<PAGE>
MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) NEW YORK MUNICIPAL BOND FUND
SUPPLEMENT TO THE CURRENT PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
Effective April 16, 1993 MFS Financial Services, Inc. will pay dealers an
additional commission equal to 0.25% of the public offering price of shares of
the Fund sold by such dealers. These commissions are in addition to the regular
dealer allowance or commission described in the Prospectus. Purchases of $1
million or more for each shareholder account will not entitle a dealer to such
additional commission.
THE DATE OF THIS SUPPLEMENT IS APRIL 16, 1993
MST-16N 4/93 36M
<PAGE>
<TABLE>
<S> <C>
MFS(R) ALABAMA MUNICIPAL BOND FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) LOUISIANA MUNICIPAL BOND FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
</TABLE>
SUPPLEMENT TO BE AFFIXED TO THE CURRENT PROSPECTUS FOR DISTRIBUTION IN MISSOURI
The trust intends to fully manage the portfolio of each Series by buying
and selling securities, as well as holding securities to maturity. The annual
portfolio turnover rate of a Series generally should not exceed 200% (excluding
turnover of obligations having a maturity of one year or less). A high turnover
rate may involve greater expenses to the Trust. The portion of income
distributions not designated as tax exempt and any distributions from net
short-term capital gains are taxable to shareholders as ordinary income for
federal tax purposes.
THE DATE OF THIS SUPPLEMENT IS JUNE 1, 1994.
MST-16M0-6/94/XXM
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MFS(R) TOTAL RETURN FUND MFS(R) ALABAMA MUNICIPAL BOND FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) GROWTH OPPORTUNITIES FUND MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) EMERGING GROWTH FUND MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) INTERMEDIATE INCOME FUND MFS(R) LOUISIANA MUNICIPAL BOND FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MANAGED SECTORS FUND MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) VALUE FUND MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) UTILITIES FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) WORLD EQUITY FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) WORLD TOTAL RETURN FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) BOND FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) LIMITED MATURITY FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) GOVERNMENT MORTGAGE FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) GOVERNMENT LIMITED MATURITY FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) GOVERNMENT SECURITIES FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) HIGH INCOME FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) MUNICIPAL LIMITED MATURITY FUND
MFS(R) WORLD GOVERNMENTS FUND MFS(R) MUNICIPAL BOND FUND
MFS(R) WORLD GROWTH FUND MFS(R) MUNICIPAL INCOME FUND
MFS(R) OTC FUND MFS(R) RESEARCH FUND
MFS(R) MUNICIPAL HIGH INCOME FUND MFS(R) WORLD ASSET ALLOCATION FUND
MASSACHUSETTS INVESTORS TRUST
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
During the period from January 3, 1995 through April 28, 1995 (the "Sales
Period") (unless extended by MFS Fund Distributors, Inc. ("MFD"), the funds'
principal underwriter), MFD will pay A. G. Edwards and Sons, Inc., ("A. G.
Edwards") 100% of the applicable sales charge on sales of Class A shares of each
of the funds listed above (the "Funds") sold for investment in Individual
Retirement Accounts ("IRAs") (excluding SEP-IRAs). In addition, MFD will pay A.
G. Edwards an additional commission equal to 0.50% of the net asset value of all
of the Class B shares of the Funds sold by A. G. Edwards during the Sales
Period.
THE DATE OF THIS SUPPLEMENT IS JANUARY 3, 1995.
MFS-16AG-1/95/3.5M
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MFS(R) MANAGED SECTORS FUND MFS(R) MUNICIPAL LIMITED MATURITY FUND
MFS(R) CASH RESERVE FUND MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) WORLD ASSET ALLOCATION FUND MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) EMERGING GROWTH FUND MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) INTERMEDIATE INCOME FUND MFS(R) LOUISIANA MUNICIPAL BOND FUND
MFS(R) HIGH INCOME FUND MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MUNICIPAL HIGH INCOME FUND MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) MONEY MARKET FUND MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) GOVERNMENT MONEY MARKET FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) MUNICIPAL BOND FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) OTC FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) TOTAL RETURN FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) RESEARCH FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) WORLD TOTAL RETURN FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) UTILITIES FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) WORLD EQUITY FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) WORLD GOVERNMENTS FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) VALUE FUND MFS(R) GROWTH OPPORTUNITIES FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) GOVERNMENT MORTGAGE FUND
MFS(R) WORLD GROWTH FUND MFS(R) GOVERNMENT SECURITIES FUND
MFS(R) BOND FUND MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS(R) LIMITED MATURITY FUND MFS(R) GOVERNMENT LIMITED MATURITY FUND
MASSACHUSETTS INVESTORS TRUST
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
Effective as of January 1, 1995, MFS Fund Distributors, Inc. ("MFD") has
replaced MFS Financial Services, Inc. ("FSI") as the Fund's distributor. Both
MFD and FSI are wholly-owned subsidiaries of Massachusetts Financial Services
Company ("MFS"), the Fund's investment adviser.
-----------------------------------------------
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction of
MFD that either (a) the employer has at least 25 employees or (b) the
aggregate purchases by the retirement plan of Class A shares of the
Funds will be in an amount of at least $250,000 within a reasonable
period of time, as determined by MFD in its sole discretion; and
(ii) A contingent deferred sales charge of 1% will be imposed on such
purchases in the event of certain redemption transactions within 12
months following such purchases.
-----------------------------------------------
Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale.
-----------------------------------------------
Class A shares of the Fund may be purchased at net asset value by
retirement plans whose third party administrators have entered into an
administrative services agreement with MFD or one or more of its affiliates to
perform certain administrative services, subject to certain operational
requirements specified from time to time by MFD or one or more of its
affiliates.
-----------------------------------------------
(Over)
<PAGE>
Class A shares of the Fund (except of the MFS municipal bond funds
identified above) may be purchased at net asset value by retirement plans
qualified under Section 401(k) of the Code through certain broker-dealers and
other financial institutions which have entered into an agreement with MFD which
includes certain minimum size qualifications for such retirement plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account.
-----------------------------------------------
The CDSC on Class A and Class B shares will be waived upon redemption by a
retirement plan where the redemption proceeds are used to pay expenses of the
retirement plan or certain expenses of participants under the retirement plan
(e.g., participant account fees), provided that the retirement plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by MFS Service Center, Inc. (the
"Shareholder Servicing Agent").
-----------------------------------------------
The CDSC on Class A and B shares will be waived upon the transfer of
registration from shares held by a retirement plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A and B share
accounts, respectively, maintained by the Shareholder Servicing Agent on behalf
of individual participants in the retirement plan, provided that the retirement
plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) of another
similar recordkeeping system made available by the Shareholder Servicing Agent.
-----------------------------------------------
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
-----------------------------------------------
The current Prospectus discloses that "Class A shares of the Fund may also
be purchased at net asset value where the purchase is in an amount of $3 million
or more and where the dealer and FSI enter into an agreement in which the dealer
agrees to return any commission paid to it on the sale (or a pro rata portion
thereof) as described above if the shareholder redeems his or her shares within
one year of purchase. (Shareholders who purchase shares at NAV pursuant to these
conditions are called ("$3 Million Shareholders")." This policy is terminated
effective as of the date of this Supplement and the above-referenced language,
and all references to "$3 Million Shareholders," are deleted from the
Prospectus.
-----------------------------------------------
From time to time, MFD may pay dealers 100% of the applicable sales charge
on sales of Class A shares of certain specified Funds sold by such dealer during
a specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset value
of all of the Class B shares of certain specified Funds sold by such dealer
during a specified sales period.
-----------------------------------------------
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to reinvest all dividends
and other distributions reinvested in additional shares.
-----------------------------------------------
From time to time, MFS may direct certain portfolio transactions to
broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's
operating expenses (e.g., fees charged by the custodian of the Fund's assets).
-----------------------------------------------
THE DATE OF THIS SUPPLEMENT IS JANUARY 13, 1995.
MFS-16-1/95/605M
<PAGE>
MFS(R) MANAGED SECTORS FUND MFS(R) GROWTH OPPORTUNITIES FUND
MFS(R) EMERGING GROWTH FUND MFS(R) HIGH INCOME FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) MUNICIPAL BOND FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) RESEARCH FUND
MFS(R) WORLD TOTAL RETURN FUND MFS(R) VALUE FUND
MFS(R) WORLD EQUITY FUND MFS(R) BOND FUND
MFS(R) UTILITIES FUND MFS(R) LIMITED MATURITY FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) MUNICIPAL LIMITED MATURITY FUND
MFS(R) MUNICIPAL INCOME FUND MFS(R) MUNICIPAL SERIES TRUST
SUPPLEMENT TO BE AFFIXED TO THE CURRENT PROSPECTUS FOR DISTRIBUTION IN OHIO
Prospective Ohio investors should note the following:
a) This Prospectus must be delivered to the investor prior to consummation of
the sale;
b) The Fund may invest up to 50% of its assets in restricted securities,
including Rule 144A securities which have been deemed to be liquid by the
Board of Trustees.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1, 1995.
MFS-16OH-2/95/19.5M
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MASSACHUSETTS INVESTORS TRUST MFS(R) WORLD TOTAL RETURN FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND MFS(R) MUNICIPAL BOND FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) MUNICIPAL HIGH INCOME FUND
MFS(R) EMERGING GROWTH FUND MFS(R) MUNICIPAL INCOME FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) GROWTH OPPORTUNITIES FUND MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) MANAGED SECTORS FUND MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) OTC FUND MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) RESEARCH FUND MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) VALUE FUND MFS(R) LOUISIANA MUNICIPAL BOND FUND
MFS(R) TOTAL RETURN FUND MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) UTILITIES FUND MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) BOND FUND MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) GOVERNMENT MORTGAGE FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) GOVERNMENT SECURITIES FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) HIGH INCOME FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) INTERMEDIATE INCOME FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) GOVERNMENT LIMITED MATURITY FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) LIMITED MATURITY FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) MUNICIPAL LIMITED MATURITY FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) WORLD EQUITY FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) WORLD GOVERNMENTS FUND MFS(R) WORLD ASSET ALLOCATION FUND
MFS(R) WORLD GROWTH FUND
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
During the period from February 1, 1995 through April 14, 1995 (the "Sales
Period") (unless extended by MFS Fund Distributors, Inc. ("MFD"), the Funds'
distributor), MFD will pay Corelink Financial Inc. ("Corelink") an additional
commission equal to 0.10% of the gross commissonable sales for Class A shares
and Class B shares and the net asset value for Class C shares (if applicable) of
the Funds sold by Corelink during the Sales Period.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1, 1995.
MFS-16CL-2/95/5M
<PAGE>
PROSPECTUS
JUNE 1, 1994
<TABLE>
<S> <C>
MFS(R) ALABAMA MUNICIPAL BOND FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) LOUISIANA MUNICIPAL BOND FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
</TABLE>
<PAGE>
PROSPECTUS
June 1, 1994
Class A Shares of Beneficial Interest
MFS(R) MUNICIPAL Class B Shares of Beneficial Interest
SERIES TRUST Class C Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) (For Certain Funds)
- ------------------------------------------------------------------------------
MFS Municipal Series Trust (the "Trust") is a mutual fund including the
following 18 separate series: MFS Alabama Municipal Bond Fund (the "Alabama
Fund"); MFS Arkansas Municipal Bond Fund (the "Arkansas Fund"); MFS California
Municipal Bond Fund (the "California Fund"); MFS Florida Municipal Bond Fund
(the "Florida Fund"); MFS Georgia Municipal Bond Fund (the "Georgia Fund"); MFS
Louisiana Municipal Bond Fund (the "Louisiana Fund"); MFS Maryland Municipal
Bond Fund (the "Maryland Fund"); MFS Massachusetts Municipal Bond Fund (the
"Massachusetts Fund"); MFS Mississippi Municipal Bond Fund (the "Mississippi
Fund"); MFS New York Municipal Bond Fund (the "New York Fund"); MFS North
Carolina Municipal Bond Fund (the "North Carolina Fund"); MFS Pennsylvania
Municipal Bond Fund (the "Pennsylvania Fund"); MFS South Carolina Municipal Bond
Fund (the "South Carolina Fund"); MFS Tennessee Municipal Bond Fund (the
"Tennessee Fund"); MFS Texas Municipal Bond Fund (the "Texas Fund"); MFS
Virginia Municipal Bond Fund (the "Virginia Fund"); MFS Washington Municipal
Bond Fund (the "Washington Fund"); and MFS West Virginia Municipal Bond Fund
(the "West Virginia Fund") (collectively referred to as either the "State Funds"
or the "Funds"). The investment objective of each Fund is to provide current
income exempt from federal income taxes and from the personal income taxes, if
any, of that State. The Trust will seek to achieve the investment objective of
each Fund by investing the assets of that Fund primarily in municipal bonds and
notes issued by that State, its political subdivisions, municipalities,
agencies, instrumentalities or public authorities. NOT MORE THAN ONE-THIRD OF
THE TOTAL ASSETS OF EACH FUND MAY BE INVESTED IN TAX-EXEMPT SECURITIES WHICH ARE
RATED LOWER THAN THE THREE HIGHEST RATING CATEGORIES OF RECOGNIZED RATING
AGENCIES OR IN COMPARABLE UNRATED SECURITIES. SUCH SECURITIES GENERALLY INVOLVE
GREATER VOLATILITY OF PRICE AND RISKS TO PRINCIPAL AND INCOME THAN SECURITIES IN
THE HIGHER RATING CATEGORIES. See "Investment Objective and Policies." The
minimum initial investment in a Fund is generally $1,000 per account (see
"Purchases").
The investment adviser and distributor for each Fund are Massachusetts Financial
Services Company and MFS Financial Services, Inc., respectively, both of which
are located at 500 Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL SERIES TRUST
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus sets forth concisely the information concerning the Trust and
each Fund that a prospective investor ought to know before investing. The Trust
has filed with the Securities and Exchange Commission a Statement of Additional
Information, dated June 1, 1994, which contains more detailed information about
the Trust and each Fund and is incorporated into this Prospectus by reference.
See page 55 for a further description of the information set forth in the
Statement of Additional Information. A copy of the Statement of Additional
Information may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
1. Synopsis .............................................................. 3
2. Condensed Financial Information ....................................... 8
3. Investment Objective and Policies ..................................... 26
4. Management of the Trust ............................................... 32
5. Information Concerning Shares of the Trust ............................ 34
Purchases ......................................................... 34
Exchanges ......................................................... 39
Redemptions and Repurchases ....................................... 40
Distribution Plans ................................................ 42
Distributions ..................................................... 44
Tax Status ........................................................ 45
Net Asset Value ................................................... 52
Description of Shares, Voting Rights and Liabilities .............. 52
Performance Information ........................................... 52
Expenses .......................................................... 53
6. Shareholder Services .................................................. 54
Appendix A -- Tax Equivalent Yield Tables ............................. 56
Appendix B -- Description of Municipal Obligations .................... 62
Appendix C -- Portfolio Composition Chart ............................. 69
Appendix D -- Additional Information Concerning the Funds ............. 70
1. SYNOPSIS
THE TRUST
MFS Municipal Series Trust (the "Trust") is an open-end, management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1984. The Trust presently consists of 19
separate series, each of which represents a portfolio with separate investment
policies. This Prospectus relates to: the Alabama Fund; the Arkansas Fund; the
California Fund; the Florida Fund; the Georgia Fund; the Louisiana Fund; the
Maryland Fund; the Massachusetts Fund; the Mississippi Fund; the New York Fund;
the North Carolina Fund; the Pennsylvania Fund; the South Carolina Fund; the
Tennessee Fund; the Texas Fund; the Virginia Fund; the Washington Fund; and the
West Virginia Fund, each of which is a non-diversified series and are referred
to in this Prospectus collectively as either the "State Funds" or the "Funds".
Shares of the remaining series of the Trust, named MFS Municipal Income Fund,
which is a diversified series, are offered and sold pursuant to a separate
prospectus and statement of additional information.
Each Fund currently offers Class A and Class B shares to the public. In
addition, the California Fund, the North Carolina Fund and the Virginia Fund
currently offer Class C shares to the public. Class A shares are offered at net
asset value plus an initial sales charge (or a contingent deferred sales charge
(a "CDSC") in the case of certain purchases of $1 million or more) and subject
to a Distribution Plan providing for an annual distribution fee and service fee.
Class B shares are offered at net asset value without an initial sales charge
but subject to a CDSC and a Distribution Plan providing for an annual
distribution fee and service fee which are greater than the Class A distribution
fee and service fee. Class B shares will convert to Class A shares approximately
eight years after purchase. Class C shares are offered at net asset value
without an initial sales charge or a CDSC but subject to a Distribution Plan
providing for an annual distribution and service fee which are equal to the
Class B annual distribution fee and service fee. Class C shares do not convert
to any other class of shares.
Each Fund is "non-diversified" which means that each Fund will, subject to the
diversification requirements of the Internal Revenue Code of 1986, as amended,
be able to invest more than 5% of its assets in obligations of each of one or
more issuers. The proceeds of sales of shares of each State Fund are used to buy
securities (primarily municipal bonds and notes and other debt instruments the
interest on which is exempt from federal income taxes and from the personal
income taxes, if any, of that State) for the portfolio of that State Fund. The
Trust's Board of Trustees provides broad supervision over the affairs of the
Trust and each Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each State Fund is to provide current income exempt
from federal income taxes and from the personal income taxes, if any, of that
State. Some of the securities purchased for the portfolios of the State Fund may
be purchased on a "when-issued" basis, which may involve certain risks. Subject
to applicable laws, the Trust may enter into futures contracts on fixed income
securities and indices of such securities on behalf of a Fund and may write and
purchase options on securities and options on futures contracts, which may also
involve certain risks. Not more than one-third of each Fund's total assets may
be invested in tax-exempt securities which are rated lower than the three
highest grades of recognized rating agencies or comparable unrated securities.
Such securities generally involve greater volatility of price and risks to
principal and income than securities in the higher rating categories.
Prospective investors should be aware that the net asset value of the shares of
each Fund (as with any open-end investment company) will change as the general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of such a portfolio can be
expected to decline. See "Investment Objective and Policies" below.
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Shares of each Fund
(as a percentage of offering price) .................................... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) .................. See Below<F1> 4.00%<F2> 0.00%
</TABLE>
THE FOLLOWING ANNUAL OPERATING EXPENSES FOR EACH CLASS OF SHARES OF EACH FUND
ARE SHOWN AFTER APPLICABLE FEE REDUCTIONS AND REIMBURSEMENTS, AS DESCRIBED IN
THE FOOTNOTES
ANNUAL OPERATING EXPENSES OF THE CLASS A SHARES OF EACH FUND (AS A PERCENTAGE
OF AVERAGE NET ASSETS):<F3>
<TABLE>
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA LOUISIANA
FUND FUND FUND FUND FUND FUND
------- -------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees .................................. .55% .40%<F4> .40%<F4> .25%<F4> .55% 0%<F4>
Rule 12b-1 Fees<F5> .............................. .25%<F6> 0%<F6> 0%<F6> 0%<F6> .25%<F6> 0%<F6>
Other Expenses ................................... .38% .38% .28% .57% .38% 0%<F7>
--- --- --- --- --- ---
Total Operating Expenses<F8> ..................... 1.18% .78% .68% .82% 1.18% 0%
</TABLE>
<TABLE>
<CAPTION>
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA PENNSYLVANIA
FUND FUND FUND FUND FUND FUND
-------- ------------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees .................................. .55% .55% .15%<F4> .50%<F4> .55% 0%<F4>
Rule 12b-1 Fees<F5> .............................. .35% .35% 0%<F6> .25%<F6> .35% 0%<F6>
Other Expenses ................................... .33% .29% 0%<F7> .42% .26% 0%<F7>
--- --- --- --- --- ---
Total Operating Expenses<F8> ..................... 1.23% 1.19% .15% 1.17% 1.16% 0%
</TABLE>
<TABLE>
<CAPTION>
SOUTH WEST
CAROLINA TENNESSEE TEXAS VIRGINIA WASHINGTON VIRGINIA
FUND FUND FUND FUND FUND FUND
-------- --------- ----- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Management Fees .................................. .55% .55% 0%<F4> .55% 0%<F4> .55%
Rule 12b-1 Fees<F5> .............................. .35% .35% 0%<F6> .35% 0%<F6> .35%
Other Expenses ................................... .33% .31% 0%<F7> .27% 0%<F7> .31%
--- --- --- --- --- ---
Total Operating Expenses<F8> ..................... 1.23% 1.21% 0% 1.17% 0% 1.21%
</TABLE>
<TABLE>
ANNUAL OPERATING EXPENSES OF THE CLASS B SHARES OF EACH FUND (AS A PERCENTAGE
OF AVERAGE NET ASSETS):<F3>
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA LOUISIANA
FUND FUND FUND FUND FUND FUND
------- -------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees ................................... .55% .40%<F4> .40%<F4> .25%<F4> .55% 0%<F4>
Rule 12b-1<F9> .................................... 1.00% 1.00%<F10> 1.00%<F10> 1.00%<F10> 1.00% 1.00%<F10>
Other Expenses .................................... .45% .45% .35% .64% .45% 0%<F7>
--- --- --- --- --- ---
Total Operating Expenses<F11> ..................... 2.00% 1.85% 1.75% 1.89% 2.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA PENNSYLVANIA
FUND FUND FUND FUND FUND FUND
-------- ------------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees ................................... .55% .55% .15%<F4> .50%<F4> .55% 0%(4)
Rule 12b-1 Fees<F9> ............................... 1.00% 1.00% 1.00%<F10> 1.00% 1.00% 1.00%(10)
Other Expenses .................................... .40% .36% 0%<F7> .49% .33% 0%(7)
--- --- --- --- --- ---
Total Operating Expenses<F11> ..................... 1.95% 1.91% 1.15% 1.99% 1.88% 1.00%
</TABLE>
<TABLE>
<CAPTION>
SOUTH WEST
CAROLINA TENNESSEE TEXAS VIRGINIA WASHINGTON VIRGINIA
FUND FUND FUND FUND FUND FUND
-------- --------- ----- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Management Fees ................................... .55% .55% 0%<F4> .55% 0%<F4> .55%
Rule 12b-1 Fees<F9> ............................... 1.00% 1.00% 1.00%<F10> 1.00% 1.00%<F10> 1.00%
Other Expenses .................................... .40% .38% 0%<F7> .34% 0%<F7> .38%
--- --- --- --- --- ---
Total Operating Expenses<F11> ..................... 1.95% 1.93% 1.00% 1.89% 1.00% 1.93%
</TABLE>
<TABLE>
ANNUAL OPERATING EXPENSES OF THE CLASS C SHARES OF EACH FUND (AS A PERCENTAGE
OF AVERAGE NET ASSETS):<F12>
<CAPTION>
NORTH
CALIFORNIA CAROLINA VIRGINIA
FUND FUND FUND
---------- -------- --------
<S> <C> <C> <C>
Management Fees .......................................................................... .40%<F4> .55% .55%
Rule 12b-1 Fees<F9> ...................................................................... 1.00% 1.00% 1.00%
Other Expenses ........................................................................... .28% .26% .27%
--- --- ---
Total Operating Expenses ................................................................. 1.68%<F13> 1.81% 1.82%
- ---------
<FN>
<F1>Purchases of $1 million or more are not subject to an initial sales charge;
however, a CDSC of 1% will be imposed on such purchases in the event of
certain redemption transactions within 12 months following such purchases
(see "Purchases" below).
<F2>Class B shares purchased prior to September 1, 1993 will be subject to a
CDSC of 5% in the event of a redemption within the first year after
purchase.
<F3>For Class A and Class B shares, percentages are based on fees incurred
during the fiscal year ended January 31, 1994, except that percentages for
the Arkansas, Florida, Mississippi and New York Funds reflect the gradual
reduction of the waiver of a portion of the management fee, and percentages
for the California Fund reflect the reduction of the management fee, during
the current fiscal year (see footnote (4)).
<F4>The Adviser has voluntarily reduced the management fee with respect to the
Arkansas, Florida, Mississippi and New York Funds to 0.20%, 0.10%, 0.00%
and 0.35% of each Fund's average daily net assets, to be increased by 0.05%
each quarter thereafter, commencing on October 1, 1993 for the Florida,
Mississippi and New York Funds and commencing on July 1, 1993 for the
Arkansas Fund, not to exceed 0.55% of each Fund's average daily net assets.
The Adviser has voluntarily reduced its management fee with respect to the
Louisiana, Pennsylvania, Texas and Washington Funds to 0.00% of each Fund's
average daily net assets for an indefinite period of time. The Adviser has
voluntarily reduced the management fee with respect to the California Fund
to 0.40% of the Fund's average daily net assets for an indefinite period of
time. See "Management of the Trust" below.
<F5>Each Fund has adopted a distribution plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per annum
of the net assets of the Fund attributable to Class A shares. (See
"Distribution Plans.") Currently, a portion of the fees payable under the
Class A Distribution Plans with respect to certain Funds is being waived,
while certain other Funds have not commenced payments under the Class A
Distribution Plans (see footnote (6)). After a substantial period of time,
distribution expenses paid under this plan, together with the initial sales
charge, may total more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
<F6>For the Arkansas, California, Florida, Louisiana, Mississippi,
Pennsylvania, Texas and Washington Funds, fees payable under the Class A
Distribution Plans will become payable pursuant to such Plans on such date
or dates as the Trustees of the Trust may determine. Following such time,
fees payable under the Class A Distribution Plans will be payable in an
amount of up to 0.35% of the average daily net assets of such Fund
attributable to Class A shares. Commencing on October 14, 1991, August 21,
1991 and June 1, 1991, FSI has voluntarily waived its right to receive
0.10% of fees payable under the Class A Distribution Plans with respect to
the Alabama, Georgia and New York Funds. See "Distribution Plans" below.
<F7>The Adviser receives an additional fee in reimbursement of certain expenses
of the Louisiana, Mississippi, Pennsylvania, Texas and Washington Funds
paid by the Adviser. During the year ended January 31, 1994, the Adviser
agreed to voluntarily reduce the expense reimbursement fee for each of
these Funds for an indefinite time period, from 0.40% to 0.00% of such
Funds' average daily net assets.
<F8>Absent a reduction in certain Funds' management fees, fees payable under
the Class A Distribution Plan and/or expense reimbursement arrangements,
Total Operating Expenses for Class A shares of the Alabama, Arkansas,
California, Florida, Georgia, Louisiana, Mississippi, New York,
Pennsylvania, Texas and Washington Funds would have been 1.28%, .93%, .83%,
1.12%, 1.28%, .95%, .95%, 1.32%, .95%, .95% and .95%, respectively.
<F9>Each Fund has adopted a distribution plan for its Class B and C shares in
accordance with Rule 12b-1 under the 1940 Act, which provides that it will
pay distribution/service fees aggregating up to 1.00% per annum of the
average net daily assets attributable to the Class B and C shares (see
"Distribution Plans"). After a substantial period of time, distribution
expenses paid under this Plan, together with any CDSC, may total more than
the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
<F10>Except in the case of the 0.25% per annum first year service fee, service
fees under a Fund's Class B Distribution Plans will become payable for the
Arkansas, California, Florida, Louisiana, Mississippi, Pennsylvania, Texas
and Washington Funds on such date or dates as the Trustees of the Trust may
determine. See "Distribution Plans" below.
<F11>Absent a reduction in certain Funds' management fees and/or expense
reimbursement arrangements, Total Operating Expenses for Class B shares of
the Arkansas, California, Florida, Louisiana, Mississippi, New York,
Pennsylvania, Texas and Washington Funds would have been 2.00%, 1.90%,
2.19%, 1.95%, 1.95%, 2.04%, 1.95%, 1.95% and 1.95%, respectively.
<F12>Percentages for Class C shares are based on Class A and Class B expenses
incurred during the fiscal year ended January 31, 1994, except that
percentages for the California Fund reflect the gradual reduction of the
waiver of a portion of the management fee during the current fiscal year
(see footnote (4)).
<F13>Absent a reduction in the California Fund's management fees, total
Operating Expenses for Class C shares would have been 1.83%.
