2007, to the Master Administrative Services Agreement, dated March 1, 1997, as amended and restated August 1, 2006. (24)
(f) Exhibit D, as revised August 1, 2007, to the Master Administrative Services Agreement, dated March 1, 1997, as amended and restated August 1, 2006. (24)
(g) Master 529 Administrative Services Agreement, dated August 1, 2002. (14)
(h) Exhibit A, as revised February 27, 2007, to the Master 529 Administration Services Agreement, dated August 1, 2002. (12)
(i) Addendum, dated October 16, 2002, to the Master 529 Administrative Services Agreement. (14)
(j) Master Class R Plan Administration and Service Agreement, as of April 1, 2005. (21)
(k) Exhibit A, dated July 26, 2005, to the Master Class R Plan Administration and Service Agreement. (19)
(l) Exhibit C, as revised April 1, 2007, to the Master Class R Administration and Service Agreement dated April 1, 2005. (4)
(m) Special Servicing Agreement, dated May 1, 2007. (15)
9 (a) Opinion and Consent of Counsel, dated September 28, 2005. (19)
(b) Legal Opinion Consent, dated September 24, 2007; filed herewith.
10 (a) Consent of Ernst & Young LLP on behalf of MFS International Value Fund, MFS International Growth Fund, MFS Emerging Markets Equity Fund, MFS Conservative Allocation Fund, MFS Moderate Allocation Fund, MFS Growth Allocation Fund and MFS Aggressive Growth Allocation Fund, dated September 24, 2007; filed herewith.
(b) Consent of Deloitte & Touche LLP on behalf of MFS International Diversification Fund, dated September 24, 2007; filed herewith.
(c) Consent of Ernst & Young LLP on behalf of MFS Emerging Markets Debt Fund, MFS New Endeavor Fund and MFS Strategic Value Fund, dated September 25, 2006. (25)
(d) Consent of Deloitte & Touche LLP on behalf of MFS Floating Rate High Income Fund, dated October 23, 2006. (23)
11 Not Applicable.
12 Investment Representation Letter for MFS Government Mortgage Fund. (3)
13 (a) Master Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, effective January 1, 1997, and Amended and Restated effective October 25, 2006. (8)
(b) Exhibit A, dated February 27, 2007, to the Master Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, amended to include MFS Money Market Fund. (6)
14 Plan pursuant to Rule 18f-3(d) under the Investment Company Act of 1940 effective September 6, 1996, as amended and restated effective October 25, 2006. (4)
15 Reserved.
16 (a) Code of Ethics as amended and restated effective January 1, 2007, pursuant to Rule 17j-1 under the Investment Company Act of 1940. (4)
(b) Code of Ethics for Personal Trading and Conduct for Non-Management Directors of MFS, effective October 6, 2004. (16)
(c) Code of Ethics for Non-MFS Management Trustees effective January 1, 2005. (11)
Power of Attorney, dated July 24, 2007; filed herewith. (Trustees) Power of Attorney, dated July 24, 2007; filed herewith. (Dwyer) Power of Attorney, dated July 24, 2007; filed herewith. (Atkinson)
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 13 filed with the SEC via EDGAR on November 28, 1995.
(3) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR on August 27, 1996.
(4) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and 811-2794) Post-Effective Amendment No. 40 filed with the SEC via EDGAR on March 29, 2007.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 56 filed with the SEC via EDGAR on March 31, 2005.
(6) Incorporated by reference to MFS Series Trust IV (File Nos. 2-54607 and 811-2594) Post-Effective Amendment No. 45 filed with the SEC via EDGAR on March 30, 2007.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 38 as filed with the SEC via EDGAR on April 11, 2002.
(8) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915 and 811-4096) Post-Effective Amendment No. 46 filed with the SEC via EDGAR on March 20, 2007.
(9) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and 811-2464) Post-Effective Amendment No. 44 filed with the SEC via EDGAR on August 1, 2002.
(10) Incorporated by reference to MFS Growth Opportunities Fund (File Nos. 2-36431 and 811-2032) Post-Effective Amendment No. 39 filed with the SEC via EDGAR on February 26, 1999.
(11) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-4777) Post-Effective Amendment No. 45 filed with the SEC via EDGAR on December 29, 2004
(12) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and 811-2464) Post-Effective Amendment No. 65 filed with the SEC via EDGAR on June 28, 2007.
(13) Incorporated by reference to Registrant's Post-Effective Amendment No. 50 filed with the SEC via EDGAR on July 9, 2004.
(14) Incorporated by reference to Registrant's Post-Effective Amendment No. 43 filed with the SEC via EDGAR on November 27, 2002.
(15) Incorporated by reference to MFS Series Trust XII (File Nos. 333-126388 and 811-21780) Post-Effective Amendment No. 7 filed with the SEC via EDGAR on June 28, 2007.
(16) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-4777) Post-Effective Amendment No. 44 filed with the SEC via EDGAR on October 29, 2004.
(17) Incorporated by reference to Registrant's Post-Effective Amendment No. 54 filed with the SEC via EDGAR on November 26, 2004.
(18) Incorporated by reference to Registrant's Post-Effective Amendment No. 46 filed with the SEC via EDGAR on September 26, 2003.
(19) Incorporated by reference to Registrant's Post-Effective Amendment No. 57 filed with the SEC via EDGAR on September 28, 2005.
(20) Incorporated by reference to Registrant's Post-Effective Amendment No. 55 filed with the SEC via EDGAR on March 14, 2005.
(21) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and 811-2794) Post-Effective Amendment No. 37 filed with the SEC via EDGAR on March 31, 2005.
(22) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and 811-5262) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on December 28, 2006.
(23) Incorporated by reference to Registrant's Post-Effective Amendment 63 filed with the SEC via EDGAR on October 27, 2006.
(24) Incorporated by reference to MFS Series Trust XV (File Nos. 2-96738 and 811-4253) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on August 24, 2007.
(25) Incorporated by reference to Registrant's Post-Effective Amendment No. 62 filed with the SEC via EDGAR on September 29, 2006.
(26) Incorporated by reference to Registrant's Post-Effective Amendment No. 60 filed with the SEC via EDGAR on April 27, 2006.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 25. INDEMNIFICATION
The Trustees and officers of the Registrant and the personnel of the Registrant's investment adviser are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940, as amended.
Reference is hereby made to (a) Article V of the Amended and Restated Declaration of Trust dated December 16, 2004, incorporated by reference to Registrant's Post-Effective Amendment No. 55, filed with the SEC via EDGAR on March 14, 2005; and (b) Section 8 of the Shareholder Servicing Agreement, incorporated by reference to Registrant's Post-Effective Amendment No. 13 with the SEC via EDGAR on November 28, 1995.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered hereby, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: MASSACHUSETTS INVESTORS GROWTH STOCK FUND;
MASSACHUSETTS INVESTORS TRUST; MFS SERIES TRUST I (which has seven series: MFS
Cash Reserve Fund, MFS Core Equity Fund, MFS Core Growth Fund, MFS New Discovery
Fund, MFS Research International Fund, MFS Technology Fund and MFS Value Fund);
MFS SERIES TRUST II (which has one series: MFS Emerging Growth Fund); MFS SERIES
TRUST III (which has three series: MFS High Income Fund, MFS High Yield
Opportunities Fund and MFS Municipal High Income Fund); MFS SERIES TRUST IV
(which has three series: MFS Government Money Market Fund, MFS Mid Cap Growth
Fund and MFS Money Market Fund); MFS SERIES TRUST V (which has three series: MFS
International New Discovery Fund, MFS Research Fund and MFS Total Return Fund);
MFS SERIES TRUST VI (which has three series: MFS Global Equity Fund, MFS Global
Total Return Fund and MFS Utilities Fund); MFS SERIES TRUST VII (which currently
has no fund); MFS SERIES TRUST VIII (which has two series: MFS Global Growth
Fund and MFS Strategic Income Fund); MFS SERIES TRUST IX (which has six series:
MFS Bond Fund, MFS Inflation-Adjusted Bond Fund, MFS Limited Maturity Fund, MFS
Municipal Limited Maturity Fund, MFS Research Bond Fund and MFS Research Bond
Fund J); MFS SERIES TRUST X (which has 12 series: MFS Aggressive Growth
Allocation Fund, MFS Conservative Allocation Fund, MFS Emerging Markets Debt
Fund, MFS Emerging Markets Equity Fund, MFS Floating Rate High Income Fund, MFS
Growth Allocation Fund, MFS International Diversification Fund, MFS
International Growth Fund, MFS International Value Fund, MFS Moderate Allocation
Fund, MFS New Endeavor Fund and MFS Strategic Value Fund); MFS SERIES TRUST XI
(which has two series: MFS Mid Cap Value Fund and MFS Union Standard Equity
Fund); MFS SERIES TRUST XII (which has 6 series: MFS Lifetime Retirement Income
Fund, MFS Lifetime 2010 Fund, MFS Lifetime 2020 Fund, MFS Lifetime 2030 Fund;
MFS Lifetime 2040 Fund and MFS Sector Rotational Fund; MFS SERIES TRUST XIII
(which has 2 series: MFS Government Securities Fund and MFS Diversified Income
Fund); MFS SERIES TRUST XIV (which has one series: MFS Institutional Money
Market Portfolio); MFS SERIES TRUST XV (which has one series: MFS Diversified