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a hypothetical
$1,000 investment in a Fund, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA
FUND FUND FUND FUND
-------------------------------------------------------------------------------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
- ----- ------- -------------- ------- --------------- ----- ------------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<F1> <F1> <F2> <F1>
1 year ............. $ 59 $ 60 $ 20 $ 55 $ 59 $ 19 $ 54 $ 58 $ 18 $ 17 $ 55 $ 59 $ 19
3 years ............ 83 93 63 71 88 58 68 85 55 53 72 89 59
5 years ............ 109 128 108 89 120 100 84 115 95 91 91 122 102
10 years ........... 184 212<F2> 212<F2> 140 189<F2> 189<F2> 128 178<F2> 178<F2> 199 144 193<F2>193<F2>
</TABLE>
<TABLE>
<CAPTION>
GEORGIA LOUISIANA MARYLAND MASSACHUSETTS
FUND FUND FUND FUND
-------------------------------------------------------------------------------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- ----- ------- -------------- ------- ------------ -------- ------------- ------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<F1> <F1> <F1> <F1>
1 year .......... $ 59 $ 60 $ 20 $ 48 $ 50 $ 10 $ 59 $ 60 $ 20 $ 59 $ 59 $ 19
3 years ......... 83 93 63 48 62 32 85 91 61 83 90 60
5 years ......... 109 128 108 48 75 55 112 125 105 110 123 103
10 years ........ 184 212<F2> 212<F2> 48 94<F2> 94<F2> 189 209<F2> 209<F2> 185 205<F2> 205<F2>
</TABLE>
<TABLE>
<CAPTION>
MISSISSIPPI NEW YORK NORTH CAROLINA PENNSYLVANIA
FUND FUND FUND FUND
-------------------------------------------------------------------------------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
- ----- ------- ------------- ------- -------------- ------- ------------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<F1> <F1> <F1> <F1>
1 year ......... $ 49 $ 52 $ 12 $ 59 $ 60 $ 20 $ 59 $ 59 $ 19 $ 18 $ 48 $50 $10
3 years ........ 52 67 37 83 92 62 83 89 59 57 48 62 32
5 years ........ 56 83 63 109 127 107 108 122 102 98 48 75 55
10 years ....... 66 112<F2> 112<F2> 183 211<F2> 211<F2> 182 201<F2> 201<F1> 213 48 94<F2> 94<F2>
</TABLE>
<TABLE>
<CAPTION>
SOUTH CAROLINA TENNESSEE TEXAS VIRGINIA
FUND FUND FUND FUND
-------------------------------------------------------------------------------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS C
- ------ ------- ------------- ------- -------------- ------- ------------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<F1> <F1> <F1> <F1>
1 year ......... $ 59 $ 60 $ 20 $ 59 $ 60 $ 20 $ 48 $ 50 $ 10 $ 59 $ 59 $ 19 $ 18
3 years ........ 85 91 61 84 91 61 48 62 32 83 89 59 57
5 years ........ 112 125 105 111 124 104 48 75 55 109 122 102 99
10 years ....... 189 209<F2> 209<F2> 187 207<F2> 207<F2> 48 94<F2> 94<F2> 183 202<F2>202<F2> 214
</TABLE>
<TABLE>
<CAPTION>
WASHINGTON WEST VIRGINIA
FUND FUND
----------------------- ----------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B
- ------ ------- --------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
(1) (1)
1 year ........... $ 48 $ 50 $ 10 $ 59 $ 60 $ 20
3 years .......... 48 62 32 84 91 61
5 years .......... 48 75 55 111 124 104
10 years ......... 48 94<F2> 94<F2> 187 207<F2> 207<F2>
<FN>
- ---------
<F1> Assumes no redemption.
<F2> Class B shares convert to Class A shares approximately eight years after
purchase; therefore years nine and ten reflect Class A expenses.
</TABLE>
THE "EXAMPLE" SET FORTH ABOVE REFLECTS THE IMPOSITION OF THE MAXIMUM SALES
CHARGE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
OF A FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table is to assist investors in understanding the
various costs and expenses that a shareholder in a Fund will bear directly or
indirectly. More complete descriptions of the following Trust expenses are set
forth in the following sections of the Prospectus: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Management of the Fund -- Investment Adviser"; and (iv) Rule
12b-1 (i.e., distribution plan) fees -- "Distribution Plans."
INVESTMENT ADVISER
Massachusetts Financial Services Company, a Delaware corporation ("MFS" or the
"Adviser"), is the Trust's investment adviser. The Adviser is responsible for
the management of the assets of each Fund, and manages the portfolio of each
Fund from day to day in accordance with its investment objective and policies.
For these management and other services, the Adviser receives a management fee
from the Trust on behalf of each Fund computed and paid monthly at an annual
rate equal to 0.55% of the Fund's average daily net assets. For the Arkansas,
California, Florida, Louisiana, Mississippi, New York, Pennsylvania, Texas and
Washington Funds, the Adviser has voluntarily reduced the management fee. See
"Management of the Trust" in this Prospectus. The MFS organization, with a
history of money management dating back to 1924, advises and administers each of
the other funds in the MFS Family of Funds (the "MFS Funds"). MFS also manages
assets for certain other registered investment companies and for substantial
private clients.
NET ASSET VALUE OF SHARES
The value of each share of each class of each Fund is its net asset value. The
net asset value per share of each class of shares is determined by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. The value of each share of each class of each Fund
changes daily as the aggregate value of the securities in the portfolio of that
Fund increases or decreases. See "Net Asset Value" below. Therefore, the value
of shares owned by a shareholder may be more or less than the shareholder's
cost.
PURCHASE OF SHARES
Shares of each Fund are continuously sold to the public and may be purchased
through any securities dealer or other financial institution having a selling
agreement with MFS Financial Services, Inc. ("FSI") in its capacity as the
Trust's distributor. Each Fund currently offers Class A and Class B shares to
the public. In addition, the California Fund, the North Carolina Fund and the
Virginia Fund currently offer Class C shares to the public.Class A shares are
offered at net asset value plus an initial sales charge (or a CDSC in the case
of certain purchases of $1 million or more) and subject to a distribution plan
providing for a distribution fee and service fee. Class B shares are offered at
net asset value without an initial sales charge but subject to a CDSC and a
distribution plan providing for an annual distribution fee and service fee which
are greater than the Class A distribution fee and service fee. Class B shares
will convert to Class A shares approximately eight years after purchase. Class C
shares are offered at net asset value without a sales charge or a CDSC but
subject to a distribution plan providing for an annual distribution and service
fee which are equal to the Class B annual distribution fee and service fee.
Class C shares do not convert to any other class of shares. The minimum initial
investment is generally $1,000 per account.
DISTRIBUTIONS
The Trust intends to declare daily and pay monthly dividends to the shareholders
of each class from the net investment income of the Fund allocable to that
class. If a Fund has profits from the sale of securities from its portfolio
(after taking into account any available capital losses, including capital loss
carryforwards from prior years), one or more capital gain distributions will be
made to shareholders of the Fund during the calendar year. A shareholder may
elect to receive dividends and capital gain distributions in either cash or
additional shares. See "Tax Status" and "Distributions" below.
REDEMPTION OF SHARES
The Trust will buy back shares of each Fund at their net asset value (subject,
in the case of Class B shares and in the case of certain Class A shares, to any
applicable CDSC) determined either on the day a dealer places an order or on the
day a shareholder's written instructions are received in proper form by the
Shareholder Servicing Agent. The Trust reserves the right to pay the redemption
price, either totally or partially, by a distribution in kind of securities from
the portfolio of a Fund (instead of cash).
EXCHANGE AND OTHER PRIVILEGES
Shareholders have the right to obtain quantity discounts on sales charges for
purchases of Class A shares under certain circumstances. Additionally,
shareholders have the right to exchange shares of a class of a Fund for shares
of the same class of another Fund (subject to residency requirements) or the
same class of shares of certain of the other MFS Funds. See "Exchanges" and
"Shareholder Services" below.
CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Funds' Annual Reports to Shareholders, which are
incorporated by reference into the Statement of Additional Information in
reliance upon the reports of Deloitte & Touche, independent certified public
accountants, as experts in acounting and auditing.
Further information about the performance of each Fund is contained in the
Fund's Annual Reports to Shareholders, which can be obtained from the
Shareholder Servicing Agent (see back cover for address and phone number)
without charge.
<PAGE>
FINANCIAL HIGHLIGHTS
(THERE WERE NO CLASS C SHARES OUTSTANDING DURING THESE PERIODS.)
<TABLE>
<CAPTION>
ALABAMA FUND
---------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------
1994 1993 1992 1991 1994<F1>
---- ---- ---- ---- ----
CLASS A CLASS B
------------------------------------------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ................... $ 10.33 $ 9.95 $ 9.65 $ 9.53 $ 10.93
------- ------- ------- ------ -------
Income from investment operations:
Net investment income<F4> .............................. $ 0.55 $ 0.56 $ 0.60 $ 0.59 $ 0.18
Net realized and unrealized gain (loss) on investments . 0.69 0.41 0.41 0.08 0.07
------- ------- ------- ------ -------
Total from investment operations ..................... $ 1.24 $ 0.97 $ 1.01 $ 0.67 $ 0.25
------- ------- ------- ------ -------
Less distributions declared to shareholders:
From net investment income ............................. $ (0.54) $ (0.58) $ (0.65) $(0.55) $ (0.18)
From net realized gain on investments .................. (0.04) (0.01) (0.06) -- (0.02)
In excess of net investment income<F2> ................. (0.01) -- -- -- --
------- ------- ------- ------ -------
Total distributions declared to shareholders ......... $ (0.59) $ (0.59) $ (0.71) $(0.55) $ (0.20)
------- ------- ------- ------ -------
Net asset value -- end of period ......................... $ 10.98 $ 10.33 $ 9.95 $ 9.65 $ 10.98
======= ======= ======= ====== =======
Total return ............................................. 12.26% 10.08% 10.92% 7.37% 2.29%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:<F4>
Expenses ............................................... 1.21% 1.08% 0.95% 0.57% 1.98%<F3>
Net investment income .................................. 5.13% 5.79% 6.19% 6.63% 3.98%<F3>
PORTFOLIO TURNOVER ....................................... 12% 17% 23% 64% 12%
NET ASSETS AT END OF PERIOD (000 OMITTED) ................ $87,344 $67,678 $48,476 $22,076 $ 2,269
<FN>
- -----------
<F1> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
<F2> For the year ended January 31, 1992, the per share distribution in excess
of net investment income was $0.004.
<F3> Annualized.
<F4> The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, and if the expense reimbursement
agreement had not been in effect, net investment income per share and the
ratios would have been:
Net Investment income ............................. $ 0.54 $ 0.55 $ 0.59 $0.52 $0.18
RATIOS (TO AVERAGE NET ASSETS): ...................
Expenses ........................................ 1.31% 1.18% 1.08% 1.33% --
Net investment income ........................... 5.03% 5.69% 6.06% 5.87% --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ARKANSAS FUND
--------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------
1994 1993<F1> 1994<F2>
---- ---- ----
CLASS A CLASS B
------------------------ -------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ............................. $ 9.88 $ 9.53 $ 10.42
------- ------- -------
Income from investment operations:
Net investment income<F6> ........................................ $ 0.56 $ 0.58 $ 0.23
Net realized and unrealized gain (loss) on investments ........... 0.60 0.35 (0.04)
------- ------- -------
Total from investment operations ............................... $ 1.16 $ 0.93 $ 0.19
Less distributions declared to shareholders:
From net investment income ....................................... (0.55) $ (0.58) $(0.14)
From net realized gain on investments<F3> ........................ -- --
In excess of net investment income<F4> ........................... (0.02) -- --
------- ------- -------
Total distributions declared to shareholders ................... $ (0.57) $ (0.58) $ (0.14)
------- ------- -------
Net asset value -- end of period ................................... $ 10.47 $ 9.88 $ 10.47
======= ======= =======
Total return ....................................................... 11.95% 10.11% 2.18%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:<F6>
Expenses ......................................................... 0.63% 0.18%<F5> 1.75%<F5>
Net investment income ............................................ 5.30% 6.01%<F5> 3.87%<F5>
PORTFOLIO TURNOVER ................................................. 3% 10% 3%
NET ASSETS AT END OF PERIOD (000 OMITTED) .......................... $203,542 $124,644 $ 5,179
<FN>
- ---------
<F1> For the period from the commencement of operations, February 3, 1992, to
January 31, 1993.
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
<F3> For the year ended January 31, 1994, the per share distributions from net
realized gain on investments and in excess of net realized gain on
investments were $0.0016 and $0.0003, respectively, for both Class A and
Class B shares.
<F4> For the year ended January 31, 1994, the per share distributions in excess
of net investment income were $0.004 for Class B shares.
<F5> Annualized.
<F6> The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, and if the expense reimbursement
agreement had not been in effect, net investment income per share and the
ratios would have been:
Net investment income ................................ $ 0.53 $ 0.52 $ 0.12
RATIOS (TO AVERAGE NET ASSETS):
Expenses ........................................... 0.91% 0.76%<F5> 3.44%<F5>
Net investment income .............................. 5.01% 5.36%<F5> 2.09%<F5>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CALIFORNIA FUND
--------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, YEAR ENDED FEBRUARY 28/29,
------------------------- ------------------------------------------------------------------------
1994<F4> 1994<F2> 1994<F3> 1993 1992 1991 1990 1989 1988 1987 1986<F1>
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A CLASS B CLASS C CLASS A
--------------------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
(FOR A SHARE
OUTSTANDING
THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of
period ........... $ 5.88 $ 6.02 $ 5.89 $ 5.42 $ 5.26 $ 5.19 $ 5.06 $ 5.08 $ 5.38 $ 5.07 $ 4.76
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income<F7> ...... $ 0.30 $ 0.10 $ 0.01 $ 0.34 $ 0.35 $ 0.33 $ 0.33 $ 0.32 $ 0.31 $ 0.32 $ 0.20
Net realized and
unrealized gain
(loss) on
investments ..... 0.14 -- 0.06 0.47 0.20 0.07 0.13 (0.02) (0.29) 0.34 0.28
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations .... $ 0.44 $ 0.10 $ 0.07 $ 0.81 $ 0.55 $ 0.40 $ 0.46 $ 0.30 $ 0.02 $ 0.66 $ 0.48
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
From net
investment
income .......... $(0.29) $(0.10) $(0.01) $(0.34) $(0.37) $(0.33) $(0.33) $(0.32) $(0.31) $(0.33) $(0.17)
From net realized
gain on
investments (0.07) (0.07) -- (0.01) (0.02) -- -- -- (0.01) (0.02) --
In excess of net
investment
income<F5> (0.01) -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders .. $(0.37) $(0.17) $(0.01) $(0.35) $(0.39) $(0.33) $(0.33) $(0.32) $(0.32) $(0.35) $(0.17)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value --
end of period ..... $ 5.95 $ 5.95 $ 5.95 $ 5.88 $ 5.42 $ 5.26 $ 5.19 $ 5.06 $ 5.08 $ 5.38 $ 5.07
====== ====== ====== ====== ====== ====== ====== ====== ====== ------ ------
RATIOS (TO AVERAGE
NET ASSETS)/
SUPPLEMENTAL DATA:<F7>
Expenses ......... 0.60%<F6> 1.60%<F6> 2.02%<F6> 0.39% 0.40% 0.87% 1.00% 1.28% 1.20% 1.04% 0.95%<F6>
Net investment
income .......... 4.99<F6> 3.64%<F6> 1.78%<F6> 6.18% 6.53% 6.39% 6.35% 6.35% 6.33% 6.25% 7.34%<F6>
PORTFOLIO TURNOVER . 38% 38% 38% 64% 73% 102% 243% 188% 240% 54% 23%
NET ASSETS AT END
OF PERIOD
(000 OMITTED) ..... $356,419 $ 19,360 $917 $272,179 $177,291 $84,551 $68,879 $59,212 $59,479 $62,368 $17,488
<FN>
- ---------
<F1> For the period from the commencement of investment operations, June 19,
1985, to February 28, 1986.
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
<F3> For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1994.
<F4> For the eleven months ended January 31, 1994.
<F5> Distributions declared to shareholders in excess of net investment income
for the eleven months ended January 31, 1994 were $0.003 for both Class B
and Class C shares.
<F6> Annualized.
<F7> The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, net investment income per share
and the ratios would have been:
RATIOS (TO AVERAGE
NET ASSETS):
Expenses .... 0.78%<F6> 1.81%<F6> 3.53%<F6> 0.77% 0.79%
Net investment
income ..... 4.82%<F6> 3.43%<F6> 0.27%<F6> 5.80% 6.14%
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FLORIDA FUND
---------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------
1994 1993<F1> 1994
---- ----- ----
CLASS A CLASS B<F2>
------------------------ ------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --beginning of period .................................. $ 9.89 $ 9.53 $10.69
------- ------ ------
Income from investment operations --
Net investment income<F4> ............................................ $ 0.57 $ 0.58 $ 0.18
Net realized and unrealized gain (loss) on investments ............... 0.86 0.36 0.03
------- ------ ------
Total from investment operations ................................... $ 1.43 $ 0.94 $ 0.21
------- ------ ------
Less distributions declared to shareholders --
From net investment income ........................................... $ (0.57) $(0.58) $(0.17)
From net realized gain on investments ................................ (0.11) -- (0.10)
In excess of net investment income ................................... (0.01) -- (0.01)
------- ------ ------
Total distributions declared to shareholders ....................... $ (0.69) $(0.58) $(0.28)
------- ------ ------
Net asset value -- end of period ....................................... $ 10.63 $ 9.89 $10.62
======= ====== ======
Total return ........................................................... 14.71% 10.28%<F3> 4.87%<F3>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:<F4>
Expenses ............................................................. 0.49% 0.05%<F3> 1.64%<F3>
Net investment income ................................................ 5.42% 6.27%<F3> 3.82%<F3>
PORTFOLIO TURNOVER ..................................................... 53% 54% 53%
NET ASSETS AT END OF PERIOD (000 OMITTED) .............................. $124,131 $74,329 $7,244
<FN>
- ---------
<F1> For the period from the commencement of operations, February 3, 1992 to
January 31, 1993.
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
<F3> Annualized.
<F4> The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, the net investment income per
share and the ratios would have been:
Net investment income per share ................................ $ 0.52 $ 0.51 $ 0.16
RATIOS (TO AVERAGE NET ASSETS):
Expenses ...................................................... 0.93% 0.81%<F3> 2.09%<F3>
Net investment income ......................................... 4.97% 5.51%<F3> 3.38%<F3>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GEORGIA FUND
----------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989* 1994**
---- ---- ---- ---- ---- ----- ------
CLASS A CLASS B
------------------------------------------------------------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ........ $10.57 $10.22 $ 9.83 $ 9.73 $ 9.73 $ 9.53 $11.26
------ ------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income<F4> ................... $ 0.57 $ 0.58 $ 0.61 $ 0.63 $ 0.66 $ 0.32 $ 0.19
Net realized and unrealized gain (loss) on
investments ................................ 0.75 0.38 0.46 0.12 0.02 0.14 0.05
------ ------ ------ ------ ------ ------ ------
Total from investment operations .......... $ 1.32 $ 0.96 $ 1.07 $ 0.75 $ 0.68 $ 0.46 $ 0.24
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .................. $(0.55) $(0.60) $(0.66) $(0.63) $(0.66) $(0.26) $(0.18)
From net realized gain on investments ....... (0.01) (0.01) (0.02) (0.02) (0.02) -- (0.01)
In excess of net investment income .......... (0.03) -- -- -- -- -- (0.01)
Total distributions declared to
shareholders ............................ $(0.59) $(0.61) $(0.68) $(0.65) $(0.68) $(0.26) $(0.20)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period .............. $11.30 $10.57 $10.22 $ 9.83 $ 9.73 $ 9.73 $11.30
====== ====== ====== ====== ====== ====== ======
Total return .................................. 12.71% 9.56% 11.29% 8.06% 7.19% 7.57%<F3> 5.34%<F3>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:<F4>
Expenses .................................... 1.21% 1.08% 0.99% 0.74% 0.42% 0.40%<F3> 1.97%<F3>
Net investment income ....................... 5.10% 5.75% 6.08% 6.46% 6.72% 6.18%<F3> 3.83%<F3>
PORTFOLIO TURNOVER ............................ 14% 27% 36% 71% 99% -- 14%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............................... $94,407 $64,649 $47,869 $29,214 $12,628 $4,383 $5,766
<FN>
- ---------
<F1> For the period from the commencement of operations, June 6, 1988 to January
31, 1989.
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
<F3> Annualized.
<F4> The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, the net investment income per
share and the ratios would have been:
Net investment income per share ........ $ 0.56 $ 0.57 $ 0.60 $ 0.59 $ 0.57 $ 0.29 $ 0.19
RATIOS (TO AVERAGE NET ASSETS):
Expenses .............................. 1.31% 1.18% 1.09% 1.11% 1.31% 1.07%+ 1.97%<F3>
Net investment income ................. 5.00% 5.65% 5.98% 6.09% 5.83% 5.51%+ 3.83%<F3>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LOUISIANA FUND
----------------------
YEAR ENDED JANUARY 31,
----------------------
1994 1994<F1>
-------- --------
CLASS A CLASS B
-------- -------
<S> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 9.53 $10.08
------ ------
Income from investment operations:
Net investment income<F3>...... $ 0.52 $ 0.18
Net realized and unrealized gain (loss) on investments 0.62 0.07
------ ------
Total from investment operations $ 1.14 $ 0.25
------ ------
Less distributions declared to shareholders --
From net investment income $(0.52) $(0.18)
From net realized gain on investments (0.02) (0.02)
Total distributions declared to shareholders $(0.54) $(0.20)
------ ------
Net asset value -- end of period $10.13 $10.13
====== ======
Total return 12.33% 2.48%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:<F3>
Expenses 0.00% 1.00%<F2>
Net investment income 5.41% 4.32%<F2>
PORTFOLIO TURNOVER 33% 33%
NET ASSETS AT END OF PERIOD (000 OMITTED) $13,781 $1,263
<FN>
<F1> For the period from the commencement of offering of Class B
shares,September 7, 1993 to January 31, 1994.
<F2> Annualized.
<F3> The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, and if the expense reimbursement
agreement had not been in effect, net investment income per share and the
ratios would have been:
Net investment income ................... $0.32 $0.09
RATIOS (TO AVERAGE NET ASSETS):
Expenses 2.03% 3.08%<F2>
Net investment income 3.38% 2.24%<F2>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MARYLAND FUND
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
--------------------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net Asset Value -- Beginning Of Period $11.40 $11.20 $10.97 $10.79 $10.76 $10.62 $11.20 $10.44
------ ------ ------ ------ ------ ------ ------ ------
Income From Investment Operations:
Net Investment Income $ 0.62 $ 0.67 $ 0.70 $ 0.70 $ 0.69 $ 0.69 $ 0.68 $ 0.71
Net Realized And Unrealized Gain
(Loss) On Investments 0.53 0.24 0.31 0.19 0.04 0.14 (0.57) 0.78
------ ------ ------ ------ ------ ------ ------ ------
Total From Investment Operations $ 1.15 $ 0.91 $ 1.01 $ 0.89 $ 0.73 $ 0.83 $ 0.11 $ 1.49
------ ------ ------ ------ ------ ------ ------ ------
Less Distributions Declared To Shareholders --
From Net Investment Income $(0.61) $(0.69) $(0.76) $(0.70) $(0.69) $(0.69) $(0.67) $(0.73)
From Net Realized Gain On Investments (0.07) (0.02) (0.02) (0.01) (0.01) -- (0.01) --
In Excess Of Net investment Income (0.04) -- -- -- -- -- -- --
In Excess Of Net Realized Gain On
Investments (0.02) -- -- -- -- -- -- --
From Paid-In Capital<F4> -- -- -- -- -- -- (0.01) --
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions Declared To
Shareholders $(0.74) $(0.71) $(0.78) $(0.71) $(0.70) $(0.69) $(0.69) $(0.73)
------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value -- End Of Period $11.81 $11.40 $11.20 $10.97 $10.79 $10.76 $10.62 $11.20
====== ====== ====== ====== ====== ====== ====== ======
Total Return 10.27% 8.34% 9.55% 8.51% 6.90% 8.15% 1.25% 14.86%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses 1.25% 1.14% 1.16% 1.17% 1.18% 1.14% 1.10% 1.10%
Net Investment Income 5.42% 6.13% 6.32% 6.45% 6.33% 6.52% 6.47% 6.60%
PORTFOLIO TURNOVER 25% 5% 9% 41% 58% 34% 13% 11%
NET ASSETS AT END OF PERIOD (000 OMITTED) $173,419 $145,794 $119,120 $101,742 $93,175 $84,380 $79,906 $81,712
<CAPTION>
----------------------------------
1986 1985<F1> 1994<F2>
----------------------------------
CLASS A CLASS B
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net Asset Value -- Beginning Of Period $9.89 $9.52 $11.88
----- ------ ------
Income From Investment Operations:
Net Investment Income $0.81 $0.22 $0.22
Net Realized And Unrealized Gain
(Loss) On Investments 0.62 0.29 (0.01)
----- ------ ------
Total From Investment Operations $1.43 $0.51 $0.21
Less Distributions Declared To Shareholders --
From Net Investment Income $(0.82) $(0.14) $(0.21)
From Net Realized Gain On Investments (0.06) -- (0.05)
In Excess Of Netinvestment Income -- -- (0.01)
In Excess Of Net Realized Gain On
Investments -- -- (0.02)
From Paid-In Capital<F3> -- -- --
----- ------ ------
Total Distributions Declared To
Shareholders $(0.88) $(0.14) $(0.29)
----- ------ ------
Net Asset Value -- End Of Period $10.44 $9.89 $11.80
----- ------ ------
Total Return 15.47% 21.42%<F3> 4.45%<F3>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses 0.98% 0.95%<F3> 1.81%<F3>
Net Investment Income 8.22% 9.15%<F3> 4.23%<F3>
PORTFOLIO TURNOVER 26% 40% 25%
NET ASSETS AT END OF PERIOD (000 OMITTED) $33,818 $9,055 $5,345
<FN>
<F1> For the period from the commencement of investment operations, October 31,
1984 to january 31, 1985.
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
<F3> Annualized.
<F4> For the year ended January 31, 1986, the per share distribution from
paid-in capital was $0.0005.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
---------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986<F1> 1994<F2>
------ ------ ------ ------ ------ ------ ------- ------ ------- ---------
CLASS A CLASS B
------------------------------------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.41 $11.05 $10.68 $10.58 $10.65 $10.60 $11.25 $10.59 $ 9.52 $11.91
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations--
Net investment income ............ $ 0.64 $ 0.68 $ 0.73 $ 0.71 $ 0.72 $ 0.72 $ 0.71 $ 0.74 $ 0.54 $ 0.23
Net realized and unrealized gain
(loss) on investments .......... 0.58 0.39 0.43 0.11 (0.07) 0.05 (0.65) 0.68 0.99 0.04
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations ... $ 1.22 $ 1.07 $ 1.16 $ 0.82 $ 0.65 $ 0.77 $ 0.06 $ 1.42 $ 1.53 $ 0.27
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders--
From net investment income ....... $(0.64) $(0.71) $(0.78) $(0.72) $(0.72) $(0.72) $(0.71) $(0.75) $(0.46) $(0.22)
From net realized gain on
investments .................... (0.20) -- -- -- -- -- -- (0.01) -- (0.20)
In excess of net investment
income ......................... (0.04) -- -- -- -- -- -- -- -- (0.01)
From paid-in capital ............. -- -- (0.01) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Total distributions declared
to shareholders ............... $(0.88) $(0.71) $(0.79) $(0.72) $(0.72) $(0.72) $(0.71) $(0.76) $(0.46) $(0.43)
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Net asset value - end of period $11.75 $11.41 $11.05 $10.68 $10.58 $10.65 $10.60 $11.25 $10.59 $11.75
====== ====== ====== ===== ====== ====== ====== ===== ====== ======
Total return ............. 11.02% 10.03% 11.23% 8.12% 6.28% 7.65% 0.80% 14.10% 20.51%<F3> 5.89%<F3>
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses 1.19% 1.08% 1.06% 1.07% 1.10% 1.07% 1.04% 0.87% 0.86%<F3> 1.81%<F3>
Net investment income .. 5.71% 6.33% 6.65% 6.74% 6.75% 6.90% 6.79% 6.83% 7.82%<F3> 4.62%<F3>
PORTFOLIO TURNOVER ....... 30% 32% 51% 43% 52% 26% 27% 7% 27% 30%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .... $300,894 $270,778 $239,311 $213,679 $215,381 $212,763 $224,219 $242,119 $94,575 $4,191
<FN>
- ---------
<F1> For the period from the commencement of operations, April 9, 1985 to
January 31, 1986.
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993, to January 31, 1994.
<F3> Annualized.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MISSISSIPPI FUND
--------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------
1994 1993* 1994**
--------------------------------------
CLASS A CLASS B
--------------------------------------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of period $ 9.38 $ 9.53 $ 9.94
Income from investment operations: ------ ------ ------
Net investment income++ ............ $ 0.55 $ 0.24 $ 0.18
Net realized and unrealized gain
(loss) on investments ............ 0.62 (0.15) 0.05
------ ------ ------
Total from investment operations ..... $ 1.17 $ 0.09 $ 0.23
------ ------ ------
Less distributions declared to shareholders --
From net investment income ......... $(0.55) $(0.24) $(0.18)
From net realized gain on
investments ...................... -- -- --
Total distributions declared to ------ ------ ------
shareholders ................... $(0.55) $(0.24) $(0.18)
------ ------ ------
Net asset value -- end of period ..... $10.00 $ 9.38 $ 9.99
====== ====== ======
Total return ......................... 12.80% 5.00% 2.33%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:+ +
Expenses ........................... 0.03% 0.00%+ 1.06%+
Net investment income .............. 5.68% 5.59%+ 4.29%+
PORTFOLIO TURNOVER 28% 14% 28%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ...................... $84,177 $41,212 $6,268
- ---------
* For the period from the commencement of investment operations, August 6,
1992, to January 31, 1993.
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, and if the expense reimbursement
agreement had not been in effect, net investment income per share and the
ratios would have been:
Net investment income ............. $0.45 $0.19 $0.14
RATIOS (TO AVERAGE NET ASSETS):
Expenses ........................ 1.01% 1.17%+ 2.12%+
Net investment income ........... 4.69% 4.42%+ 3.23%+
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NEW YORK FUND
-----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31
-----------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989<F1> 1994<F2>
CLASS A CLASS B
-------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .... $10.78 $10.25 $ 9.90 $9.74 $9.79 $9.53 $11.46
Income from investment operations -- ------ ------ ------ ----- ----- ----- ------
Net investment income<F4> ............... $0.59 $ 0.63 $ 0.65 $0.65 $0.68 $0.29 $ 0.18
Net realized and unrealized gain (loss)
on investments ........................ 0.74 0.58 0.44 0.16 0.01 0.21 0.04
----- ------ ------ ----- ----- ----- ------
Total from investment operations ...... $1.33 $ 1.21 $ 1.09 $0.81 $0.69 $0.50 $ 0.22
----- ------ ------ ----- ----- ----- ------
Less distributions declared to shareholders --
From net investment income .............. (0.57) (0.65) (0.69) (0.65) (0.67) (0.24) (0.18)
From net realized gain on investments ... (0.17) (0.03) (0.05) -- (0.06) -- (0.15)
In excess of net investment income ...... (0.03) -- -- -- -- -- (0.01)
From paid-in capital .................... -- -- -- -- (0.01) -- --
Total distributions declared to ------ ------ ------ ----- ----- ----- ------
shareholders ........................ (0.77) (0.68) (0.74) (0.65) (0.74) (0.24) (0.34)
------ ------ ------ ----- ----- ----- ------
Net asset value -- end of period .......... $11.34 $10.78 $10.25 $9.90 $9.74 $9.79 $11.34
====== ====== ====== ===== ===== ===== ======
Total return .............................. 12.69% 12.23% 11.42% 8.74% 7.33% 8.16%<F3> 5.20%<F3>
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:<F4>
Expenses ................................ 0.93% 0.53% 0.65% 0.54% 0.40% 0.40%<F3> 1.79%<F3>
Net investment income ................... 5.21% 6.16% 6.44% 6.73% 6.88% 5.93%<F3> 3.90%<F3>
PORTFOLIO TURNOVER ........................ 51% 61% 80% 188% 236% 32% 51%
NET ASSETS AT END OF PERIOD (000 OMITTED) . $184,523 $135,749 $79,524 $37,385 $20,156 $6,412 $4,828
<FN>
- ---------
<F1>For the period from the commencement of operations, June 6, 1988 to January 31, 1989.
<F2>For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
<F3>Annualized.
<F4>The investment adviser did not impose all or a portion of its advisory, distribution or expense reimbursement fees for the
periods indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income per share $0.56 $0.57 $0.60 $0.61 $0.59 $0.26 $0.17
RATIOS (TO AVERAGE NET ASSETS):
Expenses 1.23% 1.13% 1.16% 0.95% 1.32% 1.09%<F3> 2.00%<F3>
Net investment income 4.90% 5.56% 5.93% 6.33% 5.96% 5.24%<F3> 3.69%<F3>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NORTH CAROLINA FUND
---------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
CLASS A
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):-
Net asset value -- beginning of period ...... $11.80 $11.45 $11.30 $11.18 $11.15 $11.13 $11.82 $11.09
Income from investment operations-- ------ ------ ------ ------ ------ ------ ------- ------
Net investment income ..................... $ 0.64 $ 0.65 $ 0.70 $ 0.72 $ 0.73 $ 0.74 $ 0.73 $ 0.75
Net realized and unrealized gain (loss) on
investments .............................. 0.58 0.37 0.26 0.17 0.03 0.02 (0.69) 0.90
------ ------ ------ ------ ------ ------ ------- ------
Total from investment operations ........ $ 1.22 $ 1.02 $ 0.96 $ 0.89 $ 0.76 $ 0.76 $ 0.04 $ 1.65
------ ------ ------ ------ ------ ------ ------- ------
Less distributions declared to shareholders--
From net investment income ............... $(0.61) $(0.67) $(0.76) $(0.72) $(0.73) $(0.74) $(0.73) $(0.76)
From net realized gain on investments .... (0.01) -- (0.01) (0.05) -- -- (0.16) (0.04)
In excess of net investment income<F6> .... (0.03) -- -- -- -- -- -- --
From paid-in capital<F5> .................. -- -- -- (0.04) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.65) $(0.67) $(0.81) $(0.77) $(0.73) $(0.74) $(0.73) $(0.92)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period ............ $12.37 $11.80 $11.45 $11.30 $11.18 $11.15 $11.13 $11.82
====== ====== ====== ====== ====== ====== ====== ======
Total return ................................ 10.59% 9.23% 8.82% 8.34% 6.97% 7.12% 0.65% 15.76%
RATIOS (TO AVERAGE NET ASSETS)/ SUPPLEMENTAL DATA:
Expenses .................................. 1.19% 1.07% 1.09% 1.09% 1.12% 1.11% 1.08% 1.07%
Net investment income ..................... 5.21% 5.80% 6.17% 6.47% 6.48% 6.70% 6.71% 6.63%
PORTFOLIO TURNOVER .......................... 12% 2% 39% 44% 61% 25% 10% 10%
NET ASSETS AT END OF PERIOD (000 OMITTED) ... $495,158 $398,352 $312,466 $226,806 $175,101 $129,287 $110,462 $105,668
<CAPTION>
----------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------
1986 1985<F1> 1994<F2> 1994<F3>
---- ----- ---- --------
CLASS B CLASS C
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):-
Net asset value -- beginning of period ....... $10.01 $ 9.52 $12.36 $12.24
Income from investment operations-- ------ ------ ------ ------
Net investment income ...................... $ 0.82 $ 0.21 $ 0.22 $ 0.02
Net realized and unrealized gain (loss) on
investments ............................... 1.12 0.42 0.01 0.12
------ ------ ------ ------
Total from investment operations ......... $ 1.94 $ 0.63 $ 0.23 $ 0.14
Less distributions declared to shareholders-- ------ ------ ------ ------
From net investment income ................ $(0.82) $(0.14) (0.21) $(0.02)
From net realized gain on investments ..... (0.04) -- (0.01) --
In excess of net investment income<F6> ..... -- -- (0.01) --
From paid-in capital<F5> ................... -- -- -- --
------ ------ ------ ------
Total distributions declared to shareholders $(0.86) $(0.14) $(0.23) $(0.02)
------ ------ ------ ------
Net asset value -- end of period ............. $11.09 $10.01 $12.36 $12.36
====== ====== ====== ======
Total return ................................. 20.63% 25.82%<F4> 4.58%<F4> 16.50%<F4>
RATIOS (TO AVERAGE NET ASSETS)/ SUPPLEMENTAL DATA:
Expenses ................................... 0.90% 0.95%<F4> 1.84%<F4> 1.44%<F4>
Net investment income ...................... 8.02% 8.71%<F4> 4.03%<F4> 2.33%<F4>
PORTFOLIO TURNOVER ........................... 78% 39% 12% 12%
NET ASSETS AT END OF PERIOD (000 OMITTED) .... $53,561 $20,243 $13,379 $4,584
<FN>
- ---------
<F1> For the period from the commencement of operations, October 31, 1984, to January 31, 1985.
<F2> For the period from the commencement of offering of Class B shares, September 7, 1993, to January 31, 1994.
<F3> For the period from the commencement of offering of Class C shares, January 3, 1994, to January 31, 1994.
<F4> Annualized
<F5> For the year ended January 31, 1991, the per share distribution from paid-in capital was $0.005.
<F6> For the year ended January 31, 1994, the per share distribution for Class C shares in excess of net investment income was
$0.003.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
---------------------------
YEAR ENDED JANUARY 31,
---------------------------
1994* 1994**
----- ------
CLASS A CLASS B
------- -------
<S> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --beginning of period $ 9.53 $10.06
Income from investment operations -- ------- ------
Net investment income++ $ 0.50 $ 0.17
Net realized and unrealized gain (loss) on
investments 0.62 0.10
------ ------
Total from investment operations $ 1.12 $ 0.27
Less distributions declared to shareholders-- ------ ------
From net investment income $(0.50) $(0.17)
From net realized gain on investments (0.01) (0.01)
------ ------
Total distributions declared to shareholders $(0.51) $(0.18)
------ ------
Net asset value -- end of period $10.14 $10.15
====== ======
Total return 12.12% 6.76%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:++
Expenses 0.00% 1.00%+
Net investment income 5.30% 4.22%+
PORTFOLIO TURNOVER 10% 10%
NET ASSETS AT END OF PERIOD (000 OMITTED) $13,987 $3,401
* For the period from the commencement of operations, February 1, 1993 to
January 31, 1994.
** For the period from the commencement of offering of Class B shares, September
7, 1993 to January 31, 1994.
+ Annualized.
++ The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, and if the expense reimbursement
agreement had not been in effect, the net investment income per share and the
ratios would have been:
Net investment income per share $ 0.32 $ 0.05
RATIOS (TO AVERAGE NET ASSETS):
Expenses 1.94% 2.50%+
Net investment income 3.36% 1.29%+
<PAGE>
FINANCIAL HIGHLIGHTS
</TABLE>
<TABLE>
<CAPTION>
SOUTH CAROLINA FUND
------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
-------- ------- -------- ------- ------- ------ --------
CLASS A
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value $12.02 $11.74 $11.45 $11.30 $11.24 $11.14 $11.54
------ ------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income .. $ 0.63 $ 0.67 $0.70 $ 0.71 $0.72 $ 0.76 $ 0.77
Net realized and unrealized gain (loss) on investments 0.74 0.34 0.40 0.21 0.06 0.11 (0.36)
------ ------ ------ ------ ------ ------ ------
Total from investment operations $ 1.37 $ 1.01 $1.10 $ 0.92 $0.78 $ 0.87 $ 0.41
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $(0.61) $(0.69) $(0.76) $(0.71) $(0.72) $(0.77) $(0.77)
From net realized gain (0.01) (0.04) (0.05) (0.06) -- -- --
In excess of net investment income ........ (0.03) -- -- -- -- -- --
From paid-in capital<F4> -- -- -- -- -- -- (0.04)
------ ------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.65) $(0.73) $(0.81) $(0.77) $(0.72) $(0.77) $(0.81)
------ ------ ------ ------ ------ ------ ------
Net asset value --end of period $12.74 $12.02 $11.74 $11.45 $11.30 $11.24 $11.14
====== ====== ====== ====== ====== ======= ======
Total return 11.69% 8.89% 9.95% 8.46% 7.13% 8.18% 3.92%
RATIOS (TO AVERAGE NET ASSETS)/ SUPPLEMENTAL DATA:
Expenses 1.22% 1.12% 1.15% 1.18% 1.21% 0.97% 0.81%
Net investment income .. 5.06% 5.74% 6.07% 6.30% 6.35% 6.90% 7.07%
PORTFOLIO TURNOVER 10% 11% 22% 47% 54% 27% 12%
NET ASSETS AT END OF PERIOD (000 OMITTED) $187,307 $144,539 $101,434 $75,922 $57,675 $45,391 $34,025
<CAPTION>
-------------------------------------------------
1987 1986 1985<F1> 1994<F2>
--------- -------- ----------- -----------
CLASS B
-------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value $10.89 $ 9.95 $ 9.52 $12.67
------ ------ ------ ------
Income from investment operations --
Net investment income .. $ 0.77 $ 0.84 $ 0.22 $ 0.21
Net realized and unrealized gain (loss) on investments 0.69 0.95 0.35 0.06
------ ------ ------ ------
Total from investment operations $ 1.46 $ 1.79 $ 0.57 $ 0.27
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $(0.78) $(0.84) $(0.14) $(0.20)
From net realized gain (0.03) (0.01) --
In excess of net investment income ........ -- -- -- (0.01)
From paid-incapital<F4> -- -- -- --
------ ------ ------ ------
Total distributions declared to shareholders $(0.81) $(0.85) $(0.14) $(0.21)
------ ------ ------ ------
Net asset value --end of period $11.54 $10.89 $ 9.95 $12.73
====== ====== ====== ======
Total return 14.05% 19.13% 23.47%<F3> 5.47%<F3>
RATIOS (TO AVERAGE NET ASSETS)/ SUPPLEMENTAL DATA:
Expenses 0.99% 1.01% 0.95%<F3> 1.90%<F3>
Net investment income .. 7.00% 8.26% 9.09%<F3> 3.86%<F3>
PORTFOLIO TURNOVER 13% 28% 49% 10%
NET ASSETS AT END OF PERIOD (000 OMITTED) $27,978 $10,936 $3,052 $8,217
<FN>
- ---------
<F1>For the period from the commencement of operations, October 31, 1984 to January 31, 1985.
<F2>For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
<F3>Annualized.
<F4>For the year ended January 31, 1986, the per share distribution from paid-in capital was $0.00042.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TENNESSEE FUND
-------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------
1994 1993 1992 1991 1990 1989<F1> 1994<F2>
------ ------ ------ ------ ------ ------ ------
CLASS A CLASS B
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $10.37 $10.10 $ 9.90 $ 9.80 $ 9.68 $9.53 $10.87
Income from investment operations -- ------ ------ ------ ------ ------ ----- ------
Net investment income<F5> $ 0.57 $ 0.57 $ 0.61 $ 0.62 $ 0.67 $0.22 $ 0.19
Net realized and unrealized gain (loss) on
investments ........ 0.57 0.31 0.30 0.13 0.11 0.10 (0.06)
------ ------ ------ ------ ------ ----- ------
Total from investment operations $ 1.14 $ 0.88 $ 0.91 $ 0.75 $ 0.78 $0.32 $ 0.27
Less distributions declared to shareholders -- ------ ------ ------ ------ ------ ----- ------
From net investment income (0.54) (0.57) (0.66) (0.63) (0.66) (0.17) (0.19)
From net realized gain on investments -- (0.01) (0.05) (0.02) -- -- --
In excess of net investment income (0.03) -- -- -- -- -- --
From paid-in capital<F3> (0.03) -- -- -- -- -- --
------ ------ ------ ------ ------ ----- ------
Total distributions declared to shareholders (0.57) (0.61) (0.71) (0.65) (0.66) (0.17) (0.19)
------ ------ ------ ------ ------ ----- ------
Net asset value -- end of period $10.94 $10.37 $10.10 $ 9.90 $ 9.80 $9.68 $10.95
====== ====== ====== ====== ====== ===== ======
Total return 11.20% 9.03% 9.50% 7.96% 8.30% 3.43% 2.48%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:<F5>
Expenses 1.29% 1.14% 1.15% 1.03% 0.53% 0.40%<F4> 1.93%<F4>
Net investment income 5.25% 5.89% 6.11% 6.37% 6.70% 5.98%<F4> 4.20%<F4>
PORTFOLIO TURNOVER 12% 9% 42% 58% 78% 5% 12%
NET ASSETS AT END OF PERIOD (000 OMITTED) $123,050 $99,443 $87,898 $72,108 $56,048 $15,832 $3,818
<FN>
- ---------
<F1>For the period from the commencement of investment operations, August 12,1988, to January 31, 1989.
<F2>For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
<F3>For the year ended January 31, 1991, the per share distribution from paid-in capital was $0.0013.
<F4>Annualized.
<F5>The investment adviser did not impose all or a portion of its advisory, distribution or expense reimbursement fees for the
periods indicated. If these fees had been incurred by the Fund, and if the expense reimbursement agreement had not been in
effect, net investment income per share and the ratios would have been:
Net investment income $ 0.61 $ 0.60 $ 0.20
RATIOS (TO AVERAGE NET ASSETS):
Expenses 1.17% 1.24% 0.95%<F4>
Net investment income 6.23% 5.99% 5.43%<F4>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TEXAS FUND
-------------------------------
YEAR ENDED JANUARY 31,
-------------------------------
1994 1993<F1> 1994<F2>
------ --------- -----------
CLASS A CLASS B
------------------ -----------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period....... $10.01 $ 9.53 $10.79
Income from investment operations-- ------ ------ ------
Net investment income<F6> ................... $ 0.61 $ 0.57 $ 0.19
Net realized and unrealized gain (loss) on
investments ............................... 0.86 0.47 0.09
------ ------ ------
Total from investment operations: $ 1.47 $ 1.04 $ 0.28
Less distributions declared to shareholders-- ------ ------ ------
From net investment income ................ $(0.61) $(0.56) $(0.19)
From net realized gain on investments<F4>. (0.01) -- (0.01)
In excess of net investment income<F3> .... -- -- (0.01)
Total distributions declared to ------ ------ ------
shareholders ........................... $(0.62) $(0.56) $(0.21)
------ ------ ------
Net asset value -- end of period ............ $10.86 $10.01 $10.86
====== ====== ======
Total return ................................ 15.08% 11.30% 2.65%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:<F6>
Expenses .................................. 0.00% 0.00%<F5> 1.00%<F5>
Net investment income ..................... 5.75% 6.03%<F5> 4.41%<F5>
PORTFOLIO TURNOVER .......................... 7% 40% 7%
NET ASSETS AT END OF PERIOD (000 OMITTED) ... $18,987 $8,485 $956
<FN>
- ----------
<F1>For the period from the commencement of investment operations, February 3,
1992, to January 31, 1993.
<F2>For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
<F3>For the year ended January 31, 1994, the per share distributions in excess
of net investment income were $0.003 for Class A shares.
<F4>For the year ended January 31, 1994, the per share distributions in excess
of net realized gains on investments were $0.0008 for both Class A and Class
B shares.
<F5>Annualized.
<F6>The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, and if the expense reimbursement
agreement had not been in effect, net investment income per share and the
ratios would have been:
Net investment income $ 0.44 $ 0.32 $ 0.11
RATIOS (TO AVERAGE NET ASSETS)-
Expenses 1.56% 2.67%<F5> 2.90%<F5>
Net investment income 4.17% 3.36%<F5> 2.51%<F5>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
VIRGINIA FUND
-------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
-------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .... $11.72 $11.44 $11.16 $10.97 $10.91 $10.75
Income from investment operations-- ------ ------ ------ ------ ------ ------
Net investment income ................... $ 0.65 $ 0.68 $ 0.71 $ 0.73 $ 0.73 $ 0.74
Net realized and unrealized gain (loss)
on investments ........................ 0.56 0.30 0.34 0.19 0.06 0.16
------ ------ ------ ------ ------ ------
Total from investment operations ...... $ 1.21 $ 0.98 $ 1.05 $ 0.92 $ 0.79 $ 0.90
Less distributions declared to shareholders- ------ ------ ------ ------ ------ ------
From net investment income .............. $(0.62) $(0.70) $(0.77) $(0.73) $(0.73) $(0.74)
From net realized gain on investments<F6> (0.20) -- -- -- -- --
In excess of net investment income<F7> .. (0.04) -- -- -- ---- --
From paid-in capital<F5> ................ -- -- -- -- -- --
Total distributions declared to ------ ------ ------ ------ ------ ------
shareholders ........................ $(0.86) $(0.70) $(0.77) $(0.73) $(0.73) $(0.74)
------ ------ ------ ------ ------ ------
Net asset value -- end of period .......... $12.07 $11.72 $11.44 $11.16 $10.97 $10.91
====== ====== ====== ====== ====== ======
Total return .............................. 10.67% 8.88% 9.76% 8.74% 7.46% 8.76%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses ................................ 1.18% 1.08% 1.08% 1.11% 1.12% 1.09%
Net investment income ................... 5.37% 6.02% 6.32% 6.64% 6.67% 6.91%
PORTFOLIO TURNOVER ........................ 22% 20% 13% 38% 41% 38%
NET ASSETS AT END OF PERIOD (000 OMITTED) . $479,333 $399,696 $328,664 $275,202 $240,553 $207,680
<CAPTION>
-------------------------------------------------------------------------
1988 1987 1986 1985<F1> 1994<F2> 1994<F3>
-------------------------------------------------------------------------
CLASS B CLASS C
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .... $11.38 $10.78 $10.01 $ 9.52 $12.14 $11.94
Income from investment operations-- ------ ------ ------ ------ ------ ------
Net investment income ................... $ 0.72 $ 0.74 $ 0.81 $ 0.22 $ 0.22 $ 0.02
Net realized and unrealized gain (loss)
on investments ........................ (0.57) 0.61 0.77 0.42 0.01 0.12
------ ------ ------ ------ ------ ------
Total from investment operations ...... $ 0.15 $ 1.35 $ 1.58 $ 0.64 $ 0.23 $ 0.14
Less distributions declared to shareholders- ------ ------ ------ ------ ------ ------
From net investment income .............. $(0.71) $(0.75) $(0.80) $(0.15) $(0.21) $(0.02)
From net realized gain on investments<F6> (0.05) -- (0.01) -- (0.09) --
In excess of net investment income<F7> .. -- -- -- (0.01) --
From paid-in capital<F5> ................ (0.02) -- -- -- -- --
Total distributions declared to ------ ------ ------ ------ ------ ------
shareholders ........................ $(0.78) $(0.75) $(0.81) $(0.15) $(0.31) $(0.02)
------ ------ ------ ------ ------ ------
Net asset value -- end of period .......... $10.75 $11.38 $10.78 $10.01 $12.06 $12.06
====== ====== ====== ====== ====== ======
Total return .............................. 1.61% 13.12% 16.82% 26.53%<F4> 4.93%<F4> 17.05%<F4>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses ................................ 1.04% 1.02% 0.83% 0.95%<F4> 1.82%<F4> 1.18%<F4>
Net investment income ................... 6.75% 6.73% 8.89% 8.87%<F4> 4.25%<F4> 1.79%<F4>
PORTFOLIO TURNOVER ........................ 11% 20% 23% 13% 22% 22%
NET ASSETS AT END OF PERIOD (000 OMITTED) $192,104 $181,937 $85,076 $32,638 $10,877 $833
<FN>
- ---------
<F1>For the period from the commencement of operations, October 31, 1984, to January 31, 1985.
<F2>For the period from the commencement of offering of Class B shares, September 7, 1993, to January 31, 1994.
<F3>For the period from the commencement of offering of Class C shares, January 3, 1994, to January 31, 1994.
<F4>Annualized.
<F5>For the years ended January 31, 1987 and 1986, the per share distribution from paid-in capital was $0.0005 and $0.0015,
respectively.
<F6>For the year ended January 31, 1994, the per share distribution from net realized gain on investments was $0.00348.
<F7>For the year ended January 31, 1994, the per share distribution in excess of net investment income on Class C shares was $0.002.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
WASHINGTON FUND
---------------------------------
YEAR ENDED JANUARY 31,
---------------------------------
1994 1993* 1994(S)
------ ------- ---------
CLASS A CLASS B
------- ---------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 9.54 $ 9.53 $10.26
Income from investment operations-- ------ ------ ------
Net investment income++ .............. $ 0.57 $ 0.22 $ 0.18
Net realized and unrealized gain
(loss) on investments ............... 0.78 0.01 0.05
------ ------ ------
Total from investment operations: $ 1.35 $ 0.23 $ 0.23
------ ------ ------
Less distributions declared to shareholders--
From net investment income ........... $(0.57) $(0.22) $(0.18)
From net realized gain on
investments ......................... (0.07) -- (0.07)
In excess of net investment income -- -- --
Total distributions declared to ------ ------ ------
shareholders ...................... $(0.64) $(0.22) $(0.25)
------ ------ ------
Net asset value -- end of period ....... $10.25 $ 9.54 $10.24
====== ====== ======
Total return ........................... 14.55% 2.72% 2.30%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:++
Expenses ............................. 0.00% 0.00%+ 1.00%+
Net investment income ................ 5.63% 5.64%+ 4.28%+
PORTFOLIO TURNOVER ..................... 26% 12% 26%
NET ASSETS AT END OF PERIOD (000
OMITTED) ............................ $19,208 $9,574 $1,528
* For the period from the commencement of investment operations, August 7,
1992, to January 31, 1993.
(S) For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ The investment adviser did not impose all or a portion of its advisory,
distribution or expense reimbursement fees for the periods indicated. If
these fees had been incurred by the Fund, and if the expense reimbursement
agreement had not been in effect, net investment income per share and the
ratios would have been:
Net investment income ........ $0.42 $0.12 $0.10
RATIOS (TO AVERAGE NET ASSETS):
Expenses ................... 1.46% 2.47%+ 2.79%+
Net investment income ...... 4.17% 3.17%+ 2.49%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
WEST VIRGINIA FUND
--------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------
1994<F2> 1994 1993 1992 1991 1990
--------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ... $11.50 $11.20 $10.93 $10.72 $10.68 $10.51
Income from investment operations-- ------ ------ ------ ------ ------ ------
Net investment income .................. $ 0.64 $ 0.66 $ 0.70 $ 0.71 $ 0.71 $ 0.77
Net realized and unrealized gain (loss) on
investments ........................... 0.69 0.34 0.34 0.21 0.04 0.18
------ ------ ------ ------ ------ ------
Total from investment operations .... $ 1.33 $ 1.00 $ 1.04 $ 0.92 $ 0.75 $ 0.95
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders--
From net investment income ............. $(0.61) $(0.69) $(0.76) $(0.71) $(0.71) $(0.78)
From net realized gain on investments .. (0.12) (0.01) (0.01) -- -- --
In excess of net investment income ..... (0.04) -- -- -- -- --
From paid-in capital<F4> ............... -- -- -- -- -- --
Total distributions declared to ------ ------ ------ ------ ------ ------
shareholders ....................... $(0.77) $(0.70) $(0.77) $(0.71) $(0.71) $(0.78)
------ ------ ------ ------ ------ ------
Net asset value - end of period .......... $12.06 $11.50 $11.20 $10.93 $10.72 $10.68
====== ====== ====== ====== ====== ======
Total return ............................. 11.80% 9.12% 9.84% 8.91% 7.26% 9.43%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses ............................... 1.24% 1.15% 1.17% 1.21% 1.22% 0.86%
Net investment income .................. 5.30% 5.97% 6.33% 6.59% 6.63% 7.01%
PORTFOLIO TURNOVER ....................... 26% 19% 14% 37% 34% 9%
NET ASSETS AT END OF PERIOD (000 OMITTED) $141,190 $115,289 $80,440 $61,984 $52,398 $43,026
<CAPTION>
--------------------------------------------------------
1989 1988 1987 1986 1985<F1>
CLASS B
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ... $11.30 $10.77 $ 9.83 $ 9.52 $12.13
Income from investment operations-- ------ ------ ------ ------ ------
Net investment income .................. $ 0.77 $ 0.81 $ 0.84 $ 0.23 $ 0.22
Net realized and unrealized gain (loss) on
investments ........................... (0.72) 0.56 0.96 0.23 0.05
------ ------ ------ ------ ------
Total from investment operations ......... $ 0.05 $ 1.37 $ 1.80 $ 0.46 $ 0.27
Less distributions declared to shareholders-- ------ ------ ------ ------ ------
From net investment income ............. $(0.76) $(0.81) $(0.85) $(0.15) $(0.21)
From net realized gain on investments .. (0.02) (0.03) (0.01) -- (0.12)
In excess of net investment income ..... -- -- -- -- (0.01)
From paid-in capital<F4> ............... (0.06) -- -- -- --
Total distributions declared to ------ ------ ------ ------ ------
shareholders .......................... $(0.84) $(0.84) $(0.86) $(0.15) $(0.34)
------ ------ ------ ------ ------
Net asset value - end of period .......... $10.51 $11.30 $10.77 $ 9.83 $12.06
====== ====== ====== ====== ======
Total return ............................. 0.76% 13.42% 19.42% 18.96%<F3> 5.59%<F3>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses................................ 0.79% 0.87% 1.00% 0.95%<F3> 1.89%<F3>
Net investment income .................. 7.32% 7.42% 8.40% 9.71%<F3> 4.14%<F3>
PORTFOLIO TURNOVER ....................... 11% 9% 24% 14% 26%
NET ASSETS AT END OF PERIOD (000 OMITTED) $36,276 $34,436 $17,733 $7,039 $4,530
<FN>
- ---------
<F1>For the period from the commencement of operations, October 31, 1984 to January 31, 1985.
<F2>For the period from the commencement of offering of Class B shares, September 7, 1993, to January 31, 1994.
<F3>Annualized.
<F4>For the years ended January 31, 1987 and 1986, the per share distribution from paid-in capital was $0.0018 and $0.0005,
respectively.
</TABLE>
3. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of each State Fund is to
provide current income exempt from federal income taxes and personal income
taxes, if any, of that State. Any investment involves risk and there can be no
assurance that any State Fund will achieve its investment objective.
INVESTMENT POLICIES -- As a fundamental policy, the Trust seeks to achieve the
investment objective of each State Fund by investing the assets of that State
Fund primarily (i.e., at least 80% of its net assets under normal conditions) in
municipal bonds and notes and other debt instruments the interest on which is
exempt from federal income taxes and from the personal income taxes, if any, of
that State. These obligations are issued primarily by that State, its political
subdivisions, municipalities, agencies, instrumentalities or public authorities.