Real Return Fund) and MFS MUNICIPAL SERIES TRUST (which has 16 series: MFS
Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California
Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond
Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund,
MFS Mississippi Municipal Bond Fund, MFS Municipal Income Fund, MFS New York
Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania
Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee
Municipal Bond Fund, MFS Virginia Municipal Bond Fund and MFS West Virginia
Municipal Bond Fund (the "MFS
Funds"). The principal business address of each of the MFS Funds is 500 Boylston Street, Boston, Massachusetts, 02116.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has two series) and MFS Variable
Insurance Trust ("MVI") (which has 16 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 Charter Income Trust, MFS Government Markets Income Trust, MFS Intermediate Income Trust, MFS Multimarket Income Trust, MFS Municipal Income Trust, MFS Special Value Trust, MFS California Insured Municipal Fund, MFS High Income Municipal Trust, MFS InterMarket Income Trust I, MFS Intermediate High Income Fund, MFS Investment Grade Municipal Trust and MFS High Yield Municipal Trust (the "MFS Closed-End Funds"). The principal business address of each of the MFS Closed-End Funds is 500 Boylston Street, Boston, Massachusetts, 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust ("MFS/SL") (which has 26 series), Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Money Market Variable Account and Total Return Variable Account (collectively, the "Accounts"). The principal business address of MFS/SL is 500 Boylston Street, Boston, Massachusetts, 02116. The principal business address of each of the aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills, Massachusetts, 02181.
The Directors of MFS are Robert C. Pozen, Robert J. Manning, Martin E. Beaulieu, Robin A. Stelmach, Donald A. Stewart, James C. Baillie, Ronald W. Osborne and William K. O'Brien. Robert C. Pozen is the Chairman and Chairman of the Board, Mr. Manning is Chief Executive Officer, Chief Investment Officer and President, Mr. Beaulieu is Executive Vice President and the Director of Global Distribution, Robin A. Stelmach is Executive Vice President and Chief Operating Officer; Maria F. Dwyer is Executive Vice President, Chief Regulatory Officer and Chief Compliance Officer, Mark N. Polebaum is an Executive Vice President, General Counsel and Secretary, Mitchell C. Freestone, Ethan D. Corey, Mark D. Kaplan and Susan S. Newton are Assistant Secretaries, Michael W. Roberge is an Executive Vice President, Chief Investment Officer-U.S. and Co-Director of Global Research, David A. Antonelli is an Executive Vice President, Chief Investment Officer-Non U.S. and Global Equity Investments and Co-Director of Global Research, Deborah H. Miller is an Investment Officer and Director of Equity Quantitative Research, Paul T. Kirwan is an Executive Vice President, Chief Financial Officer and Treasurer and Joseph E. Lynch is the Assistant Treasurer and Timothy Tierney is the Tax Officer.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS SERIES TRUST I
MFS SERIES TRUST II
MFS SERIES TRUST III
MFS SERIES TRUST IV
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST VII
MFS SERIES TRUST VIII
MFS SERIES TRUST IX
MFS SERIES TRUST X
MFS SERIES TRUST XI
MFS SERIES TRUST XII
MFS SERIES TRUST XIII
MFS SERIES TRUST XIV
MFS SERIES TRUST XV
MFS MUNICIPAL SERIES TRUST
MFS VARIABLE INSURANCE TRUST
MFS INSTITUTIONAL TRUST
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 CALIFORNIA INSURED MUNICIPAL FUND
MFS HIGH INCOME MUNICIPAL TRUST
MFS HIGH YIELD MUNICIPAL TRUST
MFS INTERMARKET INCOME TRUST I
MFS INTERMEDIATE HIGH INCOME FUND
MFS INVESTMENT GRADE MUNICIPAL TRUST
J. Atwood Ives is the Chair, Maria F. Dwyer is President, Tracy A. Atkinson, a Senior Vice President of MFS, is Treasurer, Ellen Moynihan, a Senior Vice President of MFS and James O. Yost, David L. DiLorenzo and Mark Fischer, Vice Presidents of MFS, are the Assistant Treasurers, Mark N. Polebaum, Senior Vice President, General Counsel and Secretary of MFS, is the Secretary, Brian E. Langenfeld, Assistant Vice President and Counsel of MFS, Christopher R. Bohane and Susan A. Pereira, Vice Presidents and Senior Counsels of MFS, Ethan D. Corey, Special Counsel of MFS and Susan S. Newton, Senior Vice President and Associate General Counsel of MFS are Assistant Secretaries and Assistant Clerks.