Although the Trust seeks to invest all the assets of each State Fund in the
obligations described in the preceding paragraph, market conditions may from
time to time limit the availability of such obligations. During periods when the
Trust is unable to purchase obligations described in the preceding paragraph for
the portfolio of any State Fund, the Trust will seek to invest the assets of
that State Fund in Municipal Obligations (as defined below) the interest on
which would be exempt from federal income taxes, but would be subject to
personal income taxes of that State. Also, as a temporary defensive measure
during times of adverse market conditions, up to 50% of the assets of a State
Fund may be held in cash or invested in the short-term obligations described in
paragraphs 4 and 5 below. Under normal conditions, substantially all of the
investments of each State Fund will be made in:
(1) Tax-exempt securities which are rated AAA, AA, or A by Standard &
Poor's Ratings Group ("S&P") or by Fitch Investors Service, Inc. ("Fitch")
or are rated Aaa, Aa, or A by Moody's Investors Service, Inc. ("Moody's"),
or which are unrated but are considered to have essentially the same
characteristics and quality as securities having such ratings and are issued
by issuers which have other securities rated not lower than A by S&P, Fitch
or Moody's;
(2) Tax-exempt securities which are not rated and do not qualify under
paragraph 1 above or which are rated lower than the three highest grades of
S&P, Fitch or Moody's. However, not more than one-third of a State Fund's
total assets will be invested in such securities;
(3) Notes of issuers having an issue of outstanding Municipal
Obligations rated AAA, AA or A by S&P or Fitch or Aaa, Aa or A by Moody's or
which are guaranteed by the U.S. Government or which are rated MIG-1 or
MIG-2 by Moody's;
(4) Obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; and
(5) Commercial paper which is rated A-1 or A-2 by S&P or P-1 or P-2 by
Moody's (or which is unrated but which is considered to have essentially the
same characteristics and qualities as commercial paper having such ratings),
obligations (including certificates of deposit, bankers' acceptances and
repurchase agreements) of banks with $1 billion or more of assets, and cash.
From time to time, a portion of the Fund's distributions will be taxable to
shareholders, for example, distributions of income from the obligations
described in paragraphs 4 and 5 above, from capital gains, from transactions in
certain Municipal Bonds purchased at a market discount and from certain other
transactions. The Trust may purchase Municipal Obligations the interest on which
may be subject to an alternative minimum tax (for purposes of this Prospectus,
the interest thereon is nonetheless considered to be tax-exempt). See "Tax
Status." For a comparison of yields on Municipal Obligations and taxable
securities, see the Taxable Equivalent Yield Tables in Appendix A. For a general
discussion of Municipal Obligations, the risks associated with an investment
therein, and descriptions of the ratings of S&P, Fitch and Moody's of Municipal
Obligations and short-term obligations permitted as investments, see Appendix B.
As used in this Prospectus, the terms "Municipal Obligations" and "tax-exempt
securities" are used interchangeably to refer to 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, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is also exempt from the personal
income taxes of any State).
LOWER RATED MUNICIPAL OBLIGATIONS -- The lower rated or unrated securities
described in paragraph 2 above, while generally providing greater income than
investments in higher rated securities, usually are high risk securities
involving greater volatility of price (especially during periods of economic
uncertainty or change) and risk to principal and income (including the
possibility of default by or bankruptcy of the issuers of such securities) than
securities in the higher rating categories and because yields vary over time, no
specific level of income can ever be assured. These lower rated high yielding
fixed income securities generally tend to reflect economic changes (and the
outlook for economic growth), short-term corporate and industry developments and
the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates, although these
lower rated fixed income securities are also affected by changes in interest
rates. In particular, securities rated BBB by S&P or Fitch or Baa by Moody's
(and comparable unrated securities) while normally exhibiting adequate
protection parameters, have speculative characteristics and changes in economic
conditions and other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade Municipal Obligations. Securities rated lower than BBB by S&P or Fitch or
Baa by Moody's (and comparable unrated securities) (commonly referred to as
"junk bonds"), are considered speculative. While these high risk securities may
have some quality and protective characteristics, these can be expected to be
outweighed by large uncertainties or major risk exposures during times of
adverse market conditions. Furthermore, an economic downturn may result in a
higher incidence of defaults by issuers of these securities. During certain
periods, the higher yields on a Fund's lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of principal
and income, arising from such factors as the heightened possibility of default
or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, a Fund may continue to earn the same level of
interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Fund's yield despite the actual loss of
principal. In addition, these lower rated or unrated high risk tax-exempt
securities are frequently traded only in markets where the number of potential
purchasers, if any, is very limited. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of higher grade
tax-exempt securities. This consideration may have the effect of limiting the
ability of the Trust to sell such securities for a particular Fund at their fair
value either to meet redemption requests or to respond to changes in the economy
or the financial markets. See Appendix C to this Prospectus for charts
indicating the composition of the portfolio of each Fund for its fiscal year
ended January 31, 1994 with the debt securities rated by S&P separated into
rating categories. While the Adviser may refer to ratings issued by established
credit rating agencies, it is not a policy of the Trust to rely exclusively on
ratings issued by these agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. Furthermore, no
minimum rating standard is required by the Trust. With respect to those
Municipal Obligations which are not rated by a major rating agency, the Trust
will be more reliant on the Adviser's judgment, analysis and experience than
would be the case if such Municipal Obligations were rated. To the extent the
Trust invests in these lower rated securities, the achievement of its investment
objective may be more dependent on the Adviser's own credit analysis than in the
case of a fund investing in higher quality bonds. In evaluating the
creditworthiness of an issue, whether rated or unrated, the Adviser may take
into consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
Although higher quality tax-exempt securities may produce lower yields, they are
generally more marketable. To protect the capital of shareholders of a Fund
under adverse market conditions, the Trust may from time to time deem it prudent
to hold cash or to purchase higher quality securities or taxable short-term
obligations for that Fund with a resultant decrease in yield or increase in the
proportion of taxable income.
NON-DIVERSIFIED STATUS -- Each Fund is a "non-diversified" series of the Trust
which means that more than 5% of the assets of each Fund may be invested in the
obligations of each of one or more issuers, subject to the diversification
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
Since a relatively high percentage of the assets of a Fund may be invested in
the obligations of a limited number of issuers, the value of shares of a Fund
may be more susceptible to any single economic, political or regulatory
occurrence than the shares of a diversified investment company would be.
CHARACTERISTICS OF MUNICIPAL OBLIGATIONS -- Each Fund may invest its assets in a
relatively high percentage of municipal bonds issued by entities having similar
characteristics. The issuers may pay their interest obligations from revenue of
similar projects such as multi-family housing, nursing homes, electric utility
systems, hospitals or life care facilities. This too may make any Fund more
susceptible to similar economic, political, or regulatory occurrences,
particularly since such issuers would likely be located in the same State. As
the similarity in issuers increases, the potential for fluctuation of the net
asset value of the Fund's shares also increases. Each Fund will only invest in
securities of issuers which it believes will make timely payments of interest
and principal.
Each Fund may invest more than 25% of its assets in industrial revenue bonds
(referred to under current tax law as private activity bonds), and also may
invest more than 25% of its assets in revenue bonds issued for housing,
including multi-family housing, health care facilities or electric utilities, at
times when the relative value of issues of such a type is considered, in the
judgment of the Adviser, to be more favorable than that of other available types
of issues, taking into consideration the particular restrictions on investment
flexibility arising from the investment objective of each State Fund of
providing current income exempt from personal income taxes of that State (as
well as federal income taxes). Therefore, investors should also be aware of the
risks which these investments may entail. Industrial revenue bonds are issued by
various state and local agencies to finance various projects.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of the
bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local housing
authority and are secured only by the revenues of mortgages originated by the
authority using the proceeds of the bond issue. Because of the impossibility of
precisely predicting demand for mortgages from the proceeds of such an issue,
there is a risk that the proceeds of the issue will be in excess of demand,
which would result in early retirement of the bonds by the issuer. Moreover,
such housing revenue bonds depend for their repayment upon the cash flow from
the underlying mortgages, which cannot be precisely predicted when the bonds are
issued. Any difference in the actual cash flow from such mortgages from the
assumed cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could result
in early retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds established from
the proceeds of the bonds, assuming certain rates of return on investment of
such reserve funds. If the assumed rates of return are not realized because of
changes in interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate. The
financing of multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost constraints, the
achievement and maintainance of a sufficient level of occupancy, sound
management of the developments, timely and adequate increases in rents to cover
increases in operating expenses, including taxes, utility rates and maintenance
costs, changes in applicable laws and governmental regulations and social and
economic trends.
Electric utilities face problems in financing large construction programs in an
inflationary period, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs importantly
in this process. The facilities may also be affected by regulatory cost
restrictions applied to health care delivery in general, particularly state
regulations or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing facilities in
the private or public sector. Hospital bond ratings are often based on
feasibility studies which contain projections of expenses, revenues and
occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government agencies to
limit rates and expenses, confidence in the hospital, service area economic
developments, competition, availability and expense of malpractice insurance,
Medicaid and Medicare funding, and possible federal legislation limiting the
rates of increase of hospital charges.
Each Fund may also invest in bonds for industrial and other projects, such as
sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes and
wastes involved in these projects may include hazardous components, there are
risks associated with their production, handling and disposal.
Municipal Obligations in which the Funds may invest also include zero coupon
bonds and deferred interest bonds. Zero coupon bonds and deferred interest bonds
are debt obligations which are issued at a significant discount from face value.
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. The discount approximates the total amount of interest the
bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Zero coupon bonds and deferred interest bonds
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which make regular payments of interest.
Each Fund will accrue income on such investments for tax and accounting
purposes, which is distributable to shareholders. Since no cash is received at
the time of accrual, a Fund may be required to liquidate other portfolio
securities to satisfy its distribution obligations.
The net asset value of the shares of each Fund changes as the general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of such a portfolio can be expected to decline.
Except for the policy identified above as fundamental, shareholder approval is
not required to change any of the foregoing investment policies, or any of the
policies discussed below.
"WHEN-ISSUED" SECURITIES -- Some new issues of tax-exempt securities may be
purchased on a "when-issued" basis, which means that the obligations will be
delivered to a Fund at a future date usually beyond customary settlement time.
The commitment to purchase an obligation for which payment will be made on a
future date may be deemed a separate security. Although the amount of tax-exempt
securities which there may be commitments to purchase on a "when- issued" basis
is not limited, it is expected that under normal circumstances not more than 50%
of the total assets of any Fund will be committed to such purchases. A Fund does
not pay for such obligations until received and does not start earning interest
on the obligations until the contractual settlement date. Each Fund has
established a segregated account consisting of cash, short-term money market
instruments or high quality debt securities equal to the amount of the
commitments on behalf of the Fund to purchase "when-issued" securities. For
additional information concerning the purchase of securities on a "when-issued"
basis, see the Statement of Additional Information.
VARIABLE AND FLOATING RATE OBLIGATIONS -- The interest rates payable on certain
securities in which a Fund may invest are not fixed and may fluctuate based upon
changes in market rates. Variable rate obligations have an interest rate which
is adjusted at predesignated periods and interest on floating rate obligations
is adjusted whenever there is a change in the market rate of interest on which
the interest rate payable is based. For additional information concerning
variable and floating rate obligations, see the Statement of Additional
Information.
INVERSE FLOATING RATE OBLIGATIONS -- Each Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds or other obligations or
certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in the
opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a rate
which is a multiple (approximately two) of the rate at which fixed-rate
long-term tax-exempt securities increase or decrease in response to such
changes. As a result, such obligations have the effect of providing investment
leverage and may be more volatile than long-term fixed rate tax-exempt
obligations.
PARTICIPATION INTERESTS -- From time to time, a Fund may purchase from banks
participation interests in all or part of specific holdings of Municipal
Obligations. Each participation interest is backed by an irrevocable letter of
credit or guarantee of the selling bank. Participation interests will only be
purchased if in the opinion of counsel interest income on such interests will be
tax-exempt when distributed as dividends to shareholders of a Fund.
RESTRICTED SECURITIES -- Each Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to a Fund's limitation on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring
liquidity of Rule 144A securities. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations. The Board will
carefully monitor each Fund's investments in Rule 144A securities, focusing on
such important factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in each Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held in
a Fund's portfolio. Subject to the Funds' 15% limitation on investments in
illiquid investments, the Funds may also invest in restricted securities that
may not be sold under Rule 144A, which presents certain risks. As a result, the
Funds might not be able to sell these securities when the Adviser wishes to do
so, or might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
OPTIONS -- Each Fund may write (i.e., sell) "covered" put and call options on
fixed income securities subject to any applicable laws. Call options written by
a Fund give the holder the right to buy the underlying securities from the Fund
at a fixed exercise price up to a stated expiration date or, in the case of
certain options, on such date. Put options written by a Fund give the holder the
right to sell the underlying securities to the Fund during the term of the
option at a fixed exercise price up to a stated expiration date or, in the case
of certain options, on such date. Call options are "covered" by a Fund, for
example, when it owns the underlying securities, and put options are "covered"
by a Fund, for example, when it has established a segregated account of cash and
high grade government securities of the Fund which can be liquidated promptly to
satisfy any obligation of the Fund to purchase the underlying securities. Each
Fund may utilize other forms of cover as well, as described in the Statement of
Additional Information. Each Fund may also write straddles (combinations of puts
and calls on the same underlying security). Such transactions generate
additional premium income but also present increased risk. See the Statement of
Additional Information.
A Fund will receive a premium from writing a put or call option, which increases
the gross income of the Fund in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, a Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, a Fund
assumes the risk that it may be required to purchase the underlying security for
an exercise price higher than its then current market value, resulting in a
potential capital loss unless the security subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for a
Fund to close out its written option positions.
A Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security changes sufficiently, the option may expire
without value.
A Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, at a stated
time in the future, or in some cases, on a future date.
Each Fund may write and purchase options on securities only for hedging purposes
and not in an effort to increase current income. Options on securities that are
written or purchased by the Funds will be traded on U.S. exchanges and
over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Each Fund may enter into
futures contracts on fixed income securities and on indices of fixed income
securities, including municipal bond indices, any other financial indices, and
any index of fixed income securities which may become available for trading, and
on Eurodollar deposits ("Futures Contracts"), subject to any applicable laws.
Each Fund may, subject to any applicable laws, purchase and write options on all
such Futures Contracts ("Options on Futures Contracts"). These investments will
be used to hedge against anticipated future changes in interest rates which
otherwise might either adversely affect the value of the portfolio securities of
a Fund or adversely affect the prices of long-term bonds which are intended to
be purchased for the Fund at a later date. Such transactions may also be entered
into for non-hedging purposes, to the extent permitted by applicable law.
Futures Contracts and Options on Futures Contracts entail risks. Although the
Trust believes that use of such contracts will benefit the Funds, if the
Adviser's investment judgment about the general direction of interest rates is
incorrect, the overall performance of a Fund may be poorer than if the Fund had
not entered into any such contract.
In order to assure that each Fund will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission (the "CFTC") require that each Fund enter into transactions
in Futures Contracts and Options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging
purposes, provided that the aggregate initial margin and premiums on such
non-hedging positions do not exceed 5% of the liquidation value of each Fund's
assets. In addition, each Fund must comply with the requirements of various
state securities laws in connection with such transactions.
Each Fund has adopted the additional policy that it will not enter into a
Futures Contract if, immediately thereafter, the value of all such Fund's
Futures Contracts would exceed 50% of the value of the Fund's total assets.
Moreover, a Fund will not purchase put and call options on securities or on
Futures Contracts if as a result more than 5% of the total assets of the Fund
would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by a
Fund will be traded on U.S. exchanges.
RISK FACTORS -- Although the Funds will enter into certain transactions in
options, Futures Contracts and Options on Futures Contracts for hedging
purposes, all subject to applicable laws, such transactions nevertheless involve
risks. For example, a lack of correlation between the instrument underlying an
option or Futures Contract and the assets being hedged, or unexpected adverse
price movements, could render a Fund's hedging strategy unsuccessful and could
result in losses. In addition, there can be no assurance that a liquid secondary
market will exist for any contract purchased or sold, and a Fund may be required
to maintain a position until exercise or expiration, which could result in
losses. Transactions in such instruments entered into for non-hedging purposes,
subject to applicable laws, involve greater risks and may result in losses which
are not offset by gains on other portfolio assets. The Statement of Additional
Information contains a further description of options, Futures Contracts and
Options on Futures Contracts, and a discussion of the risks related to
transactions therein.
Transactions in the foregoing instruments may be entered into by the Funds on
U.S. exchanges regulated by the Securities and Exchange Commission (the "SEC")
or the CFTC. Options on securities may also be written or purchased in the
over-the-counter market. Over-the-counter transactions involve certain risks
which may not be present in an exchange environment.
Gains recognized from options and futures transactions engaged in by the Trust
on behalf of a Fund are taxable to the Fund's shareholders when distributed to
them.
PORTFOLIO TRADING -- Each Fund intends to fully manage its portfolio by buying
and selling securities, as well as holding securities to maturity. In managing
its portfolio, each Fund seeks to take advantage of market developments, yield
disparities and variations in the creditworthiness of issuers. For a description
of the strategies which may be used by the Funds in managing their portfolios,
which may include adjusting the average maturity of a Fund's portfolio in
anticipation of a change in interest rates, see the Statement of Additional
Information.
Distributions of gains, if any, realized from the sale of Municipal Obligations
or other securities are subject to federal income taxes and State personal
income taxes. See "Tax Status." The primary consideration in placing portfolio
security transactions with broker-dealers for execution is to obtain, and
maintain the availability of, execution at the most favorable prices and in the
most effective manner possible. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"), and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of each Fund and of the
other investment company clients of FSI as a factor in the selection of
broker-dealers to execute the portfolio transactions of any Fund. For a further
discussion of portfolio transactions, see the Statement of Additional
Information.
The Statement of Additional Information includes a listing of investment
restrictions which govern the investment policies of each Fund. The Trust's
investment limitations, policies and rating standards are generally 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.
Shareholder approval is not required to change the investment objective of any
Fund and a subsequent change in investment objective may result in the Fund
having an investment objective different from the objective which the
shareholder considered appropriate at the time of investment.
CONCENTRATION IN STATE OBLIGATIONS -- RISKS; ADDITIONAL INFORMATION -- Because
each State Fund will ordinarily invest 80% or more of its net assets in its
state, each Fund is more susceptable to factors affecting its state than is a
comparable municipal bond fund not concentrated in the obligations of issuers
located in a single state. It is also possible that there will not be sufficient
availability of suitable Municipal Obligations for each Fund to achieve its
objective of providing income and an investment exempt from state taxes.
Investors should be aware of certain additional information concerning
investments in each State's Municipal Obligations. For a discussion of this
information, which does not purport to be complete, see Appendix D.
4. MANAGEMENT OF THE TRUST
INVESTMENT ADVISER -- The Trust's Board of Trustees provides broad supervision
over the affairs of each Fund. The Adviser is responsible for the management of
each Fund's assets and the officers of the Trust are responsible for its
operations. A majority of the Trustees are not affiliated with the Adviser.
The Adviser manages the assets of each Fund (other than the Arkansas,
California, Florida, Louisiana, Mississippi, Pennsylvania, Texas and Washington
Funds) pursuant to an Investment Advisory Agreement, dated August 24, 1984 (the
"Advisory Agreement"). The Adviser manages the assets of the Arkansas, Florida
and Texas Funds pursuant to separate Investment Advisory Agreements, each dated
February 1, 1992. The Adviser manages the assets of the Mississippi and
Washington Funds pursuant to separate Investment Advisory Agreements, each dated
August 1, 1992. The Adviser manages the assets of the Louisiana and Pennsylvania
Funds pursuant to separate Investment Advisory Agreements, each dated February
1, 1993. The Adviser manages the assets of the California Fund pursuant to an
Investment Advisory Agreement dated August 1, 1993. The Adviser provides
investment advisory and administrative services with respect to each Fund, as
well as office facilities and overall administrative services for the Trust.
Each Fund is currently managed by a committee comprised of various investment
professionals employed by the Adviser. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for each Fund. For these
services and facilities, the Adviser receives a management fee from the Trust on
behalf of each Fund computed and paid monthly at an annual rate equal to 0.55%
of the Fund's average daily net assets on an annualized basis for the Fund's
then-current fiscal year. The Adviser voluntarily reduced the management fee
with respect to the Arkansas, Florida, Mississippi and New York Funds to 0.20%,
0.10%, 0.00% and 0.35%, respectively, of each Fund's average daily net assets
until October 1, 1993 (except for the Arkansas Fund which is through June 30,
1993), to be increased by 0.05% each quarter thereafter, not to exceed 0.55% of
each Fund's average daily net assets. The Adviser has voluntarily reduced its
management fee with respect to the Louisiana, Pennsylvania, Texas and Washington
Funds to 0.00% of each Fund's average daily net assets for an indefinite period
of time. The Adviser has voluntarily agreed (i) to reduce or eliminate the
management fee for the California Fund and (ii) to bear some or all of the other
operating expenses payable by such Fund. The amount by which the California
Fund's management fee will be reduced, the amount of operating expenses to be
borne, and the period during which such reduction or elimination and expense
bearing will remain in effect, will be determined from time to time by the
Adviser in its sole discretion. Such amounts will not be subject to
reimbursement by the California Fund. Effective February 1, 1994, the Adviser
has voluntarily agreed to maintain the California Fund's management fee at the
reduced rate of 0.40% of the Fund's average daily net assets for an indefinite
period of time. These fee reductions may be rescinded by the Adviser at any time
without notice to shareholders. See "Expenses" below.
For the Trust's fiscal year ended January 31, 1994, MFS received fees under the
Advisory Agreement with respect to the following Funds: Alabama Fund, $439,235;
Arkansas Fund, $940,077; Florida Fund, $522,640; Georgia Fund, $449,179;
Louisiana Fund, $54,035; Maryland Fund, $903,650; Massachusetts Fund,
$1,591,974; Mississippi Fund, $367,101 New York Fund, $916,193; North Carolina
Fund, $2,501,986; Pennsylvania Fund, $56,065; South Carolina Fund, $947,476;
Tennessee Fund, $627,398; Texas Fund, $75,954; Virginia Fund, $2,459,087;
Washington Fund, $80,180; and West Virginia Fund, $728,874. MFS voluntarily
reduced its fees under the Advisory Agreement, in whole or in part, with respect
to the following Funds in the following amounts for the Trust's fiscal year
ended January 31, 1994: the Arkansas Fund, $502,194; the Florida Fund, $444,758;
the Louisiana Fund, $54,035; the Mississippi Fund, $349,609; the New York Fund,
$340,615; the Pennsylvania Fund, $56,065; the Texas Fund, $75,954; and the
Washington Fund, $80,180. For the California Fund's 11 month period ended
January 31, 1994, fees payable to MFS amounted to $1,641,620 (of which $585,888
was not imposed). See "Expenses" below.
MFS also serves as investment adviser to each of the other MFS Funds and to
MFS/Sun Life Series 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 Institutional Trust, MFS
Union Standard Trust, MFS Variable Insurance Trust, Sun Growth Variable Annuity
Fund, Inc. and seven variable accounts, each of which accounts is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
("Sun Life of Canada (U.S.)") in connection with the sale of Compass-2 and
Compass-3 combination fixed/variable annuity contracts. The MFS Asset Management
Group, a division of MFS, provides investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under management of the MFS organization were approximately
$33.6 billion on behalf of approximately 1.4 million investor accounts as of
March 31, 1994. As of such date, the MFS organization managed approximately
$19.6 billion of assets in fixed income securities and fixed income securities
of its MFS Asset Management Group, including approximately $6.6 billion of
assets in municipal securities. MFS is a subsidiary of Sun Life of Canada (U.S.)
which in turn is a subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the Chairman, Mr.
Shames is the President and Mr. Scott is the Secretary and a Senior Executive
Vice President of MFS. Messrs. McNeil and Gardner are the Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life insurance company,
is one of the largest international life insurance companies and has been
operating in the United States since 1895. The executive officers of MFS report
to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is the Chairman and President of the
Trust. Cynthia M. Brown, Robert A. Dennis, W. Thomas London, Stephen E. Cavan,
James R. Bordewick, Jr., James O. Yost and Linda J. Hoard, all of whom are
officers of MFS, are officers of the Trust.
DISTRIBUTOR -- FSI, a wholly owned subsidiary of MFS, is the distributor of
shares of each Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing
Agent"), a wholly owned subsidiary of MFS, performs transfer agency, certain
dividend disbursing agency and other services for the Trust.
5. INFORMATION CONCERNING SHARES OF THE TRUST
PURCHASES
Shares of each Fund may be purchased through any securities dealer, certain
banks or other financial institutions having selling agreements with FSI. Non-
securities dealer financial institutions will receive transaction fees that are
the same as commission fees to dealers. Securities dealers and other financial
institutions may also charge their customers fees relating to investments in the
Trust.
Each Fund currently offers Class A and Class B shares to the public. In
addition, the California Fund, the North Carolina Fund and the Virginia Fund
currently offer Class C shares to the public. These classes bear sales charges
and distribution fees in different forms and amounts as described below.
CLASS A SHARES: Class A shares are offered at net asset value per share plus an
initial sales charge (or CDSC in the case of certain purchases of $1 million or
more) as follows:
<TABLE>
<CAPTION>
SALES CHARGE<F1> DEALER
AS A PERCENTAGE OF: ALLOWANCE AS
------------------------------ PERCENTAGE OF
AMOUNT OF NET AMOUNT AMOUNT OF
- -AMOUNT OF PURCHASE - OFFERING PRICE INVESTED OFFERING PRICE
- --------------------- -------------- ---------- ---------------
<S> <C> <C> <C>
Less than $100,000 4.75% 4.99% 4.00%
$100,000 or more but less than $250,000 4.00 4.17 3.20
$250,000 or more but less than $500,000 2.95 3.04 2.25
$500,000 or more but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more None<F2> None<F2> See Below<F2>
<FN>
- ---------
<F1>Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
<F2>A CDSC may apply in certain instances. FSI (on behalf of the Fund) will pay
a commission on purchases of $1 million or more.
</FN>
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under section 401(a) or 401(k) of the Code (a "Retirement Plan"), due
to: (a) a loan from the plan (repayments of loans, however, will constitute new
sales for purposes of assessing the CDSC); (b) "financial hardship" of the
participant in the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time; or (c) the death of a
participant in such plans; (iii) distributions from a 403(b) plan or an
Individual Retirement Account ("IRA") due to death, disability or attainment of
age 59 1/2; (iv) tax-free returns of excess contributions to an IRA; (v)
distributions by other employee benefit plans to pay benefits; and (vi) certain
involuntary redemptions and redemptions in connection with certain automatic
withdrawals from a qualified retirement plan. The CDSC on Class A shares will
not be waived, however, if the Retirement Plan withdraws from the Fund except if
that Retirement Plan has invested its assets in Class A shares of one or more of
the MFS Funds for more than 10 years from the later to occur of (i) January 1,
1993 or (ii) the date such Retirement Plan first invests its assets in Class A
shares of one or more of the MFS Funds, the CDSC on Class A shares will be
waived in the case of a redemption of all of the Retirement Plan's shares
(including shares of any other class) in all MFS Funds (i.e., all the assets of
the Retirement Plan invested in the MFS Funds are withdrawn), unless,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class A shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, in which case the
CDSC will not be waived. Any applicable CDSC will be deferred upon an exchange
of Class A shares for units of participation of the MFS Fixed Fund (a bank
collective investment fund) (the "Units"), and the CDSC will be deducted from
the redemption proceeds when such Units are subsequently redeemed (assuming the
CDSC is then payable). No CDSC will be assessed upon an exchange of Units for
Class A shares. For purposes of calculating the CDSC payable upon redemption of
Class A shares or Units acquired pursuant to one or more exchanges, the period
during which the Units are held will be aggregated with the period during which
the Class A shares are held. The applicability of the CDSC will be unaffected by
transfers of registration. FSI shall receive all CDSCs which it intends to apply
for the benefit of the Fund.
FSI allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and FSI retains approximately
3/4 of 1% of the public offering price. Pursuant to a special arrangement, the
dealer allowance as a percentage of offering price for the California Fund and
the New York Fund is as follows:
SALES CHARGE DEALER ALLOWANCE
AS A PERCENTAGE AS A PERCENTAGE
OF AMOUNT OF OF AMOUNT OF
OFFERING PRICE OFFERING PRICE
-------------- --------------
4.75% 4.25%
4.00% 3.45%
2.95% 2.50%
2.20% 1.95%
This special arrangement may be revised or discontinued at any time without
notice to shareholders.
The sales charge may vary depending on the number of shares of a Fund as well as
certain MFS Funds and other funds owned or being purchased, the existence of an
agreement to purchase additional shares during a 13-month period (or 36-month
period for purchases of $1 million or more) or other special purchase programs.