MFS/SUN LIFE SERIES TRUST
J. Kermit Birchfield is Chairman, Maria F. Dwyer is President, Tracy A. Atkinson is the Treasurer, James O. Yost, Ellen M. Moynihan, David L. DiLorenzo and Mark Fischer are the Assistant Treasurers, Mark N. Polebaum is the Secretary, Brian E. Langenfeld, Christopher R. Bohane, Ethan D. Corey, Susan A. Pereira and Susan S. Newton are the Assistant Secretaries and Assistant Clerks.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
J. Kermit Birchfield is Chairman, Maria F. Dwyer is President, Tracy A. Atkinson is Treasurer, Jim Yost, Ellen M. Moynihan, David L. DiLorenzo and Mark Fischer are the Assistant Treasurers, Mark N. Polebaum is the Secretary and Brian E. Langenfeld, Christopher R. Bohane, Ethan D. Corey, Susan A. Pereira and Susan S. Newton are the Assistant Secretaries and Assistant Clerks.
MFS FLOATING RATE INCOME FUND - (CAYMAN ISLANDS REGISTERED FUND)
MFS MERIDIAN FUNDS, SICAV
Martin E. Beaulieu, Maria F. Dwyer and Robin A. Stelmach are Directors, Tracy A. Atkinson is Treasurer, James O. Yost and Ellen M. Moynihan are the Assistant Treasurers, and Christopher R. Bohane is the Assistant Secretary.
MFS INTERNATIONAL LTD. ("MIL BERMUDA"), a limited liability company organized under the laws of Bermuda and a subsidiary of MFS, whose principal business address is Canon's Court, 22 Victoria Street, Hamilton HM 12 Bermuda, serves as investment adviser to and distributor for MFS Floating Rate Income Fund and the MFS Meridian Funds, SICAV ("SICAV Funds"). The SICAV Funds are organized in Luxembourg and qualify as an undertaking for collective investments in transferable securities (UCITS). The principal business address of the Funds is 47, Boulevard Royal, L-2449 Luxembourg. The SICAV Funds include Asia Pacific Ex-Japan Fund, Continental European Equity Fund, Emerging Markets Debt Fund, Emerging Markets Equity Fund, Euro Reserve Fund, European Bond Fund, European Equity Fund, European Growth Fund, European High Yield Bond Fund, European Smaller Companies Fund, European Value Fund, Global Total Return Fund, Global Equity Fund, Global Growth Fund, Global Value Fund, Inflation-Adjusted Bond Fund, Japan Equity Fund, Limited Maturity Fund, Research Bond Fund, Research International Fund, Strategic Income Fund, Technology Fund, U.K. Equity Fund, U.S. Dollar Money Market Fund, U.S. Mid Cap Growth Fund, U.S. Government Bond Fund, U.S. High Yield Bond Fund, U.S. Research Fund, U.S. Large Cap Growth Fund and U.S. Value Fund. The MFS Floating Rate Income Fund is organized as an exempt company under the laws of the Cayman Islands. The principal business address for the MFS Floating Rate Income Fund is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies.
James A. Jessee is a Director and President, Martin E. Beaulieu and Robert J. Manning are Directors, Paul T. Kirwan is the Treasurer, Mark N. Polebaum and Juliet Evans are the Secretaries, Mitchell C. Freestone, Ethan D. Corey, Mark D. Kaplan and Susan Newton are Assistant Secretaries, Timothy F. Tierney is the Tax Officer, Sarah Moule is Resident Representative and Appleby Corporate Svs. Ltd. Is Assistant Resident Representative.
MFS INTERNATIONAL (U.K.) LTD. ("MIL-UK"), a private limited company registered with the Registrar of Companies for England and Wales whose current address is Eversheds, Senator House, 85 Queen Victoria Street, London, England EC4V 4JL, is involved primarily in marketing and investment research activities with respect to private clients and the Cayman Islands Registered Fund and the MFS Meridian Funds, SICAV.
Olivier Lebleu is Managing Director, Mitchell C. Freestone is a Director and Barnaby Wiener is a Director. Paul T. Kirwan is the Treasurer, Joseph E. Lynch is Assistant Treasurer, Mark N. Polebaum is the Secretary, Ethan D. Corey, Mark D. Kaplan and Susan Newton are Assistant Secretaries, and Timothy F. Tierney is the Tax Officer.
MFS DO BRAZIL DESENVOLVIMENT O DE MARCAAO LTDA ("MIL BRAZIL"), a private commercial limited liability quota company organized under the laws of Brazil whose current address is Al Campinas, 1070, 7 andar, Sala 15, Sao Paulo, Sao Paulo, Brazil, is primarily involved in providing market development services to increment the use of MFS products and services in Brazil as well as being a distributor of the MFS Floating Rate Income Fund and MFS Meridian Funds, SICAV.
Robert J. Manning is the Advisory Board Member and Benedicto D. Filho is the Manager.