A description of the Right of Accumulation, Letter of Intent and the Group
Purchase privileges by which the sales charge may also be reduced is set forth
in "Shareholder Services" in the Statement of Additional Information. In
addition, FSI pays commissions to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales up to $5 million,
plus 0.25% on the amount in excess of $5 million. Purchases of $1 million or
more for each shareholder account will be aggregated over a 12-month period
(commencing from the date of the first such sale) for purposes of determining
the level of commissions to be paid during that period with respect to such
account.
Class A shares of each Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
any retired trustees of any investment company for which FSI serves as
distributor or principal underwriter, and to certain family members of such
individuals and their spouses, provided such shares will not be resold except to
the Trust. Class A shares of each Fund may be sold at net asset value to any
employee, partner, officer or trustee of any sub-adviser to any MFS Fund and to
certain family members of such individuals and their spouses, or to any trust,
pension, profit-sharing or other retirement plan for the sole benefit of such
employee or representative, provided such shares will not be resold except to
the Fund. Class A shares of each Fund may also be sold at net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with FSI or its affiliates, to certain
family members of such employees or representatives and their spouses, or to any
trust, pension, profit-sharing or any other benefit plan for the sole benefit of
such employee or representative, as well as to clients of the MFS Asset
Management Group. Insurance company separate accounts may also purchase Class A
shares of each Fund at their net asset value. Class A shares of each Fund also
may be sold at net asset value, subject to appropriate documentation, through a
dealer where the amount invested represents redemption proceeds from a
registered open-end management investment company not distributed or managed by
FSI or its affiliates, if such redemption has occurred no more than 60 days
prior to the purchase of Class A shares of each Fund and the shareholder either
(i) paid an initial sales charge or (ii) was at some time subject to, but did
not actually pay, a deferred sales charge with respect to the redemption
proceeds. Class A shares of each Fund may also be sold at net asset value where
the amount invested represents redemption proceeds from the MFS Fixed Fund. In
addition, Class A shares of each Fund may be sold at net asset value in
connection with the acquisition or liquidation of the assets of other investment
companies or personal holding companies. Class A shares of each Fund may also be
purchased at their net asset value by retirement plans where third party
administrators of such plans have entered into certain arrangements with FSI or
its affiliates provided that no commission is paid to dealers. Class A shares of
each Fund may be purchased at net asset value through certain broker-dealers and
other financial institutions which have entered into an agreement with FSI,
which includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or a similar program under which such clients
pay a fee to such broker-dealer or other financial institution.
Class A shares of each Fund may be purchased at net asset value by retirement
plans qualified under section 401(a) or 403(b) of the Code which are subject to
the Employee Retirement Income Security Act of 1974, as amended, as follows:
(i) the retirement plan and/or the sponsoring organization must subscribe to
the MFS Fundamental 401(k) PlanSM or another similar section 401(a) or 403 (b)
recordkeeping program made available by MFS Service Center, Inc.;
(ii) either (a) the sponsoring organization must have at least 25 employees or
(b) the aggregate purchases by the retirement plan of Class A shares of the
MFS Funds must be in an amount of at least $250,000 within a reasonable period
of time, as deterimined by FSI in its sole discretion; and
(iii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of a
Fund in this manner will be paid a commission by FSI, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that FSI may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at FSI's
invitation, enter into an agreement with FSI in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by FSI. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account.
Class A shares of each Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B periodic distributions which constitute
required withdrawals from qualified retirement plans. Class A shares of each
Fund may also be purchased at net asset value where the purchase is in an amount
of $3 million or more and where the dealer and FSI enter into an agreement in
which the dealer agrees to return any commission paid to it on the sale (or on a
pro rata portion thereof) as described above if the shareholder redeems his or
her shares within one year of purchase (shareholders who purchase shares at net
asset value pursuant to these conditions are called "$3 Million Shareholders").
Furthermore, Class A shares of each Fund may be sold at net asset value through
the automatic reinvestment of distributions of dividends and capital gains of
other MFS Funds pursuant to the Distribution Investment Program (see
"Shareholder Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares of each Fund are offered at net asset value
without an initial sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First 4%*
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
- ---------
*Class B shares purchased from January 1, 1993 through August 31, 1993 will be
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
For Class B shares purchased prior to January 1, 1993, each Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First 6%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases -
Contingent Deferred Sales Charge" below for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of a Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a), 401(k) or 403(b) of the Code due to death
or disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
sections 401(a) or 401(k) of the Code due to (i) returns of excess contribution
to the plan, (ii) retirement of a participant in the plan, (iii) a loan from the
plan (repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC), (iv) "financial hardship" of the participant in the plan,
as that term is defined in Treasury Regulation Section 1.401(k)-1(d)(2), as
amended from time to time, and (v) termination of employment of the participant
in the plan (excluding, however, a partial or other termination of the plan).
The CDSC on Class B shares will also be waived upon redemptions by: (i) officers
of the Trust, (ii) any of the subsidiary companies of Sun Life, (iii) eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, (iv) any trust for such persons,
(v) any trustees and retired trustees of any investment company for which FSI
serves as distributor or principal underwriter, and (vi) certain family members
of such individuals and their spouses, provided in each case that the shares
will not be resold except to the Fund. The CDSC on Class B shares will also be
waived in the case of redemptions by any employee or registered representative
of any dealer or other financial institution which has a sales agreement with
FSI, by certain family members of any such employee or representative and his or
her spouse, by any trust for the sole benefit of such employee or representative
and by clients of the MFS Asset Management Group. A retirement plan qualified
under section 401(a) of the Code (a "Retirement Plan") that has invested its
assets in Class B shares of one or more of the MFS Funds for more than 10 years
from the later to occur of (i) January 1, 1993 or (ii) the date the Retirement
Plan first invests its assets in Class B shares of one or more of the MFS Funds
will have the CDSC on Class B shares waived in the case of a redemption of all
the Retirement Plan's shares (including shares of any other class) in all MFS
Funds (i.e., all the assets of the Retirement Plan invested in the MFS Funds are
withdrawn), except that if, immediately prior to the redemption, the aggregate
amount invested by the Retirement Plan in Class B shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four year period
equals 50% or more of the total value of the Retirement Plan's assets in the MFS
Funds, then the CDSC will not be waived. The CDSC on Class B shares may also be
waived in connection with the acquisition or liquidation of the assets of other
investment companies or personal holding companies.
CONVERSION OF CLASS B SHARES: Class B shares of each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
Fund. Shares purchased through the reinvestment of distributions paid in respect
of Class B shares will be treated as Class B shares for purposes of the payment
of the distribution and service fees under the Distribution Plan applicable to
Class B shares. However, for purposes of conversion to Class A shares, all
shares in a shareholder's account that were purchased through the reinvestment
of dividends and distributions paid in respect of Class B shares (and which have
not converted to Class A shares as provided in the following sentence) will be
held in a separate sub-account. Each time any Class B shares in the
shareholder's account (other than those in the sub-account) convert to Class A
shares, a portion of the Class B shares then in the sub-account will also
convert to Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends and
distributions that are converting to Class A shares bear to the shareholder's
total Class B shares not acquired through reinvestment. The conversion of Class
B shares to Class A shares is subject to the continuing availability of a ruling
from the Internal Revenue Service or an opinion of counsel that such conversion
will not constitute a taxable event for federal tax purposes. There can be no
assurance that such a ruling or opinion will be available, and the conversion of
Class B shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares of the California Fund, the North Carolina Fund
and the Virginia Fund are offered at net asset value without an initial sales
charge or a CDSC. Class C shares do not convert to any other class of shares.
The maximum investment in Class C shares that may be made is $5,000,000 per
transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by MFS
Service Center, Inc.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of FSI. The Trust reserves the right to cease offering
shares of any Fund at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or other shareholder services, FSI or its
affiliates may either (i) give a gift of nominal value, such as a hand-held
calculator, or (ii) make a nominal charitable contribution on their behalf.
Although all MFS Funds are generally available as an investment choice for
retirement plans, such as an IRA, municipal bond funds, such as the Funds, may
not be suitable for inclusion in a retirement plan due to their tax-exempt
nature. A shareholder should consult his or her finanical or tax adviser
regarding any such investment.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Trust (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Trust ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Trust
and FSI each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Trust or FSI may reject or restrict purchases of a Fund's shares by a
particular purchaser or group, for example, when such purchase is contrary to
the best interests of a Fund's other shareholders or otherwise would disrupt
management of the Fund.
FSI may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by FSI) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and FSI to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of a Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds, which may include the Funds and which may change from time to
time. The Trust and FSI each reserve the right to request market timers to
redeem their shares at net asset value, less any applicable CDSC, if either of
these restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B and Class C shares.
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, FSI believes that such Act should not
preclude banks from entering into agency agreements with FSI (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
occurrences. In addition, state laws on this issue may differ from the
interpretation of federal law expressed herein, and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the restrictions set forth below, some or all of the shares in an
account with any Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of another
Fund or any of the other MFS Funds (if available for sale) at net asset value;
however, shares of a Fund may be exchanged for shares of another State Fund only
by residents of such other State. In addition, Class C shares may be exchanged
for shares of MFS Money Market Fund at net asset value. Shares of one class may
not be exchanged for shares of any other class. Exchanges will be made only
after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent in proper
form (i.e., if in writing -- signed by the record owner(s) exactly as the shares
are registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by MFS
Service Center, Inc.) or all the shares in the account. If an Exchange Request
is received by the Shareholder Servicing Agent on any business day prior to the
close of regular trading on the New York Stock Exchange (the "Exchange"), the
exchange usually will occur on that day if all the restrictions set forth above
have been complied with at that time. No more than five exchanges may be made in
any one Exchange Request by telephone. Additional information concerning this
exchange privilege and prospectuses for any of the other MFS Funds may be
obtained from investment dealers or the Shareholder Servicing Agent. A
shareholder should read the prospectus of the other fund and consider the
differences in objectives and policies before making any exchange. For federal
and (generally) state income tax purposes, an exchange is treated as a sale of
the shares exchanged and, therefore, an exchange could result in a capital gain
or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone" below. The exchange privilege (or any
aspect of it) may be changed or discontinued and is subject to certain
limitations, including certain restrictions on purchases by market timer
accounts. Special procedures, privileges and restrictions with respect to
exchanges may apply to market timers who enter into an agreement with FSI, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which a Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Certain purchases may, however, be subject to a CDSC in the event
of certain redemption transactions (see "Contingent Deferred Sales Charge"
below). For the convenience of shareholders, the Funds have arranged for
different procedures for redemption and repurchase. Since the net asset value of
shares of the account fluctuates, redemptions or repurchases, which are taxable
transactions, are likely to result in gains or losses to the shareholder. When a
shareholder withdraws an amount from his account, the shareholder is deemed to
have tendered for redemption a sufficient number of full and fractional shares
in his account to cover the amount withdrawn. The proceeds of a redemption or
repurchase will normally be available within seven days, except that for shares
purchased or received in exchange for shares purchased by check (including
certified checks or cashier's checks) payment of redemption proceeds may be
delayed for 15 days from the purchase date in an effort to assure that such
check has cleared. Payment of redemption proceeds may be delayed for up to seven
days if the Fund determines that such a delay would be in the best interest of
all its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption, or a letter of instruction, together with the share
certificates for the shares (if any were issued) and all in "good order" for
transfer, to the Shareholder Servicing Agent (see back cover for address). "Good
order" generally means that the stock power, written request for redemption,
letter of instruction or certificate must be endorsed by the record owner(s)
exactly as the shares are registered and the signature(s) must be guaranteed in
the manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional documents.
The Shareholder Servicing Agent may make certain de minimis exceptions to the
above requirements for redemption. Within seven days after receipt of a
redemption request by the Shareholder Servicing Agent in "good order," the Trust
will make payment in cash of the net asset value of the shares next determined
after such redemption request was received, reduced by the amount of any
applicable CDSC and the amount of any income tax required to be withheld, except
during any period in which the right of redemption is suspended or date of
payment is postponed because the Exchange is closed or trading on the Exchange
is restricted or, to the extent otherwise permitted by the 1940 Act, if an
emergency exists (See "Tax Status").
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee." The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through a securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. Net asset value is calculated on the day the dealer places
the order with FSI, as the Fund's agent. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO FSI ON THE SAME DAY BEFORE FSI CLOSES FOR BUSINESS, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
D. REDEMPTION BY CHECK -- Only Class A and Class C shares may be redeemed by
check. A shareholder (except a $3 Million Shareholder) owning Class A or Class C
shares of a Fund may elect to have a special account with State Street Bank and
Trust Company (the "Bank") for the purpose of redeeming Class A or Class C
shares from his or her account by check. The Bank will provide each Class A or
Class C shareholder, upon request, with forms of checks drawn on the Bank. Only
shareholders having accounts in which no share certificates have been issued
will be permitted to redeem shares by check. Checks may be made payable in any
amount not less than $500. Shareholders wishing to avail themselves of this
check-writing privilege should so request on their Account Application, must
execute signature cards (for additional information, see the Account
Application) with the signature guaranteed in the manner set forth below under
the caption "Signature Guarantee," and must return any Class A or Class C share
certificates issued to them. Additional documentation will be required from
corporations, partnerships, fiduciaries or other such institutional investors.
All checks must be signed by the shareholder(s) of record exactly as the account
is registered before the Bank will honor them. The shareholders of joint
accounts may authorize each shareholder to redeem by check. The check may not
draw on monthly dividends which have been declared but not distributed.
SHAREHOLDERS WHO PURCHASE CLASS A AND CLASS C SHARES BY CHECK (INCLUDING
CERTIFIED CHECKS OR CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY
AFTER THEY HAVE BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS
PRESENTED TO THE BANK FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL
SHARES WILL BE REDEEMED TO COVER THE AMOUNT OF THE CHECK AND ANY APPLICABLE CDSC
AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE
CHECK PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE
WITHHELD, IS GREATER THAN THE VALUE OF THE CLASS A OR CLASS C SHARES HELD IN THE
SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID, AND THE SHAREHOLDER
MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF CHECKS DUE TO FLUCTUATION
IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL OR MOST OF
THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND ACCOUNT
BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE EXACT TOTAL
VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS. There is presently no charge
to the shareholder for the maintenance of this special account or for the
clearance of any checks, but each Fund and the Bank reserve the right to impose
such charges or to modify or terminate the redemption-by-check privilege at any
time.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, each Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
GENERAL: Shareholders of each Fund who have redeemed their shares have a
one-time right to reinvest the redemption proceeds in the same class of shares
of any Fund or any other of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares, or 12 months of the initial purchase in the case of
certain Class A share purchases, a CDSC will be imposed upon redemption. Such
purchases under the Reinstatement Privilege are subject to all limitations in
the Statement of Additional Information regarding this privilege.
Subject to the Trust's compliance with applicable regulations, each Fund
reserves the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution-in-kind, the
shareholder could incur brokerage or transaction charges when converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the shareholder) if at any time the total
investment in such account drops below $500 because of redemptions, except in
the case of accounts established for automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which the minimum investment requirement is either $250 or $50. See
"Purchases" above. Shareholders will be notified that the value of their account
is less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed. No CDSC will be
imposed with respect to such involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the
case of purchases of $1 million or more of Class A shares) or six years (in the
case of purchases of Class B shares). Purchase of Class A shares made during a
calendar month, regardless of when during the month the investment occurred,
will age one month on the last day of the month and each subsequent month. Class
B shares purchased on or after January 1, 1993 will be aggregated on a calendar
month basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of a Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year. At the time of a redemption, the amount by which the
value of a shareholder's account for a particular class represented by Direct
Purchases exceeds the sum of the six calendar year aggregations (12 months in
the case of purchases of $1 million or more of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC and (ii) the amount of redemption equal
to the then-current value of Reinvested Shares is not subject to the CDSC, but
(iii) any amount of the redemption in excess of the aggregate of the
then-current value of Reinvested Shares and the Free Amount is subject to a
CDSC. The CDSC will first be applied against the amount of Direct Purchases
which will result in any such charge being imposed at the lowest possible rate.
The CDSC to be imposed upon redemptions will be calculated as set forth in
"Purchases" above.
The applicability of the CDSC will be unaffected by exchanges or transfers of
registration.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares for each applicable Fund pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule"), after having concluded that there is
a reasonable likelihood that the plans would benefit such Fund and its
shareholders.
CLASS A DISTRIBUTION PLAN. Each Fund's Class A Distribution Plan provides that
the Fund will pay FSI a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
A shares of that Fund annually in order that FSI may pay expenses on behalf of
such Fund related to the distribution and servicing of Class A shares. Such
payments have already commenced with respect to the Alabama, Georgia, Maryland,
Massachusetts, New York, North Carolina, South Carolina, Tennessee, Virginia and
West Virginia Funds and will commence, in the case of the Arkansas, California,
Florida, Louisiana, Mississippi, Pennsylvania, Texas and Washington Funds on
such date or dates as may be determined from time to time by the Trustees of the
Trust in their discretion. The expenses to be paid by FSI on behalf of a Fund
include a service fee to securities dealers which enter into a sales agreement
with FSI of up to 0.25% on that Fund's average daily net assets attributable to
Class A shares that are owned by investors for whom such securities dealers is
the holder or dealer of record. This fee is intended to be partial consideration
for all personal services and/or account maintenance services rendered by the
dealer with respect to Class A shares. FSI may from time to time reduce the
amount of the service fee paid for shares sold prior to a certain date. FSI, as
the Trust's distributor, will also retain a distribution fee of 0.10% of a
Fund's average daily net assets attributable to Class A shares as partial
consideration for services performed and expenses incurred in the performance of
FSI's obligations under its distribution agreement with the Trust. FSI has
voluntarily waived its right to receive such 0.10% fee under the Class A
Distribution Plan with respect to the Alabama, Georgia and New York Funds; this
waiver may be discontinued by FSI at any time without prior notice. In addition,
to the extent that the aggregate of the foregoing fees does not exceed 0.35% per
annum of the average daily net assets of a Fund attributable to Class A shares,
each Fund is permitted to pay other distribution-related expenses, including
commissions to dealers and payments to wholesalers employed by FSI for sales at
or above a certain dollar level. Service fees may be reduced for a securities
dealer that is the holder or dealer of record for an investor who owns shares of
a Fund having an aggregate net asset value at or above a certain dollar level.
Dealers may from time to time be required to meet certain criteria in order to
receive service fees. FSI or its affiliates are entitled to retain all service
fees payable under the Class A Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by FSI or its affiliates for shareholder accounts. Certain banks and
other financial institutions that have selling agreements with FSI will receive
service fees that are the same as service fees to dealers. Fees payable under
the Class A Distribution Plan are charged to, and therefore reduce income
allocated to, Class A shares.
CLASS B DISTRIBUTION PLAN. Each Fund's Class B Distribution Plan provides that
the Fund will pay FSI a daily distribution fee equal on an annual basis to 0.75%
of that Fund's average daily net assets attributable to Class B shares and will
pay FSI a service fee of up to 0.25% per annum of that Fund's average daily net
assets attributable to Class B shares (which FSI will in turn pay to securities
dealers which enter into a sales agreement with FSI at a rate of up to 0.25% per
annum of that Fund's average daily net assets attributable to Class B shares
owned by investors for whom that securities dealer is the holder or dealer of
record). This service fee is intended to be additional consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to Class B shares. FSI will pay commissions to dealers of 3.75% of
the purchase price of Class B shares purchased through dealers. FSI will also
advance to dealers the first year service fee at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, FSI may retain the
service fee paid by a Fund with respect to such shares for the first year after
purchase. Therefore, the total amount paid to a dealer upon the sale of shares
is 4.00% of the purchase price of the shares (commission rate of 3.75% plus
service fee equal to 0.25% of the purchase price). Dealers will become eligible
for additional service fees with respect to such shares commencing in the
thirteenth month following the purchase. Except in the case of the 0.25% per
annum first year service fee, service fees under a Fund's Class B Distribution
Plan will become payable for the Arkansas, California, Florida, Louisiana,
Mississippi, Pennsylvania, Texas and Washington Funds on such date or dates as
the Trustees of the Trust may determine. Dealers may from time to time be
required to meet certain criteria in order to receive service fees. FSI or its
affiliates are entitled to retain all service fees payable under the Class B
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by FSI or its affiliates
for shareholder accounts. The purpose of the distribution payments to FSI under
the Class B Distribution Plan is to compensate FSI for its distribution services
to each Fund. Since FSI's compensation is not directly tied to its expenses, the
amount of compensation received by FSI during any year may be more or less than
its actual expenses. For this reason, this type of distribution fee arrangement
is characterized by the staff of the SEC as being of the "compensation" variety.
However, the Funds are not liable for any expenses incurred by FSI in excess of
the amount of compensation it receives. The expenses incurred by FSI, including
commissions to dealers, are likely to be greater than the distribution fees for
the next several years, but thereafter such expenses may be less than the amount
of the distribution fees. Certain banks and other financial institutions that
have selling agreements with FSI will receive agency transaction and service
fees that are the same as commissions and service fees to dealers. Fees payable
under the Class B Distribution Plan are charged to, and therefore reduce, income
allocated to Class B shares. The Class B Distribution Plan also provides that
FSI will receive all CDSCs attributable to Class B shares (see "Redemptions and
Repurchases" above), which do not reduce the distribution and service fees.
CLASS C DISTRIBUTION PLAN. Each Fund's Class C Distribution Plan (applicable
to California, North Carolina and Virginia Funds only) provides that the Fund
will pay FSI a distribution fee of up to 0.75% per annum of the Fund's average
daily net assets attributable to Class C shares and will pay FSI a service fee
of up to 0.25% per annum of the Fund's average daily net assets attributable to
Class C shares (which FSI in turn pays to securities dealers which enter into a
sales agreement with FSI at a rate of up to 0.25% per annum of the Fund's daily
net assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record). The distribution/service
fees attributable to Class C shares are designed to permit an investor to
purchase such shares through a broker-dealer without the assessment of an
initial sales charge or a CDSC while allowing FSI to compensate broker-dealers
in connection with the sale of such shares. The service fee is intended to be
additional consideration for all personal services and/or account maintenance
services rendered with respect to Class C shares. FSI or its affiliates are
entitled to retain all service fees payable under the Class C Distribution Plan
with respect to accounts for which there is no dealer of record as partial
consideration for personal services and/or account maintenance services
performed by FSI or its affiliates for shareholder accounts. The purpose of the
distribution payments to FSI under the Class C Distribution Plan is to
compensate FSI for its distribution services to the Fund. Distribution payments
under the Plan will be used by FSI to pay securities dealers a distribution fee
in an amount equal on an annual basis to 0.75% of the Fund's average daily net
assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record. (Therefore, the total
amount of distribution/service fees paid to a dealer on an annual basis is 1.00%
of the Fund's average daily net assets attributable to Class C shares owned by
investors for whom the securities dealer is the holder or dealer of record.) FSI
also pays expenses of printing prospectuses and reports used for sales purposes,
expenses with respect to the preparation and printing of sales literature and
other distribution related expenses, including, without limitation, the
compensation of personnel and all costs of travel, office expense and equipment.
Since FSl's compensation is not directly tied to its expenses, the amount of
compensation received by FSI during any year may be more or less than its actual
expenses. For this reason, this type of distribution fee arrangement is
characterized by the staff of the SEC as being of the "compensation" variety.
However, the Funds are not liable for any expenses incurred by FSI in excess of
the amount of compensation it receives. Certain banks and other financial
institutions that have agency agreements with FSI will receive agency
transaction and service fees that are the same as distribution fees and service
fees to dealers. Fees payable under the Class C Distribution Plan are charged
to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
Each Fund intends to declare daily and pay to its shareholders substantially all
of its net investment income as dividends on a monthly basis. Dividends
generally are distributed on the first business day of the following month. In
addition, a Fund may make one or more distributions during the calendar year to
its shareholders from any long-term capital gains. Each Fund also may make one
or more distributions during the calendar year to its shareholders from
short-term capital gains. Shareholders may elect to receive dividends and
capital gain distributions in either cash or additional shares of the same class
with respect to which a distribution is made (see "Tax Status" and "Shareholder
Services -- Distribution Options" below). Distributions paid by each Fund with
respect to Class A shares will generally be greater than those paid with respect
to Class B and Class C shares because expenses attributable to Class B and Class
C shares will generally be higher.
TAX STATUS
FEDERAL INCOME TAXES -- Each Fund is treated as a separate entity for federal
income tax purposes. In order to minimize the taxes that the Funds would
otherwise be required to pay, each Fund intends to qualify each year as a
separate "regulated investment company" under Subchapter M of the Code, and to
make distributions to its shareholders in accordance with the timing
requirements imposed by the Code, it is expected that the Fund will not be
required to pay any federal income or excise taxes. Each Fund also expects that
the dividends it pays to its shareholders from interest on Municipal Obligations
will be exempt from federal income tax, because each Fund intends to satisfy
certain requirements of the Code. Distributions of income from capital gains,
from investments in taxable securities and from certain other transactions
including transactions involving Municipal Obligations purchased at a market
discount will be taxable to shareholders, whether distributed in cash or in
additional shares; however, it is expected that such amounts would not be
substantial in relation to the tax-exempt interest received by each Fund.
Shareholders may not have to pay state or local taxes on dividends derived from
interest on U.S. government obligations, although such taxes generally would be
due with respect to capital gains realized on the disposition of such
obligations. Investors should consult with their tax advisers in this regard.
A statement setting forth the federal income tax status of all distributions for
each calendar year, including the portion (if any) taxable as ordinary income;
the portion taxable as long term capital gains; the portion, if any,
representing a return of capital (which is free of current taxes but results in
a basis reduction); the portion exempt from federal income taxes as
"exempt-interest dividends"; the portion, if any, that is a tax preference item
under the federal alternative minimum tax; and the amount, if any, of federal
income tax withheld will be sent to each shareholder of each Fund promptly after
the end of such year.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
a Fund will not be deductible for federal income tax purposes. Exempt- interest
dividends are taken into account in calculating the amount of social security
and railroad retirement benefits that may be subject to federal income tax.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by certain private activity bonds
should consult their advisers before purchasing shares in a Fund.
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest and makes interest on certain
tax-exempt bonds and distributions by a Fund of such interest a tax preference
item for purposes of the individual and corporate alternative minimum tax. In
addition, all exempt-interest dividends may affect a corporate shareholder's
alternative minimum tax liability.
Each Fund intends to withhold U.S. federal income tax at the rate of 30% on
taxable dividends and any other payments that are subject to such withholding
and are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
Each Fund is also required in certain circumstances to apply backup withholding
of 31% of taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. However, backup withholding will not
be applied to payments which have been subject to 30% withholding. Prospective
investors should read the Account Application for information regarding backup
withholding of federal income tax and should consult their own tax advisers as
to the tax consequences of an investment in a Fund.
STATE INCOME TAXES
The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor any Fund is liable for any income or franchise tax in The
Commonwealth of Massachusetts as long as it qualifies as a regulated investment
company under the Code. Set forth below are brief descriptions of the personal
income tax status of an investment in the Funds under tax laws currently in
effect in the state for which the Fund is named. A statement setting forth the
state income tax status of each Fund's distributions made during each calendar
year will be sent to shareholders annually.
ALABAMA TAXES -- The Alabama Department of Revenue has advised the Trust that
under existing Alabama law as long as the Alabama Fund qualifies as a separate
"regulated investment company" under the Code, and provided the Fund is invested
in obligations the interest on which would be exempt from Alabama personal
income taxes if held directly by an individual shareholder (such as obligations
of Alabama or its political subdivisions, of the United States or of certain
territories or possessions of the United States), dividends received from the
Alabama Fund that represent interest received by the Alabama Fund on such
obligations will be exempt from Alabama personal income taxes. To the extent
that distributions by the Alabama Fund are derived from long-term or short-term
capital gains on such obligations, or from dividends or capital gains on other
types of obligations, such distributions will not be exempt from Alabama
personal income tax.
Capital gains or losses realized from a redemption, sale or exchange of shares
of the Alabama Fund by an Alabama resident will be taken into account for
Alabama personal income tax purposes.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the Alabama Fund to purchase or carry shares of the Alabama Fund will not be
deductible for Alabama income tax purposes.
ARKANSAS TAXES -- On December 13, 1991, the Arkansas Department of Finance and
Administration issued a letter ruling to the Arkansas Fund providing that, under
the current terms of the Arkansas Fund's Prospectus, income distributions to
Arkansas Fund shareholders, to the extent such distributions represent interest
on obligations of the State of Arkansas or obligations of the United States or
its possessions, will be exempt from Arkansas income tax.
Capital gains or losses realized from transactions in the portfolio securities
of the Arkansas Fund and distributed to shareholders and the capital gains and
losses realized by shareholders from redemptions, sales or exchanges of shares
of the Arkansas Fund will be taken into account for Arkansas income tax
purposes.