MFS INSTITUTIONAL ADVISORS (AUSTRALIA) LTD. ("MFSI-AUSTRALIA"), a private limited company organized under the Corporations Law of New South Wales, Australia whose current address is Level 27, Australia Square, 264 George Street, Sydney, NSW2000, Australia, is involved primarily in investment management and distribution of Australian superannuation unit trusts and acts as an investment adviser to institutional accounts.
Graham E. Lenzner is the Director and Chairman of the Board, Loretta Lenzner, Robert J. Manning and Sheldon Rivers are Directors, Paul T. Kirwan is the Treasurer, Joseph E. Lynch is Assistant Treasurer and Mitchell C. Freestone, Ethan D. Corey, Mark D. Kaplan and Susan Newton are Assistant Secretaries and Timothy F. Tierney is the Tax Officer.
MFS FUND DISTRIBUTORS, INC. ("MFD"), a wholly owned subsidiary of MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
Robert J. Manning is the Director, Martin E. Beaulieu is a Director and Chairman of the Board, James A. Jessee is President, Paul T. Kirwan is the Treasurer, Joseph E. Lynch is Assistant Treasurer, Mark N. Polebaum is the Secretary, Mitchell C. Freestone, Mark D. Kaplan, Ethan D. Corey and Susan S. Newton are Assistant Secretaries and Timothy F. Tierney is the Tax Officer.
MFS SERVICE CENTER, INC. ("MFSC"), a wholly owned subsidiary of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End Funds, MFSIT and MVI.
Robert J. Manning is Director and Chairman of the Board, Maureen Leary-Jago is a Director and the President, Mark N. Polebaum is the Secretary, Mitchell C. Freestone, Ethan D. Corey, Mark D. Kaplan and Susan S. Newton are Assistant Secretaries, Paul T. Kirwan is the Treasurer, Joseph E. Lynch is Assistant Secretary and Timothy F. Tierney is the Tax Officer.
MFS INSTITUTIONAL ADVISORS, INC. ("MFSI"), a wholly owned subsidiary of MFS, provides investment advice to substantial private clients.
Robert J. Manning is Chairman of the Board, Chief Investment Officer and a Director, Martin E. Beaulieu is a Director, Carol Geremiah is the President, Maria Dwyer is Chief Compliance Officer, John F. O'Connor and David J. Picher are Senior Vice Presidents, Mitchell C. Freestone, Ethan D. Corey and Mark D. Kaplan are Assistant Secretaries and Paul T. Kirwan is the Treasurer, Joseph E. Lynch is Assistant Treasurer and Timothy F. Tierney is Tax Officer.
SUN LIFE RETIREMENT SERVICES (U.S.), INC. ("SUN LIFE RETIREMENT SERVICES"), a wholly owned subsidiary of Sun Life Financial (U.S.) Holdings, Inc., markets MFS products to retirement plans and provides administrative and record keeping services for retirement plans.
Claude Accum is a Director, Chairman of the Board, President and Chief Executive Officer, Martin E. Beaulieu and Ronald Friesen are Directors, Paul T. Kirwan is the Treasurer, Joseph E. Lynch is Assistant Secretary, Mark N. Polebaum is the Secretary, Mitchell C. Freestone, Ethan D. Corey, Mark D. Kaplan and Susan S. Newton are Assistant Secretaries and Timothy F. Tierney is the Tax Officer.
MFS INVESTMENT MANAGEMENT K.K. (JAPAN) ("MIMKK"), a wholly owned subsidiary of MFS, is a corporation incorporated in Japan. MIMKK, whose address is 16F Daido Seimei Kasumigaseki Bldg., 1-4-2- Kasumigaseki, Chiyoda-ku, Tokyo Japan 100 0013, is involved in investment management activities.
Carol W. Geremia and Susan Pereira are Directors, Takafumi Ishii is a Director and Representative Director, Paul T. Kirwan is Statutory Auditor, Mark N. Polebaum is Secretary, Ethan D. Corey, Susan Newton, Mitchell C. Freestone and Mark D. Kaplan are Assistant Secretaries. Timothy F. Tierney is the Tax Officer.
MFS HERITAGE TRUST COMPANY ("MFS TRUST"), a New Hampshire-chartered limited-purpose trust company whose current address is 650 Elm Street, Suite 404, Manchester, NH 03101, provides directed trustee services to retirement plans.
Carol W. Geremia is Director and President, Deborah H. Miller is Director and Investment Officer, Maureen Leary-Jago and Joseph F. Flaherty are Directors, Paul T. Kirwan is the Treasurer, Ethan D. Corey and Susan S. Newton are Assistant Clerks, Mark D. Kaplan is Clerk and Trust Officer and Timothy F. Tierney is the Tax Officer.