CALIFORNIA TAXES: The California Fund believes that under existing California
law, as long as at the end of each quarter of the California Fund's taxable year
the California Fund continues to qualify for the special federal income tax
treatment afforded regulated investment companies and at least 50% of the value
of the California Fund's assets consists of obligations that, if held by an
individual, would pay interest exempt from California taxation, shareholders of
the California Fund will be able to exclude from income, for California personal
income tax purposes, "California exempt-interest dividends" received from the
California Fund during that taxable year. A "California exempt-interest
dividend" is any dividend or portion thereof of the California Fund not
exceeding the interest received by the California Fund during the taxable year
on obligations that, if held by an individual, would pay interest exempt from
California taxation (less certain direct and allocated expenses which include
amortization of acquisition premium) and so designated by written notice to
shareholders within 60 days after the close of that taxable year.
Distributions, other than "California exempt-interest dividends," by the
California Fund to California residents will be subject to California personal
income taxation. Gains realized by California residents from a redemption or
sale of shares of the California Fund will also be subject to California
personal income taxation. In general, California nonresidents, other than
certain dealers, will not be subject to California personal income taxation on
distributions by the California Fund or on gains from the redemption or sale of
shares of the California Fund, unless those shares have acquired a California
"business situs." (Such California nonresidents will, however, likely be subject
to other state or local income taxes on such distributions or gains, depending
on their residence.) Short-term capital losses realized by shareholders from a
redemption of shares of the California Fund within six months from the date of
their purchase will not be allowed for California personal income tax purposes
to the extent of any tax-exempt dividends received with respect to such shares
during such period. No deduction will be allowed for California personal income
tax purposes for interest on indebtedness incurred or continued to purchase or
carry shares of the California Fund for any taxable year of a shareholder during
which the California Fund distributes "California exempt-interest dividends."
A statement setting forth the amount of "California exempt-interest dividends"
distributed during each calendar year will be sent to shareholders annually.
FLORIDA TAXES -- Florida does not currently impose an income tax on individuals.
Thus, individual shareholders of the Florida Fund will not be subject to any
Florida state income tax on distributions received from the Florida Fund.
However, certain distributions will be taxable to corporate shareholders which
are subject to Florida corporate income tax.
Florida currently imposes an "intangibles tax" at the annual rate of 0.20% on
certain securities and other intangible assets owned by Florida residents.
Certain types of tax exempt securities of Florida issuers, U.S. Government
securities and tax exempt securities issued by certain U.S. territories and
possessions are exempt from this intangibles tax. Shares of the Florida Fund
will also be exempt from the Florida intangibles tax if the portfolio consists
exclusively of securities exempt from the intangibles tax on December 31 of the
year. If the portfolio consists of any assets on December 31 which are not so
exempt however, only the portion of the shares of the Florida Fund which relate
to securities issued by the United States and its possessions and territories
will be exempt from the Florida intangibles tax, and the remaining portion of
such shares will be fully subject to the intangibles tax, even if they partly
relate to Florida tax exempt securities.
GEORGIA TAXES -- Under existing laws, shareholders will not be subject to
Georgia income tax on distributions with respect to shares of the Georgia Fund
to the extent such distributions represent "exempt-interest dividends" for
federal income tax purposes that are attributable to interest-bearing
obligations issued by or on behalf of the State of Georgia or its political
subdivisions, or issued by territories or possessions of the United States (to
the extent federal law exempts interest on obligations of such territories or
possessions from state income taxation) which are held by the Georgia Fund.
Distributions, if any, derived from capital gain or other sources generally will
be taxable to shareholders of the Georgia Fund for Georgia income tax purposes.
Obligations of the State of Georgia and its political subdivisions and public
institutions are exempt from the Georgia intangible personal property tax.
Obligations issued by territories or possessions of the United States (to the
extent federal law exempts obligations of such territories or possessions from
state property taxation) are exempt by federal statute from taxes such as the
Georgia intangible personal property tax. It is likely, however, that the
Georgia intangible personal property tax applies at the rate of $.10 per $1,000
in value of shares of the Georgia Fund held by shareholders who are subject to
such tax.
LOUISIANA TAXES -- The Louisiana Fund is not subject to Louisiana income tax
except to the extent that obligations held by the Louisiana Fund, not including
tax-exempt obligations of the State of Louisiana, or its political or
governmental subdivisions, its governmental agencies or instrumentalities,
acquire a business situs within Louisiana.
Based upon a private ruling obtained from the Louisiana Department of Revenue
and Taxation (the "Department"), and subject to the current policies of the
Department, shareholders of the Louisiana Fund who are individuals and residents
of the State of Louisiana and who are otherwise subject to Louisiana income tax
will not be subject to Louisiana income tax on Louisiana Fund dividends to the
extent that such dividends are attributable to interest on tax-exempt
obligations of the State of Louisiana or its political or governmental
subdivisions, its governmental agencies or instrumentalities. To the extent that
distributions by the Louisiana Fund are attributable to sources other than those
described in the preceding sentence, such distributions, including but not
limited to long-term or short-term capital gains, will not be exempt from
Louisiana income tax.
Non-resident individuals maintaining their legal domicile other than in the
State of Louisiana will not be subject to Louisiana income tax on their
Louisiana Fund dividends.
To the extent a shareholder in the Louisiana Fund is a corporation otherwise
subject to the Louisiana corporation franchise tax, its investment in and
distributions from the Louisiana Fund will not be exempt but will be included in
its taxable capital in determining its Louisiana corporation franchise tax
liability.
The Louisiana Fund will notify its shareholders within 60 days after the close
of the year as to the interest derived from Louisiana obligations and exempt
from Louisiana income tax.
The Louisiana Fund's property will not be subject to Louisiana ad valorem taxes.
MARYLAND TAXES -- Holders of the Maryland Fund who are individuals,
corporations, estates or trusts and who are subject to Maryland state and local
income tax will not be subject to tax in Maryland on Maryland Fund dividends to
the extent such dividends (A) qualify as exempt-interest dividends of a
regulated investment company under Section 852(b)(5) of the Code which are
attributable to (i) interest on tax-exempt obligations of the State of Maryland
or its political subdivisions or authorities or (ii) interest on obligations of
the United States or an authority, commission, instrumentality, possession or
territory of the United States, or (B) are attributable to gain realized by the
Maryland Fund from the sale or exchange of bonds issued by Maryland or a
political subdivision of Maryland or of the United States or an authority,
commission or instrumentality of the United States.
To the extent that distributions of the Maryland Fund are attributable to
sources other than those described above, such as (i) interest on obligations
issued by states other than Maryland or (ii) income from repurchase contracts,
such distributions will not be exempt from Maryland state and local income
taxes. In addition, gain realized by a shareholder upon a redemption or exchange
of Maryland Fund shares will be subject to Maryland taxation.
In the event the Maryland Fund fails to qualify as a "regulated investment
company," the Maryland Fund would be subject to corporate Maryland income tax
and distributions would be taxable as ordinary income to the shareholders.
Maryland presently includes in taxable net income items of tax preferences as
defined in the Code. Interest paid on certain private activity bonds constitutes
a tax preference. Accordingly, subject to a threshold amount, 50% of any
distributions on the Maryland Fund attributable to such private activity bonds
will not be exempt from Maryland state and local income taxes.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the Maryland Fund to purchase or carry shares of the Maryland Fund will not be
deductible for Maryland state and local income tax purposes to the extent such
interest is allocable to exempt-interest dividends.
MASSACHUSETTS TAXES -- Under existing Massachusetts law, as long as the
Massachusetts Fund qualifies as a separate "regulated investment company" under
the Code, (i) the Massachusetts Fund will not be liable for any income or
corporate excise tax in The Commonwealth of Massachusetts and (ii) shareholders
of the Massachusetts Fund who are subject to Massachusetts personal income
taxation will not be required to include in their Massachusetts gross income
that portion of their "exempt-interest dividends" (as defined in Section
852(b)(5) of the Code) from the Massachusetts Fund which the Massachusetts Fund
clearly identifies as directly attributable to interest received by the
Massachusetts Fund on obligations issued by The Commonwealth of Massachusetts,
its counties and municipalities, authorities, political subdivisions or
instrumentalities or on obligations of the United States or its agencies or
possessions that are exempt from state taxation.
Any capital gains distributed by the Massachusetts Fund (except for cases in
which capital gains are specifically exempted from income taxation under the
legislation authorizing issuance of the obligations the sale of which produced
such capital gains), or gains realized by the shareholder from a redemption or
sale of shares of the Massachusetts Fund, will be subject to Massachusetts
personal income taxation.
MISSISSIPPI TAXES -- Interest received upon the obligations of the State of
Mississippi or political subdivisions thereof are exempt from income tax in the
State of Mississippi. A recently adopted Mississippi Income Tax Regulation
provides a pass-through of the tax-exempt character of interest received by a
regulated investment company, such as the Mississippi Fund, upon distribution to
its shareholders. Under the new Regulation, a taxpayer's pro rata portion of
interest dividends distributed by the Mississippi Fund is exempt from
Mississippi income tax to the extent that such pro rata portion represents
interest received by the Fund from governmental securities which would be exempt
for Mississippi income tax purposes if such governmental securities were
directly held by the taxpayer.
NEW YORK TAXES -- Under existing New York laws, shareholders will not be subject
to New York State nor New York City personal income taxes on New York Fund
dividends to the extent that such dividends qualify as "exempt-interest
dividends" under the Code and represent interest income attributable to
obligations of the State of New York and its political subdivisions (as well as
certain other obligations the interest on which is exempt from New York State
and New York City personal income taxes, such as, for example, certain
obligations of The Commonwealth of Puerto Rico). To the extent that New York
Fund distributions are derived from other income, including long-term or
short-term capital gains, such distributions will not be exempt from New York
State or New York City personal income tax.
Dividends on shares of the New York Fund are not excluded from net income in
determining New York State or New York City franchise taxes on corporations or
financial institutions.
Capital gains or losses realized by a shareholder from a redemption, sale or
exchange of shares of the New York Fund will be taken into account for New York
State personal income tax purposes, in the case of a New York State resident,
and for New York City personal income tax purposes, in the case of a resident of
New York City.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the New York Fund to purchase or carry shares of the New York Fund will not be
deductible for New York State or New York City personal income tax purposes.
NORTH CAROLINA TAXES -- The North Carolina Department of Revenue has advised the
Trust that under existing North Carolina law, as long as the North Carolina Fund
qualifies as a separate "regulated investment company" under the Code and 50% or
more of the value of the total assets of the North Carolina Fund consists of
obligations whose interest is exempt from federal income tax, dividends received
from the North Carolina Fund that represent either (i) interest exempt from
federal income tax and received by the North Carolina Fund on obligations of
North Carolina or its political subdivisions; nonprofit educational institutions
organized or chartered under the laws of North Carolina; or Guam, Puerto Rico,
or the U.S. Virgin Islands including the governments thereof and their agencies,
instrumentalities and authorities, or (ii) interest received by the North
Carolina Fund on direct obligations of the United States will be exempt from
North Carolina personal income taxes. In the event the North Carolina Fund fails
to qualify as a separate "regulated investment company" or does not satisfy the
50% test, the foregoing exemption may be unavailable or substantially limited.
Any capital gains distributed by the North Carolina Fund (except for capital
gains attributable to the sale by the North Carolina Fund of an obligation the
profit from which is exempt by a North Carolina statute) or gains realized by
the shareholder from a redemption or sale of shares of the North Carolina Fund
will be subject to North Carolina personal income taxes.
If certain substantive (as to portfolio composition) and reporting requirements
are met, shares of the North Carolina Fund will be entirely exempt from the
North Carolina intangibles tax. Otherwise, the shares will be partially exempt.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the North Carolina Fund to purchase or carry shares of the North Carolina Fund
generally will not be deductible for North Carolina income tax purposes.
PENNSYLVANIA TAXES -- Individual shareholders who are Pennsylvania residents
subject to the Pennsylvania personal income tax will not be subject to
Pennsylvania personal income tax on distributions of income and gains made by
the Fund which are attributable to obligations issued by the Commonwealth of
Pennsylvania and its political subdivisions, agencies and instrumentalities,
certain qualifying obligations of United States territories and possessions or
United States Government obligations, the interest and gains from which are
statutorily free from state taxation in the Commonwealth of Pennsylvania
("exempt obligations"). Capital gain distributions by the Fund will be subject
to Pennsylvania personal income tax.
Distributions attributable to most other sources will not be exempt from
Pennsylvania personal income tax.
Corporate shareholders who are subject to the Pennsylvania corporate net income
tax will not be subject to corporate net income tax on distributions of interest
made by the Pennsylvania Fund, provided such distributions are attributable to
obligations issued by the Commonwealth of Pennsylvania and its political
subdivisions, agencies and instrumentalities, and certain qualifying territories
and possessions of the United States, and further provided such distributions
are not included in such shareholder's Federal taxable income determined before
net operating loss carryovers and special deductions.
Shares of the Pennsylvania Fund which are held by individual shareholders who
are Pennsylvania residents and subject to the Pennsylvania county personal
property tax will be exempt from such tax to the extent that the Fund's
portfolio consists of exempt obligations on the annual assessment date. Further,
shares of the Fund which are held by individual shareholders who are residents
of the City of Pittsburgh or the School District of Pittsburgh, or both, will be
exempt from the personal property tax imposed by each such jurisdiction to the
extent that the Fund's portfolio consists of exempt obligations on the annual
assessment date. Corporations are not subject to Pennsylvania personal property
taxes.
In the case of individual shareholders who are residents of the City of
Philadelphia, distributions of interest derived from exempt obligations will not
be taxable for purposes of the Philadelphia School District Investment Net
Income Tax.
SOUTH CAROLINA TAXES -- Under existing South Carolina law, as long as the South
Carolina Fund qualifies as a separate "regulated investment company" under the
Code, shareholders of the South Carolina Fund will not be required to include in
their South Carolina gross income distributions from the South Carolina Fund to
the extent such distributions qualify as "exempt-interest dividends" as defined
in the Code, which are directly attributable to interest received by the South
Carolina Fund on tax-exempt obligations issued by the State of South Carolina or
its political subdivisions or the United States. In the event the South Carolina
Fund fails to qualify as a separate "regulated investment company," the
foregoing exemption may be unavailable or substantially limited.
Any capital gains distributed by the South Carolina Fund, or gains realized by a
shareholder from a redemption or sale of shares of the South Carolina Fund, will
be subject to South Carolina income taxation.
As intangible personal property, the shares of the South Carolina Fund are
exempt from any and all ad valorem taxation in South Carolina.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the South Carolina Fund to purchase or carry shares of the South Carolina Fund
generally will not be deductible for South Carolina income tax purposes.
TENNESSEE TAXES -- Under existing Tennessee law, as long as the Tennessee Fund
qualifies as a separate "regulated investment company" under the Code, dividends
received from the Tennessee Fund will not be subject to the Tennessee individual
income tax, also known as the Hall Income Tax, to the extent that such dividends
represent income of the Tennessee Fund attributable to interest on (i) bonds or
securities of the United States government or any agency or instrumentality
thereof, (ii) bonds of the State of Tennessee or any county, municipality, or
political subdivision thereof, including any agency, board, authority, or
commission, or (iii) bonds of Puerto Rico, United States Virgin Islands, or
Guam. In addition, the administrative position of the Tennessee Department of
Revenue is that dividends received from the Tennessee Fund will not be subject
to the Tennessee individual income tax to the extent that such dividends
represent income of the Tennessee Fund attributable to capital gains from the
sale, exchange, redemption, payment at maturity, or other disposition of such
bonds or securities.
Other distributions from the Tennessee Fund, including dividends attributable to
obligations of issuers in states other than Tennessee, will not be exempt from
the Tennessee individual income tax.
TEXAS TAXES -- The State of Texas currently imposes no income tax. Therefore, no
portion of any dividend received by an individual shareholder of the Texas Fund
in respect of his shares is subject to income taxation by the State or by any
political subdivision of the State. Furthermore, generally the shares are not
taxable under any property tax levied in the State; however, this exemption
under certain circumstances may not apply to insurance companies, savings and
loan associations, or certain transportation businesses (the extent of taxation
of intangible personal property owned by such entities being governed by
specific statutes). The "inheritance tax" imposed by the State upon certain
transfers of property of a deceased resident individual shareholder may be
measured in part upon the value of the shares included in the estate of such
shareholder.
The Fund is not subject to the state corporate franchise tax. However, with
respect to any corporate shareholder of the Texas Fund (or any partnership
shareholder of the Texas Fund having corporate partners) which otherwise is
subject to the state corporate franchise tax, the shares of the Texas Fund held
by the shareholder will be taken into account in computing the "taxable capital"
of the shareholder allocated to the State, upon which such franchise tax may be
measured. In addition, such a corporate shareholder may be required to include
in its net taxable earned surplus, for purposes of the Texas franchise tax, all
or a portion of any gains on, or dividends which are includable in its gross
income for federal income tax purposes in respect of the shares. Certain
substantial amendments to the state corporate franchise tax recently have been
enacted. Because no authoritative judicial, legislative or administrative
interpretation of these amendments has issued, and there remain many unresolved
questions regarding their potential effect on corporate franchise taxpayers,
each corporation which is subject to the state franchise tax (and each
partnership having corporate partners which are subject to the state franchise
tax) and which is considering the purchase of shares of the Texas Fund should
consult its tax advisor regarding the effect of these amendments.
The foregoing is a general, abbreviated summary of certain of the provisions of
the Texas statutes and administrative interpretations presently in effect as
they directly govern the taxation of shareholders of the Texas Fund. The
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Trust transactions.
VIRGINIA TAXES -- Under existing Virginia law, as long as the Virginia Fund
qualifies as a separate "regulated investment company" under the Code, and 50%
or more of the value of the total assets of the Virginia Fund consists of
obligations whose interest is exempt from federal income tax, dividends received
from the Virginia Fund that represent either (i) interest exempt from federal
income tax and received by the Virginia Fund on obligations of Virginia or its
political subdivisions or Guam, Puerto Rico, or the U.S. Virgin Islands or (ii)
interest received by the Virginia Fund on direct obligations of the United
States will be exempt from Virginia personal income taxes. In the event the
Virginia Fund fails to qualify as a separate "regulated investment company" or
does not satisfy the 50% test, the foregoing exemption may be unavailable or
substantially limited.
An individual shareholder of the Virginia Fund who is a Virginia resident will
recognize capital gains for Virginia income tax purposes to the same extent that
he would for federal income tax purposes when the Virginia Fund makes a capital
gain distribution or when the shareholder redeems or sells shares.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the Virginia Fund to purchase or carry shares of the Virginia Fund generally
will not be deductible for Virginia income tax purposes.
WASHINGTON TAXES -- The State of Washington currently imposes no income tax.
Therefore, no portion of any dividend received by a shareholder of the
Washington Fund in respect of his shares is subject to income taxation by the
State of Washington or by any political subdivision of the State. Furthermore,
the shares are generally not taxable under any property tax levied in the State
of Washington. The State of Washington's inheritance tax imposed upon certain
transfers of property of a deceased resident individual shareholder may be
measured in part upon the value of the shares included in the estate of that
shareholder.
The State of Washington currently imposes an excise tax upon any person engaging
in business activity in Washington. This excise tax is measured by the gross
receipts of the taxpayer, but Washington law permits certain deductions.
Interest income paid on obligations of the State of Washington, its political
subdivisions, and its municipal corporations may be deducted for excise tax
purposes by any person. In addition, interest and dividend income from other
sources may generally be deducted by persons other than financial institutions
(i.e., banks, loan companies, securities or other financial businesses). Thus,
the dividends received by a shareholder (other than a financial institution) of
the Washington Fund will not be subject to Washington excise tax.
WEST VIRGINIA TAXES -- In 1993 the West Virginia Department of Tax and Revenue
issued Technical Assistance Advisory 93-002 which was declared to be of
precedential value. This Technical Assistance Advisory addresses liability for
West Virginia personal income tax on interest and dividend income received by
investors in regulated investment companies. Accordingly, under existing law, as
long as the West Virginia Fund qualifies as a separate "regulated investment
company" under the Code, that portion of exempt-interest dividends that
represents interest income received by the West Virginia Fund from obligations
of the United States and its possessions and interest or dividend income
received by the West Virginia Fund on obligations or securities of any
authority, commission or instrumentality of the United States or of the State of
West Virginia, which is exempt from West Virginia State income tax by federal or
West Virginia law, is exempt from West Virigina Personal Income Tax. This
exemption does not apply to any portion of interest income on obligations of any
state other than West Virginia, regardless of any exemption provided under
federal law. In the event the West Virginia Fund fails to qualify as a separate
"regulated investment company", the foregoing exemption may be unavailable or
substantially limited.
The Technical Assistance Advisory contains a more specific, although
nonexclusive, list of obligations and authorities which are exempt from
taxation. The Technical Assistance Advisory also confirms that interest on
indebtedness incurred (directly or indirectly) by a shareholder of the West
Virginia Fund to purchase or carry shares of the West Virginia Fund will not be
deductible for West Virginia income purposes.
NET ASSET VALUE
The net asset value per share of each class of each Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. In determining such net asset value, the portfolio
securities of each Fund are valued on the basis of valuations furnished by a
pricing service, since such valuations are believed to reflect the fair value of
such securities, as described in the Statement of Additional Information. A
share's net asset value is effective for orders received by the dealer prior to
its calculation and received by FSI prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Fund has two classes of shares entitled Class A and Class B Shares of
Beneficial Interest (without par value). The California Fund, the North Carolina
Fund and the Virginia Fund also have a third class of shares entitled Class C
Shares of Beneficial Interest (without par value). The Trust presently has 19
series of shares and has reserved the right to create and issue additional
series and classes of shares. The shares of each class of each Fund participate
equally in the earnings, dividends and assets attributable to that class of
shares of the particular Fund. Shareholders are entitled to one vote for each
share held. Shares of each Fund generally vote separately, for example to
approve investment advisory agreements, but shares of all Funds vote together,
including shares of other series of the Trust, to the extent required under the
1940 Act, in the election of Trustees and selection of accountants.
Additionally, each class of shares of a Fund will vote separately on any
material increases in the fees under its Distribution Plan or on any other
matter that affects solely its class of shares, but will otherwise vote together
with all other classes of shares of the Fund on all other matters. The Trust
does not intend to hold annual shareholder meetings. The Declaration of Trust
provides that a Trustee may be removed from office in certain instances (see
"Description of Shares, Voting Rights and Liabilities" in the Statement of
Additional Information).
Each share of a class of each Fund represents an equal proportionate interest in
that Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above in "Purchases -- Conversion of Class B Shares"). Shares are fully
paid and non-assessable. Should a Fund be liquidated, shareholders of each class
of that Fund are entitled to share pro rata in the net assets attributable to
that class available for distribution to shareholders. Shares will remain on
deposit with the Shareholder Servicing Agent and certificates will not be issued
except in connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Trust will provide yield, tax-equivalent yield, current
distribution rate and total rate of return quotations for each class of shares
of each Fund and may also quote fund rankings in the relevant fund category from
various sources, such as the Lipper Analytical Services, Inc. and Wiesenberger
Investment Companies Service. Yield and tax-equivalent yield quotations are
based on the annualized net investment income per share of each class of a Fund
over a 30-day period stated as a percent of the maximum public offering price of
shares of that class on the last day of that period. The yield calculation for
Class B shares assumes no CDSC is paid. The current distribution rate for each
class is generally based upon the total amount of dividends per share paid by
the Fund to shareholders of that class during the past 12 months and is computed
by dividing the amount of such dividends by the maximum public offering price of
that class at the end of such period. Current distribution rate calculations for
Class B shares assume no CDSC is paid. The current distribution rate differs
from the yield and tax-equivalent yield calculations because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income from option writing, short-term capital gains, and return
of invested capital, and is calculated over a different period of time. Total
rate of return quotations reflect the average annual percentage change over
stated periods in the value of an investment in a class of shares of a Fund made
at the maximum public offering price of the shares of that class with all
dividends reinvested and which, if quoted for periods of six years or less, will
give effect to the imposition of the CDSC assessed upon redemptions of Class B
shares. Such total rate of return quotations may be accompanied by quotations
which do not reflect the reduction in value of the initial investment due to the
sales charge or the deduction of the CDSC, and which will thus be higher. Each
Fund's yield, tax- equivalent yield and total rate of return quotations are
based on historical performance and are not intended to indicate future
performance. Yield and tax-equivalent yield reflect only net portfolio income
allocable to a class as of a stated period of time, and current distribution
rate reflects only the rate of distributions paid by a Fund over a stated period
of time, while total rate of return reflects all components of investment return
over a stated period of time. All performance quotations for a Fund may from
time to time be used in advertisements, shareholder reports or other
communications to shareholders. For a discussion of the manner in which the
Trust will calculate yield, tax-equivalent yield, current distribution rate and
total rate of return, see the Statement of Additional Information. In addition
to information provided in shareholder reports, the Trust may, in its
discretion, from time to time, make a list of all or a portion of a Fund's
holdings available to investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of the
Adviser and all the Trust's expenses (other than those assumed by MFS or FSI),
including: all fees paid under the Investment Advisory Agreements and
Distribution Plans; governmental fees; interest charges; taxes (if any);
membership dues in the Investment Company Institute allocable to the Trust; fees
and expenses of independent auditors and of legal counsel; expenses of
preparing, printing and mailing share certificates, periodic reports, notices
and proxy statements to shareholders and to governmental officers and
commissions; brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions; insurance premiums;
fees and expenses of State Street Bank and Trust Company, the Trust's Custodian,
for all services to the Trust, including safekeeping of funds and securities and
maintaining required books and accounts; fees and expenses of MFS Service
Center, Inc., the Shareholder Servicing Agent, and of any registrar or dividend
disbursing agent of the Trust; expenses of repurchasing and redeeming shares and
servicing shareholder accounts; expenses of calculating the net asset value of
the shares of each Fund; and expenses of shareholder meetings. Expenses relating
to the issuance, registration and qualification of shares of each Fund and the
preparation, printing and mailing of prospectuses for such purposes are borne by
the Trust except that its Distribution Agreement with FSI, as the Trust's
distributor, requires FSI to pay for prospectuses which are to be used for sales
to prospective investors. Expenses of the Trust which are not attributable to a
specific Fund are allocated among the Funds in a manner believed by management
of the Trust to be fair and equitable. The Adviser has agreed to pay for the
Louisiana, Mississippi, Pennsylvania, Texas and Washington Funds the foregoing
expenses (except for the fees paid under the Advisory Agreements and any
Distribution Plan) until the dates specified below, and to pay the expenses
after August 23, 1984 relating to the organization of the Trust, all subject to
reimbursement by such Funds and the Trust, as applicable. To accomplish such
reimbursement, the Adviser receives an expense reimbursement fee from each such
Fund in addition to the management fees, computed and paid monthly at the annual
rate of 0.40% of the average daily net assets of the Fund for its then-current
fiscal year, with a limitation that immediately after any such payment the
aggregate expenses of each such Fund, including the management fee but excluding
any Distribution Plan fees, will not exceed .95% of its average daily net
assets. MFS has voluntarily reduced its expense reimbursement fee to 0.00% for
an indefinite period beginning with the commencement of operations of each such
Fund. This fee reduction may be rescinded by the Adviser at any time without
notice to shareholders. The expense reimbursement and fee agreement terminates
for each such Fund on the earlier of either the date on which the payments made
thereunder by such Fund equal the prior payment of such reimbursable expenses by
the Adviser or December 31, 2001 (in the case of the Mississippi, Texas and
Washington Funds, and December 31, 2002, in the case of the Louisiana and
Pennsylvania Funds). Similar expense reimbursement and fee agreements were in
place but have been terminated with respect to the Alabama, Arkansas, Florida,
Georgia, Maryland, Massachusetts, New York, North Carolina, South Carolina,
Tennessee, Virginia and West Virginia Funds. In addition, MFS has voluntarily
reduced the management fee for an indefinite period for each of the Arkansas,
California, Florida, Louisiana, Mississippi, New York, Pennsylvania, Texas and
Washington Funds. See "Management of the Trust" above.
6. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Trust should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder of each Fund will
receive confirmation statements showing the transaction activity in his account.
Cancelled checks, if any will be sent to shareholders monthly. Each shareholder
will receive an annual statement of the federal income tax and the state
personal income tax status of reportable distributions made by the Fund during
the calendar year (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts ) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares
of that Fund. This option will be assigned if no other option is
specified.
-- Dividends (including short-term capital gains) in cash; long-term capital
gain distributions reinvested in additional shares of that Fund.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) of dividends and capital gain
distributions will be made in additional full and fractional shares of that Fund
at the net asset value in effect at the close of business on the last business
day of the month. Dividends and capital gain distributions in amounts less than
$10 will automatically be reinvested in additional shares of the Fund. Any
request to change a distribution option must be received by the Shareholder
Servicing Agent a reasonable time prior to the last business day of the month
for a dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Trust makes available the following programs designed to enable shareholders to
add to their investment in an account with the Trust or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Trust.