MFS JAPAN HOLDINGS, LLC, a private limited liability company organized under the laws of Delaware whose address is 500 Boylston Street, Boston, MA 02116, is
primarily a holding company and is 50% owned by Massachusetts Financial Services Company and 50% owned by Sun Life Financial (Japan), Inc.
Robert J. Manning, Carol W. Geremia and Donald A. Stewart are Managers, Mark N. Polebaum is the Secretary, Paul T. Kirwan is Treasurer, Joseph E. Lynch is Assistant Secretary, Mitchell C. Freestone, Ethan D. Corey, Susan S. Newton and Mark D. Kaplan are Assistant Secretaries and Timothy F. Tierney is the Tax Officer.
SUN LIFE OF CANADA (U.S.) FINANCIAL SERVICES HOLDINGS, INC., a company incorporated under the laws of Delaware whose address is 500 Boylston Street, Boston, Massachusetts 02116, is the direct parent company of Massachusetts Financial Services Company.
Robert J. Manning is the Director, Chairman of the Board and President, Donald A. Stewart is a Director, Mark N. Polebaum is the Secretary, Mitchell C. Freestone, Ethan D. Corey, Mark D. Kaplan and Susan S. Newton are Assistant Secretaries, Paul T. Kirwan is the Treasurer, Joseph Lynch is the Assistant Treasurer and Timothy F. Tierney is the Tax officer.
MFS INVESTMENT MANAGEMENT COMPANY (LUX) S.A., a joint stock company organized under the laws of Luxembourg whose registered office is 49, Avenue J.F. Kennedy, L-1855, Kirchberg, Luxembourg, is the management company of the MFS Investment Funds, which has 3 portfolios: MFS Investment Funds-Global Equity Ex-Japan Fund, MFS Investment Funds-Global Equity Fund and MFS Investment Funds-Global Equity Eurozone Bias Fund.
Maria F. Dwyer, Martin E. Beaulieu and Robin A. Stelmach are Directors, Paul T. Kirwan is Treasurer, Joseph E. Lynch is Assistant Treasurer, Mark N. Polebaum is the Secretary, Mitchell C. Freestone, Ethan D. Corey, Susan S. Newton and Mark D. Kaplan are Assistant Secretaries and Timothy F. Tierney is the Tax Officer.
In addition, the following persons, Directors or officers of MFS, have the affiliations indicated:
Donald A. Stewart Chief Executive Officer, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr. Stewart
is also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
C. James Prieur President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr. Prieur
is also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
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William W. Stinson Non-Executive Chairman, Sun Life Financial and Sun
Life Assurance Company of Canada, Sun Life Centre,
150 King Street West, Toronto, Ontario, Canada;
Chairman, Westshore Terminals Income Fund,
Vancouver, British Columbia; Director, Grant
Forest Products Inc., Ontario, Canada and Trustee,
Fording Canadian Coal Trust, Calgary, Alberta
James C. Baillie Counsel, Torys, Ontario, Canada; Chair,
Independent Electricity Market Operator, Ontario,
Canada; Chair, Corel Corporation, Ontario, Canada;
Director, Sun Life Financial, Ontario Canada;
Director, FPI Ltd., Newfoundland, Canada
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ITEM 27. DISTRIBUTORS
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal business address of each of these persons is 500 Boylston Street, Boston, Massachusetts 02116.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or in part, at the office of the Registrant at the following locations:
NAME ADDRESS
---- -------
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Funds 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 Bolyston St.
(transfer agent) Boston, MA 02116
Ropes & Gray One International Place
(counsel) Boston, MA 02110
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ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
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 24th day of September, 2007.
MFS SERIES TRUST X
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 September 24, 2007.
SIGNATURE TITLE
--------- -----
MARIA F. DWYER* President (Principal Executive Officer)
------------------------------------
Maria F. Dwyer
TRACY A. ATKINSON* Principal Financial and Accounting Officer
------------------------------------
Tracy A. Atkinson
ROBERT E. BUTLER* Trustee
------------------------------------
Robert E. Butler
LAWRENCE H. COHN* Trustee
------------------------------------
Lawrence H. Cohn
DAVID H. GUNNING* Trustee
------------------------------------
David H. Gunning
WILLIAM R. GUTOW* Trustee
------------------------------------
William R. Gutow
MICHAEL HEGARTY* Trustee
------------------------------------
Michael Hegarty
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J. ATWOOD IVES* Trustee
------------------------------------
J. Atwood Ives
ROBERT J. MANNING* Trustee
------------------------------------
Robert J. Manning
LAWRENCE T. PERERA* Trustee
------------------------------------
Lawrence T. Perera
ROBERT C. POZEN* Trustee
------------------------------------
Robert C. Pozen
J. DALE SHERRATT* Trustee
------------------------------------
J. Dale Sherratt
LAURIE J. THOMSEN* Trustee
------------------------------------
Laurie J. Thomsen
ROBERT W. UEK* Trustee
------------------------------------
Robert W. Uek
*By: SUSAN S. NEWTON
-------------------------------------
Name: Susan S. Newton
as Attorney-in-fact
Executed by Susan S. Newton on behalf of
those indicated pursuant to Powers of
Attorney, each dated July 24, 2007; filed
herewith (Trustees) (Dwyer) (Atkinson).