LETTER OF INTENT: If a shareholder (other than group purchases as described
in the Statement of Additional Information) anticipates purchasing $100,000 or
more of Class A shares of a Fund alone or in combination with Class B or Class C
Shares of the Fund or any of the classes of the other MFS Funds or MFS Fixed
Fund (a bank collective investment fund) within a 13-month period (or 36-month
period for purchases of $1 million or more), the shareholder may obtain such
shares at the same reduced sales charge as though the total quantity were
invested in one lump sum, subject to escrow agreements and the appointment of an
attorney for redemptions from the escrow amount if the intended purchases are
not completed, by completing the Letter of Intent section of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of all classes of shares of
that shareholder in the MFS Funds reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of a Fund may
be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by a Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder (except a $3 Million Shareholder)
may direct the Shareholder Servicing Agent to send him (or anyone he designates)
periodic payments, as designated on the Account Application and based upon the
value of his account. Each payment under a Systematic Withdrawal Plan (a "SWP")
must be at least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B shares in any year pursuant to a SWP will not be subject
to a CDSC and generally are limited to 10% of the value of the account at the
time of the establishment of the SWP. The CDSC will not be waived in the case of
SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds, and in the case of Class C shares, for shares of MFS Money
Market Fund, under the Automatic Exchange Plan, a dollar cost averaging program.
The Automatic Exchange Plan provides for automatic monthly or quarterly
transfers of funds from the shareholder's account in an MFS Fund for investment
in the same class of other MFS Funds selected by the shareholder provided such
shares are available for sale. Under the Automatic Exchange Plan, transfers of
at least $50 each may be made to up to four different funds. A shareholder
should consider the objectives and policies of a fund and review its prospectus
before electing to transfer money into such fund through the Automatic Exchange
Plan. No transaction fee is imposed in connection with transfer transactions
under the Automatic Exchange Plan. However, transfers from MFS Money Market
Fund, MFS Government Money Market Fund or Class A shares of MFS Cash Reserve
Fund will be subject to any applicable sales charge. For federal and (generally)
state income tax purposes, a transfer is treated as a sale of the shares
transferred and, therefore, could result in a capital gain or loss to the
shareholder making the transfer. See the Statement of Additional Information for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital gain
and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares and because of
assessement of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Funds may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax advisers before establishing any of the tax-deferred retirement plans
described above.
--------------
The Trust's Statement of Additional Information, dated June 1, 1994 contains
more detailed information about the Trust and the Funds, including information
related to (i) the Trust's investment policies and restrictions; (ii) its
Trustees, officers and investment adviser; (iii) portfolio transactions; (iv)
the method used to calculate performance quotations of each of the Funds; (v)
the Distribution Plans; (vi) various services and privileges provided by the
Trust for the benefit of the shareholders of each of the Funds; (vii)
determination of net asset value of shares of each of the Funds; and (viii)
certain voting rights of shareholders of each of the Funds.
<PAGE>
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLES
(RATES FOR 1994 UNDER FEDERAL AND STATE INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent
to tax-exempt bond yields, for the ranges indicated, under federal and,
respectively, Alabama, Arkansas, California, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Virginia and West Virginia personal income tax laws that
apply to 1994. The States of Florida, Texas and Washington do not currently
impose an income tax on individuals. Such yields will differ under the laws
applicable to subsequent years. Separate calculations, showing the applicable
taxable income brackets, are provided for investors who file joint returns and
for those investors who file individual returns. In each table, the effective
marginal income tax rate will be increased if personal exemptions are phased out
(for the phase out period only) and if a portion of itemized deductions is
disallowed. This increase in the marginal rates, if applicable, will cause a
corresponding increase in the equivalent taxable yields.
ALABAMA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 19.10% 3.71% 4.94% 6.18% 7.42% 8.65% 9.89% 0.15 0.048240
$ 0 - 38,000 19.07 3.71 4.94 6.18 7.41 8.65 9.89 0.15 0.047894
$ 22,751 - 55,100 $ 38,001 - 91,850 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000
$ 55,101 - 115,000 $ 91,851 - 140,000 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000
$115,001 - 250,000 $140,001 - 250,000 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000
$250,000 & over $250,000 & over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000
<FN>
<F1>Net amount subject to Federal and Alabama personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined Federal and Alabama rate assumes itemization of state tax deduction.
<F3>Alabama tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
ARKANSAS
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 22,750 18.53% 3.68% 4.91% 6.14% 7.36% 8.59% 9.82% 0.15 0.041540
$ 0 - 38,000 19.45 3.72 4.97 6.21 7.45 8.69 9.93 0.15 0.052369
$ 22,751- 55,100 32.99 4.48 5.97 7.46 8.95 10.45 11.94 0.28 0.069304
$ 38,001 - 91,850 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000
$ 55,101-115,000 $ 91,851 - 140,000 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000
$115,001-250,000 $140,001 - 250,000 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000
$250,000 & over $250,000 & over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000
<FN>
<F1>Net amount subject to Federal and Arkansas personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined Federal and Arkansas rate assumes itemization of state tax deduction.
<F3>Arkansas tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
<PAGE>
CALIFORNIA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 17.80% 3.65% 4.87% 6.08% 7.30% 8.52% 9.73% 0.15 0.032883
$ 0 - 38,000 17.34 3.63 4.84 6.05 7.26 8.47 9.68 0.15 0.027531
$ 22,751 - 55,100 34.40 4.57 6.10 7.62 9.15 10.67 12.20 0.28 0.088923
$ 38,001 - 91,850 34.01 4.55 6.06 7.58 9.09 10.61 12.12 0.28 0.083506
$ 55,101 - 115,000 37.49 4.80 6.40 8.00 9.60 11.20 12.80 0.31 0.094029
$ 91,851 - 140,000 37.42 4.79 6.39 7.99 9.59 11.19 12.78 0.31 0.093000
$115,001 - 250,000 42.58 5.22 6.97 8.71 10.45 12.19 13.93 0.36 0.102786
$140,001 - 250,000 42.11 5.18 6.91 8.64 10.36 12.09 13.82 0.36 0.095394
$250,001 - 424,760 45.64 5.52 7.36 9.20 11.04 12.88 14.72 0.396 0.100000
$250,000 & over $424,760 & over 46.24 5.58 7.44 9.30 11.16 13.02 14.88 0.396 0.110000
<FN>
<F1>Net amount subject to Federal and California personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined Federal and California rate assumes itemization of state tax deduction.
<F3>Federal and California tax rates and brackets are based on 1993 information, since at this time 1994
information is not available.
</FN>
</TABLE>
FLORIDA
1994 TAX YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- ------------------------------------ INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX --------------------------------------------------
1994 1994 BRACKET 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
- ---------------- ---------------- -------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 15.00% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 22,751 - 55,100 $ 38,001 - 91,850 28.00 4.17 5.56 6.94 8.33 9.72 11.11
$ 55,101 - 115,000 $ 91,851 - 140,000 31.00 4.35 5.80 7.25 8.70 10.14 11.59
$115,001 - 250,000 $140,001 - 250,000 36.00 4.69 6.25 7.81 9.38 10.94 12.50
$250,000 & over $250,000 & over 39.60 4.97 6.62 8.28 9.93 11.59 13.25
<FN>
<F1>Net amount subject to Federal personal income tax after deductions and exemptions.
</FN>
</TABLE>
<PAGE>
GEORGIA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 19.39% 3.72% 4.96% 6.20% 7.44% 8.68% 9.92% 0.15 0.051639
$ 0 - 38,000 19.52 3.73 4.97 6.21 7.46 8.70 9.94 0.15 0.053157
$ 22,751 - 55,100 $ 38,001 - 91,850 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000
$ 55,101 - 115,000 $ 91,851 - 140,000 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000
$115,001 - 250,000 $140,001 - 250,000 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000
$250,000 & over $250,000 & over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000
<FN>
<F1>Net amount subject to Federal and Georgia personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined Federal and Georgia rate assumes itemization of state tax deduction.
<F3>Georgia tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
LOUISIANA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 17.65% 3.64% 4.86% 6.07% 7.29% 8.50% 9.71% 0.15 0.031207
$ 0 - 38,000 17.95 3.66 4.88 6.09 7.31 8.53 9.75 0.15 0.034736
$ 22,751 - 55,100 31.11 4.35 5.81 7.26 8.71 10.16 11.61 0.28 0.043153
$ 38,001 - 91,850 31.31 4.37 5.82 7.28 8.73 10.19 11.65 0.28 0.045964
$ 55,101 - 115,000 $ 91,851 - 140,000 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000
$115,001 - 250,000 $140,001 - 250,000 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000
$250,000 & over $250,000 & over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000
<FN>
<F1>Net amount subject to Federal and Louisiana personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the
federal tax bracket. Combined Federal and Louisiana rate assumes itemization of state tax deduction.
<F3>Louisiana tax rates and brackets are based on 1993 information, since at this time 1994 information
is not available.
</FN>
</TABLE>
<PAGE>
MARYLAND
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 19.03% 3.71% 4.94% 6.18% 7.41% 8.65% 9.88% 0.15 0.047361
$ 0 - 38,000 17.95 3.66 4.88 6.09 7.31 8.53 9.75 0.15 0.034736
$ 22,751 - 55,100 $ 38,001 - 91,850 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000
$ 91,851 - 140,000 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000
$115,001 - 250,000 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000
$141,001 - 250,000 39.78 4.98 6.64 8.30 9.96 11.62 13.28 0.36 0.059090
$250,000 & over $250,000 & over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000
<FN>
<F1>Net amount subject to Federal and Maryland personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the
federal tax bracket. Combined Federal and Maryland rate assumes itemization of state tax deduction.
<F3>Maryland tax rates and brackets are based on 1993 information, since at this time 1994 information is
not available.
</FN>
</TABLE>
MASSACHUSETTS
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 25.20% 4.01% 5.35% 6.68% 8.02% 9.36% 10.70% 0.15 0.120000
$ 22,750 - 55,100 $ 38,000 - 91,850 36.64 4.73 6.31 7.89 9.47 11.05 12.63 0.28 0.120000
$ 55,100 - 115,000 $ 91,850 - 140,000 39.28 4.94 6.59 8.23 9.88 11.53 13.18 0.31 0.120000
$115,000 - 250,000 $140,000 - 250,000 43.68 5.33 7.10 8.88 10.65 12.43 14.20 0.36 0.120000
$250,000 & over $250,000 & over 46.85 5.64 7.53 9.41 11.29 13.17 15.05 0.396 0.120000
<FN>
<F1>Net amount subject to Federal and Massachusetts personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined Federal and Massachusetts rate assumes itemization of state tax deduction.
<F3>Massachusetts tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
<PAGE>
MISSISSIPPI
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 18.69% 3.69% 4.92% 6.15% 7.38% 8.61% 9.84% 0.15 0.043405
$ 0 - 38,000 18.91 3.70 4.93 6.17 7.40 8.63 9.87 0.15 0.046051
$ 22,751 - 55,100 $ 38,001 - 91,850 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000
$ 55,101 - 115,000 $ 91,851 - 140,000 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000
$115,001 - 250,000 $140,001 - 250,000 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000
$250,000 & over $250,000 & over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000
<FN>
<F1>Net amount subject to Federal and Mississippi personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined Federal and Mississippi rate assumes itemization of state tax deduction.
<F3>Mississippi tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
NEW YORK STATE RESIDENTS (EXCEPT NEW YORK CITY RESIDENTS)
1994 TAX YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- ----------------------------- INCOME TAX-EXEMPT YIELD AVERAGE AVERAGE AVERAGE AVERAGE
SINGLE JOINT TAX ---------------------------------- FEDERAL STATE CITY NYC ADD'L
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE SURCHARGE SURCHARGE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 20.37% 3.77% 5.02% 6.26% 7.53% 8.79% 10.05% 0.15 0.063167 0.000000 0.000000 0.000000
$ 0 - 38,000 20.16 3.76 5.01 6.26 7.52 8.77 10.02 0.15 0.060648 0.000000 0.000000 0.000000
$ 22,751 - 55,100 33.47 4.51 6.01 7.52 9.02 10.52 12.02 0.28 0.075938 0.000000 0.000000 0.000000
$ 38,001 - 91,850 33.47 4.51 6.01 7.52 9.02 10.52 12.02 0.28 0.075938 0.000000 0.000000 0.000000
$ 55,100 - 115,000 36.24 4.71 6.27 7.84 9.41 10.98 12.55 0.31 0.075938 0.000000 0.000000 0.000000
$ 91,851 - 140,000 36.24 4.71 6.27 7.84 9.41 10.98 12.55 0.31 0.075938 0.000000 0.000000 0.000000
$115,001 - 250,000 $140,001 - 250,000 40.86 5.07 6.76 8.45 10.15 11.84 13.53 0.36 0.075938 0.000000 0.000000 0.000000
$250,000 & over $250,000 & over 44.19 5.38 7.17 8.96 10.75 12.54 14.33 0.396 0.075938 0.000000 0.000000 0.000000
<FN>
<F1>Net amount subject to Federal and New York personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
<F3>Federal and New York tax rates and brackets are based on 1994 information.
</FN>
</TABLE>
<PAGE>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY
1994 TAX YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- ----------------------------- INCOME TAX-EXEMPT YIELD AVERAGE AVERAGE AVERAGE AVERAGE
SINGLE JOINT TAX ------------------------------------ FEDERAL STATE CITY NYC ADD'L
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE SURCHARGE SURCHARGE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 23.40% 3.92% 5.22% 6.53% 7.83% 9.14% 10.44% 0.15 0.063167 0.027922 0.003353 0.004379
$ 0 - 38,000 23.14 3.90 5.20 6.51 7.81 9.11 10.41 0.15 0.060648 0.027528 0.003283 0.004314
$ 38,001 - 91,850 36.63 4.73 6.31 7.89 9.47 11.05 12.62 0.28 0.075938 0.033435 0.005151 0.005402
$ 55,100 - 115,000 39.31 4.94 6.59 8.24 9.89 11.53 13.18 0.31 0.075938 0.033959 0.005100 0.005468
$ 91,850 - 140,000 39.30 4.94 6.59 8.24 9.88 11.53 13.18 0.31 0.075938 0.033832 0.005100 0.005450
$115,000 - 250,000 $140,000 - 250,000 43.71 5.33 7.11 8.88 10.66 12.44 14.21 0.36 0.075938 0.034000 0.005100 0.005474
$250,000 & over $250,000 & over 46.88 5.65 7.53 9.41 11.30 13.18 15.06 0.396 0.075938 0.034000 0.005100 0.005474
<FN>
<F1>Net amount subject to Federal and New York personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
<F3>Federal and New York tax rates and brackets are based on 1994 information.
</FN>
</TABLE>
<PAGE>
NORTH CAROLINA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ------------------ ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 20.47% 3.77% 5.03% 6.29% 7.54% 8.80% 10.06% 0.15 0.064392
$ 0 - 38,000 20.47 3.77 5.03 6.29 7.54 8.80 10.06 0.15 0.064406
$ 22,751 - 55,100 $ 38,001 - 91,850 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000
$ 55,101 - 115,000 36.31 4.71 6.28 7.85 9.42 10.99 12.56 0.31 0.076886
$ 91,851 - 140,000 36.26 4.71 6.28 7.84 9.41 10.98 12.55 0.31 0.076230
$115,001 - 250,000 $140,001 - 250,000 40.96 5.08 6.78 8.47 10.16 11.86 13.55 0.36 0.077500
$250,000 & over $250,000 & over 44.28 5.38 7.18 8.97 10.77 12.56 14.36 0.396 0.077500
<FN>
<F1>Net amount subject to Federal and North Carolina personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined federal and North Carolina rate assumes itemization of state tax deduction.
<F3>North Carolina tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
PENNSYLVANIA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 17.38% 3.63% 4.84% 6.05% 7.26% 8.47% 9.68% 0.15 0.028000
$ 22,751 - 55,100 $ 38,001 - 91,850 30.02 4.29 5.72 7.14 8.57 10.00 11.43 0.28 0.028000
$ 55,101 - 115,000 $ 91,851 - 140,000 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.31 0.028000
$115,001 - 250,000 $140,001 - 250,000 37.79 4.82 6.43 8.04 9.64 11.25 12.86 0.36 0.028000
$250,000 & over $250,000 & over 41.29 5.11 6.81 8.52 10.22 11.92 13.63 0.396 0.028000
<FN>
<F1>Net amount subject to Federal and Pennsylvania personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax
bracket. Combined Federal and Pennsylvania rate assumes itemization of state tax deduction.
<F3>Pennsylvania tax rates and brackets are based on 1993 information, since at this time 1994 information is not
available.
</FN>
</TABLE>
<PAGE>
SOUTH CAROLINA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 19.77% 3.74% 4.99% 6.23% 7.48% 8.72% 9.97% 0.15 0.056168
$ 0 - 38,000 20.25 3.76 5.02 6.27 7.52 8.78 10.03 0.15 0.061719
$ 22,751 - 55,100 $ 38,001 - 91,850 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000
$ 55,101 - 115,000 $ 91,851 - 140,000 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000
$115,001 - 250,000 $140,001 - 250,000 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000
$250,000 & over $250,000 & over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000
<FN>
<F1>Net amount subject to Federal and South Carolina personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax
bracket. Combined Federal and South Carolina rate assumes itemization of state tax deduction.
<F3>Federal & South Carolina Tax rates and brackets are based on 1994 information.
</FN>
</TABLE>
<PAGE>
TENNESSEE
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 20.10% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 0.15 0.060000
$ 22,751 - 56,100 $ 38,001 - 91,850 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000
$ 55,101 - 115,000 $ 91,851 - 140,000 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000
$115,001 - 250,000 $140,001 - 250,000 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000
$250,000 & over $250,000 & over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000
<FN>
<F1>Net amount subject to Federal and Tennessee personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax
bracket. Combined Federal and Tennessee rate assumes itemization of state tax deduction.
<F3>Tennessee tax rates and brackets are based on 1993 information, since at this time 1994 information is not
available.
</FN>
</TABLE>
TEXAS
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX -----------------------------------------------------
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
- ----------------- ------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 15.00% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 22,751 - 55,100 $ 38,001 - 91,850 28.00 4.17 5.56 6.94 8.33 9.72 11.11
$ 55,101 - 115,000 $ 91,851 - 140,000 31.00 4.35 5.80 7.25 8.70 10.14 11.59
$115,001 - 250,000 $140,001 - 250,000 36.00 4.69 6.25 7.81 9.38 10.94 12.50
$250,000 & over $250,000 & over 39.60 4.97 6.62 8.28 9.93 11.59 13.25
<FN>
<F1>Net amount subject to Federal personal income tax after deductions and exemptions.
</FN>
</TABLE>
VIRGINIA
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ------------------------------------------ FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------- ------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 18.93% 3.70% 4.93% 6.17% 7.40% 8.63% 9.87% 0.15 0.046180
$ 0 - 38,000 19.31 3.72 4.96 6.20 7.44 8.68 9.91 0.15 0.050723
$ 22,751 - 55,100 $ 38,001 - 91,850 32.14 4.42 5.89 7.37 8.84 10.32 11.79 0.28 0.057500
$ 55,101 - 115,000 $ 91,851 - 140,000 34.97 4.61 6.15 7.69 9.23 10.76 12.30 0.31 0.057500
$115,001 - 250,000 $140,001 - 250,000 39.68 4.97 6.63 8.29 9.95 11.60 13.26 0.36 0.057500
$250,000 & over $250,000 & over 43.07 5.27 7.03 8.78 10.54 12.30 14.05 0.396 0.057500
<FN>
<F1>Net amount subject to Federal and Virginia personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax
bracket. Combined Federal and Virginia rate assumes itemization of state tax deduction.
<F3>Virginia tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
WASHINGTON
1994 TAX YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- -------------------------------------- INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX -----------------------------------------------------
1994<F3> 1994<F3> BRACKET 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
- ----------------- ------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 15.00% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 22,751 - 55,100 $ 38,001 - 91,850 28.00 4.17 5.56 6.94 8.33 9.72 11.11
$ 55,101 - 115,000 $ 91,851 - 140,000 31.00 4.35 5.80 7.25 8.70 10.14 11.59
$115,001 - 250,000 $140,001 - 250,000 36.00 4.69 6.25 7.81 9.38 10.94 12.50
$250,000 & over $250,000 & over 39.60 4.97 6.62 8.28 9.93 11.59 13.25
<FN>
<F1>Net amount subject to Federal personal income tax after deductions and exemptions.
</FN>
</TABLE>
WEST VIRGINIA
1994 TAX YEAR
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME<F1>
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE
SINGLE JOINT TAX ---------------------------------------------------- FEDERAL STATE
1994<F3> 1994<F3> BRACKET<F2> 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE
- ----------------------------------------- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 18.03% 3.66% 4.88% 6.10% 7.32% 8.54% 9.76% 0.15 0.035603
$ 0 - 38,000 18.32 3.67 4.90 6.12 7.35 8.57 9.79 0.15 0.039078
$ 22,751 - 55,100 31.72 4.39 5.86 7.32 8.79 10.25 11.72 0.28 0.061653
$ 38,001 - 91,850 32.49 4.44 5.93 7.41 8.89 10.37 11.85 0.28 0.062400
$ 55,101 - 115,000 35.46 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.064590
$ 91,851 - 140,000 35.49 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.065000
$115,001 - 250,000 $140,000 - 250,000 40.16 5.01 6.68 8.36 10.03 11.70 13.37 0.36 0.065000
$250,000 & over $250,000 & over 43.53 5.31 7.08 8.85 10.63 12.40 14.17 0.396 0.065000
<FN>
<F1>Net amount subject to Federal and West Virginia personal income tax after deductions and exemptions.
<F2>Effective combined federal and state tax bracket. State rate based on the average state rate for the federal tax bracket.
Combined Federal and West Virginia rate assumes itemization of state tax deduction.
<F3>West Virginia tax rates and brackets are based on 1993 information, since at this time 1994 information is not available.
</FN>
</TABLE>
<PAGE>
APPENDIX B
DESCRIPTION OF MUNICIPAL OBLIGATIONS
Municipal Obligations include bonds, notes and commercial paper issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is also exempt from the personal
income taxes of any state). Municipal Obligation bonds are issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligation bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds (referred to under
current tax law as private activity bonds), are issued by or on behalf of public
authorities to obtain funds to provide privately-operated housing facilities,
airport, mass transit or port facilities, sewage disposal, solid waste disposal
or hazardous waste treatment or disposal facilities and certain local facilities
for water supply, gas or electricity. Such obligations are included within the
term Municipal Obligations if the interest paid thereon qualifies as exempt from
federal income tax. Other types of industrial development bonds, the proceeds of
which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute Municipal
Obligations, although the current federal tax laws place substantial limitations
on the size of such issues.
The two principal classifications of Municipal Obligation bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its good faith, credit and taxing power for the payment of
principal and interest. The payment of the principal of and interest on such
bonds may be dependent upon an appropriation by the issuer's legislative body.
The characteristics and enforcement of general obligation bonds vary according
to the law applicable to the particular issuer. Revenue bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source. Industrial development bonds which are Municipal Obligations are in most
cases revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. Municipal Bonds also include participations in
municipal leases. These are undivided interests in a portion of an obligation in
the form of a lease or installment purchase which is issued by state and local
governments to acquire equipment and facilities. Municipal leases frequently
have special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt- issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. Although the obligations will be secured by the leased
equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might, in some cases, prove difficult. In light
of these concerns, the Trust has adopted and follows procedures for determining
whether municipal lease securities purchased by the Trust are liquid and for
monitoring the liquidity of municipal lease securities held in the Trust's
portfolio. The procedures require that a number of factors be used in evaluating
the liquidity of a municipal lease security, including the frequency of trades
and quotes for the security, the number of dealers willing to purchase or sell
the security and the number of other potential purchasers, the willingness of
dealers to undertake to make a market in the security, the nature of the market
place in which the security trades, the credit quality of the security, and
other factors which the Adviser may deem relevant. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications, depending on numerous factors.
Municipal Obligation notes generally are used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
Obligation notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance working
capital needs of municipalities. Generally, they are issued in anticipation of
various tax revenues, such as income, sales, use and business taxes, and are
payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under Federal Revenue Sharing Programs.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most cases,
the long-term bonds then provide the money for the repayment of the Notes.
Issues of commercial paper typically represent short-term, unsecured, negotiable
promissory notes. These obligations are issued by agencies of state and local
governments to finance seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases, Municipal
Obligation commercial paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions of
the Municipal Obligation market, size of a particular offering, the maturity of
the obligation and rating (if any) of the issue.
DESCRIPTION OF RATINGS+
The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings Group
and Fitch Investors Service, Inc. represent their opinions as to the quality of
various debt obligations. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, Municipal Obligations with the same
maturity, coupon and rating may have different yields while Municipal
Obligations of the same maturity and coupon with different ratings may have the
same yield.
DESCRIPTION OF LONG-TERM DEBT RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue. Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons. NOTE: Those bonds in the Aa, A,
Baa, Ba and B groups which Moody's believes possess the strongest investment
attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories. Debt rated "BB", "B"
"CCC", "CC" and "C" is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
"BB" indicates the least degree of speculation and "C" the highest. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or large exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payment is jeopardized.
PLUS (+ ) OR MINUS (-): The ratings from "AA" to
"CCC" may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeble events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F- 1+ ".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
PLUS (+ ) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
DESCRIPTION OF RATINGS OF STATE AND MUNICIPAL NOTES
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated MOODY'S INVESTMENT GRADE ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
Symbols used will be as follows:
MIG-1/VMIG-1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market-
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
-- Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 -- Speculative capacity to pay principal and interest.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ : Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated "F-
1+ ".
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned "F-1+ " and "F-1" ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
F-5: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D: Default. Issues assigned this rating are in actual or imminent payment
default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually senior debt obligations not having an original maturity in excess of
one year. Moody's two highest commercial paper rating categories are as follows:
"Prime-1" -- Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term senior debt obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
"Prime-2" -- Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term senior debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. S&P's two highest commercial paper rating categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+ ) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
DESCRIPTION OF OTHER INVESTMENTS
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury or agencies,
authorities or instrumentalities of the U.S. Government and include bills,
certificates of indebtedness, notes, and bonds. Agencies, authorities and
instrumentalities of the U.S. Government are established under the authority of
an act of Congress and include, but are not limited to, the Government National
Mortgage Association ("GNMA"), the Tennessee Valley Authority, the Bank for
Cooperatives, the Farmers Home Administration, Federal Home Loan Banks ("FHLB"),
Federal Intermediate Credit Banks, Federal Land Banks, and the Federal National
Mortgage Association ("FNMA").
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the United States;
others, such as securities of FHLB, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government will provide financial
support to instrumentalities sponsored by the U.S. Government as it is not
obligated by law, in certain instances, to do so.
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited
in a commercial bank, are for a definite period of time, earn a specified rate
of return, and are normally negotiable.
BANKERS' ACCEPTANCES -- are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed "accepted"
when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
REPURCHASE AGREEMENTS -- are agreements pursuant to which the Trust, on
behalf of a Fund, acquires securities subject to the seller's agreement to
repurchase at a specified time and price. The Trust's position during the entire
term of the repurchase agreement will be fully collateralized. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Trust's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Trust has adopted
certain procedures intended to minimize any risk.
+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this Prospectus for the securities listed. Ratings
are generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of the Trust's
fiscal year end.
<PAGE>
APPENDIX C
PORTFOLIO COMPOSITION CHART
<TABLE>
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA LOUISIANA MARYLAND
FUND FUND FUND FUND FUND FUND FUND
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
NET ASSETS NET ASSETS NET ASSETS NET ASSETS NET ASSETS NET ASSETS NET ASSETS
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
SECURITY
- --------
Short-term Obligations
and Other Assets ............ 1% 1% 1% 2% 1% (3)% 1%
Debt-Unrated by S&P ......... 11% 9% 5% 2% 12% 4% 10%
DEBT-S&P RATING
- ---------------
AAA ........................ 43% 34% 33% 56% 38% 68% 46%
AA ......................... 14% 22% 17% 17% 26% 9% 28%
A ......................... 14% 27% 40% 11% 13% 16% 11%
BBB ....................... 17% 7% 4% 12% 7% 6% 4%
BB ......................... 0% 0% 0% 0% 1% 0% 0%
B .......................... 0% 0% 0% 0% 2% 0% 0%
---- ---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100% 100%
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSSETTS MISSISSIPPI NEW YORK NORTH CAROLINA PENNSYLVANIA SOUTH CAROLINA
FUND FUND FUND FUND FUND FUND
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
NET ASSETS NET ASSETS NET ASSETS NET ASSETS NET ASSETS NET ASSETS
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
SECURITY
- --------
Short-term Obligations
and Other Assets ............ 1% 0% 1% 0% (1)% 1%
Debt-Unrated by S&P ......... 14% 3% 8% 7% 5% 4%
DEBT-S&P RATING
- ---------------
AAA ....................... 38% 46% 25% 36% 66% 48%
AA ........................ 8% 12% 19% 27% 8% 24%
A ......................... 31% 28% 25% 24% 15% 17%
BBB ....................... 8% 11% 22% 6% 7% 6%
---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100%
</TABLE>
<TABLE>
<CAPTION>
TENNESSEE TEXAS VIRGINIA WASHINGTON WEST VIRGINIA
FUND FUND FUND FUND FUND
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
NET ASSETS NET ASSETS NET ASSETS NET ASSETS NET ASSETS
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
SECURITY
- --------
Short-term Obligations
and Other Assets ............ 1% 1% 1% 1% 1%
Debt-Unrated by S&P ......... 6% 1% 11% 3% 8%
DEBT-S&P RATING
- ---------------
AAA ........................ 35% 50% 34% 38% 42%
AA ......................... 13% 24% 35% 40% 8%
A .......................... 28% 15% 18% 16% 21%
BBB ........................ 15% 8% 1% 2% 15%
BB ......................... 2% 1% 0% 0% 5%
---- ---- ---- ---- ----
100% 100% 100% 100% 100%
</TABLE>
The charts above indicate the composition of the portfolio of each Fund for
the fiscal year ended January 31, 1994 with the debt securities rated by S&P
separated into the indicated categories. The percentages were calculated by
averaging the monthly dollar weighted average of each Funds' net assets
invested in each category. The chart does not necessarily indicate what the
composition of any Funds' portfolio will be in subsequent fiscal years.