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MFS Series Trust I MFS Series Trust II MFS Series Trust III MFS Series Trust IV MFS Series Trust V MFS Series Trust VI MFS Series Trust VII MFS Series Trust VIII MFS Series Trust IX MFS Series Trust X MFS Series Trust XI MFS Series Trust XII MFS Series Trust XIII MFS Series Trust XIV MFS Series Trust XV Massachusetts Investors Growth Stock Fund Massachusetts Investors Trust MFS California Insured Municipal Fund MFS Charter Income Trust MFS Government Markets Income Trust MFS Growth Opportunities Fund MFS High Income Municipal Trust MFS High Yield Municipal Trust MFS Institutional Trust MFS InterMarket Income Trust I MFS Intermediate High Income Fund MFS Intermediate Income Trust MFS Investment Grade Municipal Trust MFS Multimarket Income Trust MFS Municipal Income Trust MFS Municipal Series Trust MFS Special Value Trust MFS Variable Insurance Trust
(each a "Registrant")
POWER OF ATTORNEY
The undersigned, being the Treasurer and Principal Financial and Accounting Officer of each of the above-mentioned Registrants, hereby severally constitutes and appoints Mark N. Polebaum, Susan S. Newton, Christopher R. Bohane, Timothy M. Fagan, Brian E. Langenfeld and Susan A.
Pereira, 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 my 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 24th day of July, 2007.
TRACY A. ATKINSON Principal Financial and Accounting Officer --------------------------------- Tracy A. Atkinson |
MFS Series Trust I
MFS Series Trust II
MFS Series Trust III
MFS Series Trust IV
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust VII
MFS Series Trust VIII
MFS Series Trust IX
MFS Series Trust X
MFS Series Trust XI
MFS Series Trust XII
MFS Series Trust XIII
MFS Series Trust XIV
MFS Series Trust XV
Massachusetts Investors Growth Stock Fund
Massachusetts Investors Trust
MFS California Insured Municipal Fund
MFS Charter Income Trust
MFS Government Markets Income Trust
MFS Growth Opportunities Fund
MFS High Income Municipal Trust
MFS High Yield Municipal Trust
MFS Institutional Trust
MFS InterMarket Income Trust I
MFS Intermediate High Income Fund
MFS Intermediate Income Trust
MFS Investment Grade Municipal Trust
MFS Multimarket Income Trust
MFS Municipal Income Trust
MFS Municipal Series Trust
MFS Special Value Trust
MFS Variable Insurance Trust
(each a "Registrant")
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POWER OF ATTORNEY
The undersigned, being the President and Principal Executive Officer of each of the above-mentioned Registrants, hereby severally constitutes and appoints Mark N. Polebaum, Susan S. Newton, Christopher R. Bohane, Timothy M. Fagan, Brian E. Langenfeld and Susan A. Pereira, 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 my 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 24th day of July, 2007.
MARIA F. DWYER President (Principal Executive Officer) ------------------------------------ Maria F. Dwyer |
MFS Series Trust I
MFS Series Trust II
MFS Series Trust III
MFS Series Trust IV
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust VII
MFS Series Trust VIII
MFS Series Trust IX
MFS Series Trust X
MFS Series Trust XI
MFS Series Trust XII
MFS Series Trust XIII
MFS Series Trust XIV
MFS Series Trust XV
Massachusetts Investors Growth Stock Fund
Massachusetts Investors Trust
MFS California Insured Municipal Fund
MFS Charter Income Trust
MFS Government Markets Income Trust
MFS Growth Opportunities Fund
MFS High Income Municipal Trust
MFS High Yield Municipal Trust
MFS Institutional Trust
MFS InterMarket Income Trust I
MFS Intermediate High Income Fund
MFS Intermediate Income Trust
MFS Investment Grade Municipal Trust
MFS Multimarket Income Trust
MFS Municipal Income Trust
MFS Municipal Series Trust
MFS Special Value Trust
MFS Variable Insurance Trust
(each a "Registrant")
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POWER OF ATTORNEY
The undersigned, a Trustee of each of the above-mentioned Registrants, hereby severally constitutes and appoints Mark N. Polebaum, Susan S. Newton, Christopher R. Bohane, Timothy M. Fagan, Brian E. Langenfeld and Susan A. Pereira, 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 my 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 24th day of July, 2007.
ROBERT E. BUTLER Trustee ------------------------------------- Robert E. Butler LAWRENCE H. COHN Trustee ------------------------------------- Lawrence H. Cohn DAVID H. GUNNING Trustee ------------------------------------- David H. Gunning WILLIAM R. GUTOW Trustee ------------------------------------- William R. Gutow MICHAEL HEGARTY Trustee ------------------------------------- Michael Hegarty J. ATWOOD IVES Trustee ------------------------------------- J. Atwood Ives ROBERT J. MANNING Trustee ------------------------------------- Robert J. Manning |
LAWRENCE T. PERERA Trustee ------------------------------------- Lawrence T. Perera ROBERT C. POZEN Trustee ------------------------------------- Robert C. Pozen J. DALE SHERRATT Trustee ------------------------------------- J. Dale Sherratt LAURIE J. THOMSEN Trustee ------------------------------------- Laurie J. Thomsen ROBERT W. UEK Trustee ------------------------------------- Robert W. Uek |
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
----------- ---------------------- --------
1 (j) Amendment, dated April 27, 2007, to the Declaration of
Trust to terminate Classes 529A, 529B and 529C Shares
of MFS Strategic Value Fund.
9 (b) Legal Opinion Consent, dated September 24, 2007.
10 (a) Consent of Ernst & Young LLP on behalf of MFS
International Value Fund, MFS International Growth
Fund, MFS Emerging Markets Equity Fund, MFS
Conservative Allocation Fund, MFS Moderate Allocation
Fund, MFS Growth Allocation Fund and MFS Aggressive
Growth Allocation Fund, dated September 24, 2007.
(b) Consent of Deloitte & Touche LLP on behalf of MFS
International Diversification Fund, dated September 24,
2007.
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EXHIBIT NO. 99.1(j)
MFS SERIES TRUST X
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
TERMINATION OF CLASSES
Pursuant to Section 9.2(b) of the Amended and Restated Declaration of Trust, dated as of December 16, 2004, as amended (the "Declaration"), of MFS Series Trust X (the "Trust"), the undersigned, constituting a majority of the Trustees of the Trust, do hereby certify that class 529A, 529B and 529C shares of MFS Strategic Value Fund, a series of the Trust, have been terminated.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed this amendment, in one or more counterparts, all constituting a single instrument, as an instrument under seal in The Commonwealth of Massachusetts, as of April 27, 2007, and further certify, as provided by the provisions of Section 9.3(c) of the Declaration, that this amendment was duly adopted by the undersigned in accordance with Section 9.3(a) of the Declaration.
EXHIBIT NO. 99.9(b)
LEGAL OPINION CONSENT
I consent to the incorporation by reference in this Post-Effective Amendment No. 64 to the Registration Statement (File Nos. 33-1657 and 811-4492) (the "Registration Statement") of MFS(R) Series Trust X (the "Trust"), of my opinion dated September 28, 2005 appearing in Post-Effective Amendment No. 57 to the Trust's Registration Statement, which was filed with the Securities and Exchange Commission on September 28, 2005.
Boston, Massachusetts
September 24, 2007
EXHIBIT NO. 99.10(a)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the references to our firm under the captions "Financial Highlights" in each Prospectus and "Independent Registered Public Accounting Firm and Financial Statements" in each Statement of Additional Information for the funds below, in Post-Effective Amendment No. 64 to the Registration Statement (Form N-1A, No 33-1657) of MFS Series Trust X.
We also consent to the incorporation by reference into the Statement of Additional Information of our report, dated July 10, 2007 with respect to the financial statements and financial highlights of MFS Aggressive Growth Allocation Fund, MFS Conservative Allocation Fund, MFS Emerging Markets Equity Fund, MFS Growth Allocation Fund, MFS International Growth Fund, MFS International Value Fund and MFS Moderate Allocation Fund (each a Fund of MFS Series Trust X) included in the Annual Report to Shareholders for the fiscal year ended May 31, 2007.
Boston, Massachusetts
September 24, 2007
EXHIBIT NO. 99.10(b)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Post-Effective Amendment No. 64 to Registration Statement No. 33-1657 on Form N-1A of our report dated July 11, 2007 relating to the financial statements and financial highlights of MFS International Value Fund, MFS International Diversification Fund, appearing in the Annual Report on Form N-CSR of MFS Series Trust X for the year ended August 31, 2007, and to the reference to us under the headings "Financial Highlights" in the Prospectus and "Independent Registered Public Accounting Firm and Financial Statements" in the Statement of Additional Information, which are part of such Registration Statement.
Boston, Massachusetts
September 24, 2007