Rather, the Trust's investment objectives, policies and restrictions indicate
the extent to which the Trust may purchase securities in the various
categories.
<PAGE>
APPENDIX D
ADDITIONAL INFORMATION CONCERNING THE STATE FUNDS
The following discussion regarding certain economic, financial and legal matters
pertaining to the relevant States and their governments are drawn primarily from
official statements relating to securities offerings of those States and other
publicly available documents, dated as of various dates prior to the date of
this Prospectus, and do not purport to be complete descriptions. Discussions
regarding the financial condition of a particular State government may not be
relevant to Municipal Obligations issued by political subdivisions of that
State. Moreover, the general economic conditions discussed may or may not affect
issuers of the obligations of these States. None of the information is relevant
to any tax-exempt securities issued by territories and possessions of the United
States or the District of Columbia or their political subdivisions, agencies or
instrumentalities.
ALABAMA FUND
Alabama'a economy has experienced a major trend toward industrialization over
the last two decades. By 1990, manufacturing accounted for 40% of Alabama's Real
Gross State Product (the total value of goods and services produced in Alabama).
During the 1960's and 1970's the State's industrial base became more diversified
and balanced, moving away from primary textiles (including apparel), chemicals,
rubber and plastics. Since the early 1980's, modernization of existing
facilities and an increase in direct foreign investments in the State has made
the manufacturing sector more competitive in domestic and international markets.
Among the leading manufacturing industries have been pulp and paper and
chemicals, the development and growth of which have been made possible by
abundant rainfall and a high pulpwood growth rate. In recent years Alabama has
ranked as the fifth largest producer of timber in the nation. Alabama has fresh
water availability of twenty times present usage. The State's growing chemical
industry has been the natural complement of production of wood pulp and paper.
Mining, oil and gas production, textiles and apparel, rubber and plastics,
printing and publishing, steel, machinery and service industries are also
important to Alabama's economy. Coal mining is by far the most important mining
activity.
In recent years, the importance of service industries to the State's economy has
increased significantly. The major service industries in the State are the
general healthcare industries, most notably represented by the University of
Alabama medical complex in Birmingham, and the high technology research and
development industries concentrated in the Huntsville area. The financial,
insurance and real estate sectors have also shown strong growth over the last
several years.
The economy in the State of Alabama significantly recovered from the recession
of the early 1980's. Since 1983 the State has recovered and moved forward faster
than the national average. The Alabama Development Office (ADO) reported as of
December 31, 1992, that for the sixth consecutive year more than $2 billion was
expended in Alabama for new and expanded industries.
Despite the economic expansion that has taken place the State is suffering along
with the rest of the nation through the recent downturn in the economy. Growth
in overall tax revenues was only about 3.4% from fiscal 1991 to 1992. Corporate
income tax receipts declined slightly from 1991 to 1992. However, State tax
collections are up about 8.9% for the nine month period ending June 30, 1993, as
compared to the same period for fiscal 1992, indicating an economic recovery is
in progress. Individual income tax receipts and sales tax receipts for the same
nine month period increased 8.0% and 7.3%, respectively.
Real Gross State Product (RGSP) is a comprehensive measure of economic
performance for the State of Alabama. Alabama's RGSP is defined as the total
value of all final goods and services produced in the State in constant dollar
terms. Hence, changes in RGSP reflect changes in final output. From 1986-1992,
RGSP originating in manufacturing increased by 16% while RGSP originating in all
the non-manufacturing sectors grew by 13%.
There was a significant decrease in unemployment in the period 1985-1989 due to
the economic recovery from the recession of the early 1980's. Since 1989
unemployment rates have come down more gradually due to the general nationwide
reduction in activity and employment in the industrial sector. At the end of
November, 1992 the State unemployment rate was 7.3% compared to the national
average of 7.4%.
An adverse decision in the cases of Alabama Coalition for Equity, Inc., et al.
v. Hunt, et al., could have a substantial adverse effect on the State's
financial position.
In Alabama Coalition for Equity, Inc., et al. v. Hunt, et al., filed on May 3,
1990, the Circuit Court of Montgomery County, the plaintiffs have alleged that
the State of Alabama's public school funding structure is unconstitutional under
the United States Constitution and the Alabama State Constitution. The
plaintiffs sought inter alia, an injunction prohibiting the State of Alabama
from implementing or maintaining any public school fund system perpetuating the
current funding structure; a ruling requiring the State of Alabama to maintain a
constitutional public school funding structure; and the payment of the
plaintiffs' attorneys' fees.
On August 13,1991, the court granted partial summary judgment to the plaintiffs
on the constitutionality of amendment 111, Section 256, of the Alabama
Constitution. The court ruled that this provision violated the Equal Protection
Clause of the Fourteenth Amendment to the United States Constitution. On
December 3, 1993, the court made final its Remedy Order which found the entire
educational system of the State of Alabama to be unconstitutional. The court
held that all school children have a right to attend school in a liberal system
of public schools required to be provided by the State. The trial court intends
to conduct further hearings on the implementation of its Remedy Order. The
Remedy Order has been appealed to the Alabama Supreme Court by intervenors.
Should the trial court's decision be upheld, the State may be required to expend
substantial amounts on implementation of and compliance with the Order.
ARKANSAS FUND
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. The State is now moving toward a heavier
manufacturing base involving more sophisticated processes and products such as
electrical machinery, transportation equipment, fabricated metals and
electronics. Arkansas now has a higher percentage of workers involved in
manufacturing than the national average. The diversification of economic
interests has lessened the State's cyclical sensitivity to the impact of any
single sector.
Arkansas' diversified economic base is also reflected in the distribution of the
State's employment among the manufacturing, trade, service and governmental
sectors. During the past decade, there have been gains in the services and
wholesale and retail trade sectors. However, the civilian unemployment rate in
Arkansas has exceeded the national average during each year since 1978.
Manufacturing continues to be a leading component of Arkansas' economy.
Manufacturing contributes over 25% of the total wage and salary component of
personal income. There is an almost equal division between durable and
nondurable goods. Non-manufacturing and non-agricultural goods provide a
balanced proportion of the overall economy and tend to insulate the State's
economy from any adverse economic conditions which affect manufacturing.
Agriculture is a significant and historical component of Arkansas' economy. Over
40% of the land in Arkansas is devoted to agriculture. Arkansas ranks first in
the nation in rice production, first in commercial broilers and fourth in
cotton.
Arkansas ranks first in the nation in the production of bauxite and bromine. The
State has significant natural gas and oil production in its west, central and
southern regions. There is also increased activity in the coal mining fields of
western Arkansas.
CALIFORNIA FUND
Certain of the securities in the California Fund's portfolio may be obligations
of issuers which rely in whole or in part, directly or indirectly, on ad valorem
real property taxes as a source of revenue. Article XIIIA of the California
Constitution, adopted in 1978, limits ad valorem taxes on real property, and
restricts the ability of taxing entities to increase real property tax revenues.
At the time of adoption of Article XIIIA, the State General Fund had a
substantial surplus. Following the adoption of Article XIIIA, legislation was
adopted which provided for a one-time distribution of a portion of the State's
General Fund surplus to local public agencies, the reallocation of property tax
and other revenue to such agencies, and the State's assumption of certain
obligations theretofore paid out of local funds. The surplus in the General Fund
was depleted and the State ended fiscal 1982-1983 on June 30, 1983 with a
General Fund deficit. Although, a surplus in the General Fund was subsequently
reestablished, in recent years the State has again been operating at a
substantial deficit.
Since the start of fiscal 1990-1991, the State has faced the worst economic,
fiscal, and budget conditions since the 1930s. The State ended fiscal 1990-
1991, fiscal 1991-1992 and fiscal 1992-1993 with multibillion dollar deficits
and, at the date of this Prospectus, forecasts indicate that the State will end
fiscal 1993-1994 with a multibillion dollar deficit. In February 1994 the
State's nonpartisan legislative analyst projected that the State could end
fiscal 1993-1994 with an accumulated deficit of approximately $3 billion and
that the State could incur an additional deficit of at least $3 billion during
fiscal 1994-1995 (resulting in an accumulated deficit by the end of fiscal
1994-1995 of approximately $6 billion). The State's analyst also noted that
costs related to the January 1994 earthquake in Los Angeles could increase the
State's deficit. Although the proposed State budget for fiscal 1994-1995 calls
for the retirement of the deficit during the fiscal year, it assumes certain
questionable revenue items, such as receipt of higher federal aid and revenue
from favorable outcomes in pending litigation. In addition, the State's budget
in recent years has not reflected certain questionable school funding shifts.
The State's ability to raise revenues and to reduce expenditures to the extent
necessary to balance the budget for any year depends, among other things, upon
the State's economic health and the accuracy of the State's revenue predictions,
as well as the impact of budgetary restrictions imposed by voter- passed
initiatives.
The financial difficulties experienced by the State and other issuers of
California municipal securities in recent years have resulted in the credit
ratings of certain of their obligations being downgraded significantly by the
major rating agencies. There can be no assurance that credit ratings on
securities in the California Fund's portfolio will not be further downgraded.
In connection with establishing the budget for fiscal 1993-1994, approximately
$2.6 billion of property tax revenues were transferred from local governments to
public schools to help meet education funding requirements. To counteract the
negative impact of the property tax transfer on local governments, a sales tax
increase (with revenues allocable to local police and fire services) was
permanently extended by voters in November 1993.
Article XIIIB of the California Constitution, originally adopted in 1979, limits
significantly spending by state government and by "local government" (defined as
"any city, county, city and county, school district, special district,
authority, or other political subdivision of or within the state"). One of the
exclusions from these limitations for any entity of government is the debt
service costs of bonds existing or legally authorized as of January 1, 1979, or
thereafter approved by the voters.
Article XIIIB states that it shall not "be construed to impair the ability of
the state or of any local government to meet its obligations with respect to
existing or future bonded indebtedness." Despite this language, following the
adoption of Article XIIIB, concern has been expressed with respect to the
combined effect of such constitutionally imposed limits on the ability of
California state and local governments to utilize bond financing. For fiscal
1986-1987, the State collected revenues in excess of Article XIIIB spending
limits. As a result, over $1 billion in unexpected revenues received by the
State during fiscal 1986-1987, attributable in part to greater than anticipated
realization of capital gain income by California taxpayers in the latter part of
1986 due to changes in the federal income tax laws, was returned to the
taxpayers. Article XIIIB was modified substantially by Propositions 98 and 111
of 1988 and 1990, respectively. Proposition 111 relaxed Article XIIIB spending
limits and revised Proposition 98, which, as revised, may require approximately
40% of the State's general fund budget and 50% of revenues collected in excess
of the State spending limit to be spent on public schools and community
colleges.
In June 1982, California voters approved initiative measures which (1) repealed
the California gift and inheritance tax laws, and enacted, in lieu thereof, a
California death tax, and (2) increased, for taxable years commencing on or
after January 1, 1982, the amount by which personal income tax brackets will be
adjusted annually in an effort to index such tax brackets to account for the
effects of inflation. Following the adoption of such measures, the California
Department of Finance and the California Legislative Analyst reported that the
amount of the annual reductions in state revenues resulting from the approval of
these measures would be substantial. California has also revised its system of
taxing corporations which conduct business both within and without California
(such corporations were previously taxed under the so-called "unitary" method
applied on a worldwide basis). Since 1988, such corporations have been able to
elect, subject to payment of an election fee, to use the "unitary" method, but
on a "water's edge" basis and in 1993 the fee was eliminated. The revisions in
the State's system of corporate taxation could also result in decreased state
revenues. In addition, at the time of this Prospectus the constitutionality of
the worldwide combined reporting method and the election fee for prior years is
being challenged in the courts. The success of such litigation could also result
in decreased state revenues. Decreased state revenues may result in reductions
in allocations of state revenues to local governments. California legislation,
adopted after enactment of the Federal Tax Reform Act of 1986, revised
California's personal income tax and corporate tax laws to make them conform to
federal income tax provisions.
In November 1982, California issued registered revenue-anticipation warrants in
the aggregate principal amount of $400 million to enable California to meet its
then-current cash requirements. Such warrants were timely repaid. In February
1983, legislation was enacted which enabled California, until June 30, 1985, to
borrow funds by issuing notes or other short-term instruments; the June 30, 1985
termination date was eliminated by legislation enacted in September 1984. Since
1983, California has repeatedly issued revenue anticipation notes authorized by
the February, 1983 legislation. All required payments on such notes have been
timely made. In July 1993 the State issued $2 billion of revenue anticipation
notes due June 28, 1994. Because of a two month delay that took place in
enacting the State's budget for fiscal 1992- 1993, the State issued registered
warrants (promissory notes with no specific maturity) to suppliers and other
State-payees. Registered warrants had not been issued by the State since the
1930s. Recent budget imbalances have also caused the State to issue revenue
anticipation warrants three times in less than two years. Revenue anticipation
warrants can be issued and redeemed in different fiscal years (as compared to
revenue anticipation notes that are issued and redeemed in the same fiscal year)
and prior to 1992, the State had not issued revenue anticipation warrants since
1983. The State issued $475 million of revenue anticipation warrants in June
1992 and $2 billion of revenue anticipation warrants in June 1993. All required
payments on such revenue anticipation warrants have been timely made. In
February 1994 the State issued $3.2 billion of revenue anticipation warrants
consisting of $1.2 billion of Series A warrants due December 21, 1994, and $2
billion of Series B warrants due July 26, 1994. As of the date of this
Prospectus, the State plans to sell $5.5 billion of revenue anticipation notes
in July 1994 to help retire a portion of such warrants. It is not presently
possible to determine the extent to which California will issue additional
revenue-anticipation warrants, additional short-term interest-bearing notes or
other instruments in future fiscal years.
Because of the complex nature of Articles XIIIA and XIIIB, the possible
ambiguities and inconsistencies in their respective terms, and the applicability
of their respective exemptions and exceptions and the impossibility of
predicting future appropriations, it is not presently possible to determine the
impact of Article XIIIA or Article XIIIB or any implementing or related
legislation on the securities in the Fund's portfolio or the ability of State or
local governments to pay the interest on, or repay the principal of, such
securities. Article XIIIA and its implementing and related legislation have been
subject to legal challenges based on various State and federal constitutional
grounds. In 1979, the California Supreme Court held unconstitutional as an
impairment of contract that part of legislation distributing a portion of the
State's General Fund surplus to local public agencies which purported to
eliminate certain cost of living salary increases provided for by agreement with
certain local public agency employees. With that exception, to date the courts
either have upheld the constitutionality of Article XIIIA and its implementing
and related legislation or have interpreted them in such a manner as to avoid
the necessity for a direct determination of constitutional issues. In June 1992,
the U.S. Supreme Court upheld the constitutionality of Article XIIIA. However,
Articles XIIIA and XIIIB and their respective implementing and related
legislation may be subject to continuing or future legal challenges. It is not
presently possible to predict the outcome of any such litigation with respect to
the ultimate scope, impact or constitutionality of either Article XIIIA or
Article XIIIB, or their respective implementing or related legislation, or the
impact of any such determinations upon State agencies and local governments, or
upon the abilities of such entities to pay the interest on, or repay the
principal of, the securities in the California Fund's portfolio.
FLORIDA FUND
Florida has made significant advances in recent years in diversifying its
economy, which at one time was almost entirely fueled by its elderly population
and tourism. Still more service-oriented than most other states, Florida now
accommodates numerous diversifying urban centers. The Miami/Dade area has
developed into a major international banking center, while maintaining itself as
a prime tourist destination. The Orlando area, stimulated by the presence and
growth of Walt Disney World and the Epcot Center, has also become a significant
diverse employment hub.
Economic conditions in much of Florida have improved significantly since a year
ago. In some areas, this is due to positive income and jobs performances linked
to the moderate state and national economic recoveries. In southeastern Florida,
improved growth rates are associated with ongoing recovery efforts after
Hurricane Andrew.
Sectors that have shown recent strong growth trends across the state are
business services, health care services and retail trade. Defense downsizing has
eliminated numerous military and related civilian jobs and resulted in decreases
in defense manufacturing jobs. The decreases in defense manufacturing jobs have
been offset by increased jobs in the manufacturing of construction materials,
which have shown rapid growth due to the great need for construction materials
resulting from the hurricane.
Overall in 1992, Florida experienced moderate jobs growth. In the most recent
quarter, state employment rates improved in all twenty of the state's metro
economies and on average among the non-metro areas as well.
Gross income measured in 1987 dollars has moved upward in Florida,
notwithstanding the hurricane-related decline in personal income experienced in
the third quarter of 1992 by residents of southeastern Florida.
GEORGIA FUND
Since 1973 the State's long-term debt obligations have been issued in the form
of general obligation debt or guaranteed revenue debt. The State may incur
guaranteed revenue debt by guaranteeing the payment of certain revenue
obligations issued by an instrumentality of the State. Prior to 1973 all of the
State's long-term debt obligations were issued by ten separate State authorities
and secured by lease rental agreements between such authorities and various
State departments and agencies ("Authority Lease Obligations"). The Georgia
Constitution since 1973 has prohibited further Authority Lease Obligations. The
Georgia Constitution prohibits the incurring of any general obligation debt or
guaranteed revenue debt if the highest aggregate annual debt service requirement
for the then current year or any subsequent fiscal year for outstanding general
obligation debt and guaranteed revenue debt, including the proposed debt, and
the highest aggregate annual payments for the then current year of any
subsequent fiscal year of the State for all remaining Authority Lease
Obligations, exceed 10% of the total revenue receipts, less refunds, of the
state treasury in the fiscal year immediately preceding the year in which any
such debt is to be incurred. As of January, 1994, the total indebtedness of the
State of Georgia consisting of general obligation debt, guaranteed revenue debt
and remaining Authority Lease Obligations totalled $4,002,605,000 and the
highest aggregate annual payment for such debt equalled 5.32% of fiscal year
1993 State treasury receipts.
The Georgia Constitution also permits the State to incur public debt to supply a
temporary deficit in the State treasury in any fiscal year created by a delay in
collecting the taxes of that year. Such debt must not exceed, in the aggregate,
5% of the total revenue receipts, less refunds, of the State treasury in the
fiscal year immediately preceding the year in which such debt is incurred. The
debt incurred must be repaid on or before the last day of the fiscal year in
which it is to be incurred out of the taxes levied for that fiscal year. No such
debt may be incurred in any fiscal year if there is then outstanding unpaid debt
from any previous fiscal year which was incurred to supply a temporary deficit
in the State treasury. No such short-term debt has been incurred under this
provision since the inception of the constitutional authority permitting it.
Virtually all of debt obligations of the State of Georgia and its counties,
municipalities and other political subdivisions and public authorities are
required by law to be validated and confirmed in a judicial proceeding prior to
issuance.
The State operates on a fiscal year beginning July 1 and ending June 30.
Estimated revenue collections of $9,131,999,998 for the fiscal year 1994 showed
an increase of 9.41% over collections for the similar period in the previous
fiscal year.
Based on data of the Georgia Department of Revenue for fiscal year 1993, income
tax receipts and sales tax receipts of the State for fiscal year 1993 comprised
approximately 47% and 36%, respectively, of the total State tax revenues.
Further, such data shows that total State tax revenue collections for fiscal
year 1993 ($8,346,411,129.33) increased by approximately 1% over such
collections in fiscal year 1992.
The unemployment rate of the civilian labor force in the State as of May 1993
was 5.2% according to data provided by the Georgia Department of Labor. The
Metropolitan Atlanta area, which is the largest employment center in the area
comprised of Georgia and its five bordering states and which accounts for
approximately 42% of the State's population, has for some time enjoyed a lower
rate of unemployment than the State considered as a whole. In descending order,
wholesale and retail trade, financing insurance and retail services,
manufacturing, government and transportation comprise the largest source of
employment within the State.
Several lawsuits have been filed against the State of Georgia asserting that the
decision in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989),
invalidates Georgia's tax treatment of Federal Retirement Benefits for years
prior to 1989. Under the three year statute of limitation set out in Georgia's
refund statute, the maximum potential liability under these suits calculated to
August 15, 1993, would appear to be no greater than $100 million. The plaintiffs
in these suits originally requested refunds for tax years beginning with 1980.
The State's maximum exposure to all taxpayers with a Davis claim for the years
1980-1988 would appear to be approximately $591 million. Any such liability
would be predicated on a holding by the State of Georgia court or the United
States Supreme Court that a refund remedy is required. The Georgia Supreme Court
has held in Georgia's "test case" that the plaintiff is not entitled to a
refund. The plaintiff has petitioned the United States Supreme Court for a writ
of certiorari.
Three suits have been filed against the State of Georgia seeking refunds of
liquor taxes in light of Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984)
under Georgia's pre-Bacchus statute. In the Beam case, 501 U.S. (decided June
20, 1991) the United States Supreme Court indicated that Bacchus was
retroactive, but only within the bounds of State statutes of limitations and
procedural bars, and left State courts to determine any remedy in light of
reliance interests, equitable considerations, and other defenses. Georgia's
statute of limitations has run on all pre-Bacchus claims for refund except five
pending claims seeking $31 million in tax plus interest. On remand, the Fulton
County Superior Court has ruled that procedural bars and other defenses bar any
recovery by taxpayers on Beam's claims for refund. The Georgia Supreme Court has
affirmed and Beam has petitioned the United States Supreme Court for a writ of
certiorari.
Age International, Inc. v. State and Age International, Inc. v. Miller are suits
(one for refund and one for declaratory and injunctive relief) which have been
filed against the State of Georgia by foreign producers of alcoholic beverages
seeking $96,000,000 in refunds of alcohol import taxes imposed under Georgia's
post-Bacchus (see previous note) statute. These claims constitute 99% of all
such taxes paid during the preceding three years. In addition, the claimants
have filed administrative claims for an additional $23,000,000 for apparently
later time periods. The Age refund case is still pending in the trial court. The
Age declaration/injunctive relief case was dismissed by the U.S. District Court
and is on appeal to the Eleventh Circuit Court of Appeals.
The case of Board of Public Education for Savannah/Chatham County v. State of
Georgia is based on the local school board's claim that the State finance the
major portion of the costs of its desegregation program. The Savannah Board
originally requested restitution in the amount of $30,000,000, but the Federal
District Court set forth a formula which would require a State payment in the
amount of approximately $6,000,000. Plaintiffs, dissatisfied with the
apportionment of desegregation costs between state and county and an adverse
ruling on the state funding formula for transportation costs, have appealed to
the United States Eleventh Circuit Court of Appeals. The State has filed a
responsive cross-appeal on the ground that there is no basis for any liability.
A similar complaint has been filed by DeKalb County and there are approximately
five other school districts which potentially might attempt to file similar
claims. In the DeKalb County case alone, the plaintiffs appear to be seeking
approximately $67,500,000 of restitution. The DeKalb case has recently been
tried and is awaiting final argument and decision by the Court.
Leslie K. Johnsen v. Collins. Plaintiff in this case has filed suit in federal
district and state superior courts challenging the Constitutionality of
Georgia's transfer fee (often referred to as "impact fee") by asserting that the
fee violates the commerce clause, due process, equal protection and privilege
and immunity provisions of the United States Constitution. Plaintiff seeks to
prohibit the State from further collections and to require the State to return
to her and those similarly situated all fees previously collected. From May 1992
to February 1994, the State has collected $11,304,925. The State continues to
collect approximately $500,000 to $600,000 per month.
Daniel W. Tedder v. Marcus E. Collins, Sr., is a class action suit challenging
the validity of a Georgia Department of Revenue regulation issued in July 1992
which resulted in enforcement of sales tax collections on sales of used
transportation equipment, most notably sales of used cars where neither party is
engaged in the regular sale of used cars. The trial court declared the
regulation invalid. Approximately $30,000,000 of tax on such sales was collected
before the regulation was rescinded and collection ceased. Accordingly, refund
claims of up to $30,000,000 plus interest could be sought. Approximately
$16,000,000 in refunds have been paid.
Many factors affect and could have an adverse impact on the financial condition
of the State and other issuers of long-term debt obligations which may be held
in the portfolio of the Georgia Fund, including national, social, environmental,
economic and political policies and conditions, many of which are not within the
control of the State or such issuers. It is not possible to predict whether or
to what extent those factors may affect the State and other issuers of long-term
debt obligations which may be held in the portfolio of the Georgia Fund and the
impact thereof on the ability of such issuers to meet payment obligations.
LOUISIANA FUND
Under Louisiana law, certain bonds and obligations constitute general
obligations of the State of Louisiana or are backed by the full faith and credit
of the State of Louisiana, and certain bonds and obligations do not or are not.
The Louisiana Fund invests in both types of obligations.
The Bond Security and Redemption Fund of the State of Louisiana secures all
general obligation bonds of the State of Louisiana issued pursuant to Article
VII, Sections 6(A) and 6(B) of the constitution of Louisiana and those bonds
issued by State agencies or instrumentalities which are backed by the State's
full faith and credit, pari passu. Article VII, Section 9(B) of the State
Constitution gives constitutional status to the Bond Security and Redemption
Fund and further provides that, subject to contractual obligations existing on
the effective date of the Constitution (January 1, 1975), all State money
deposited in the State Treasury is to be credited to the Bond Security and
Redemption Fund, except money received as the result of grants or donations or
other forms of assistance when the terms and conditions thereof or of agreements
pertaining thereto require otherwise. This section further requires that in each
fiscal year an amount be allocated from the Bond Security and Redemption Fund
sufficient to pay all obligations that are secured by the full faith and credit
of the State and that become due and payable within the current fiscal year,
including principal, interest, premiums, sinking or reserve funds or other
requirements. Under the administrative procedures of the State Treasurer's
office, debt service requirements falling due each month are set aside in the
Bond Security and Redemption Fund during the immediately preceding and current
month, followed by monthly transfers of excess funds to the State's general and
other funds.
Any bonds issued by the State of Louisiana other than general obligation bonds,
or any bonds issued by the State of Louisiana or any other issuer that are not
backed by the full faith and credit of the State of Louisiana are not entitled
to the benefits of the Bond Security and Redemption Fund.
The legislature has limited its ability to authorize certain debt and the State
Bond Commission's ability to issue certain bonds. The legislature may not
authorize general obligation bonds or other general obligations secured by the
full faith and credit of the State if the amount of authorized but unissued debt
plus the amount of outstanding debt exceeds twice the average annual revenues of
the Bond Security and Redemption Fund for the last three fiscal years completed
prior to such authorization. This debt limitation is not applicable to or shall
not include the authorization of refunding bonds secured by the full faith and
credit of the State, or to authorized or outstanding bond anticipation notes.
Bond anticipation notes are issued in anticipation of the sale of duly
authorized bonds or to fund capital improvements. The State Bond Commission may
not issue general obligation bonds or other general obligations secured by the
full faith and credit of the State at any time when the highest annual debt
service requirement for the current or any subsequent fiscal years for such
debt, including the debt service on such bonds or other obligations then
proposed to be sold by the State Bond Commission, exceeds 10% of the average
annual revenues of the Bond Security and Redemption Fund for the last three
fiscal years completed prior to such issuance. The annual revenues of the Bond
Security and Redemption Fund for the three fiscal years ended June 30, 1991,
1992 and 1993, were respectively: $5,024,957,000, $5,136,845,000 and
$5,994,856,000. This debt limitation is not applicable to the issuance or sale
by the State Bond Commission of refunding bonds secured by the full faith and
credit of the State of Louisiana or to bond anticipation notes. However, in
calculating the annual debt service requirements in any fiscal year, included is
the debt service on refunding bonds and excluded is the debt service
requirements on the prior issues of bonds refunded by the refunding bonds.
The State Bond Commission may also issue and sell revenue anticipation notes to
avoid temporary cash flow deficits. These notes are payable from anticipated
cash, as reflected in the most recent official forecast of the Revenue
Estimating Conference. Unless issued in accordance with the provisions of
Article VII, Section 6(A) of the State Constitution, the notes do not constitute
a full faith and credit obligation of the State.
The foregoing limitations on indebtedness imposed upon the legislature and the
State Bond Commission do not apply to obligations that are not general
obligations of the State of Louisiana or that are not backed by the full faith
and credit of the State of Louisiana.
Although the manner in which the Bond Security and Redemption Fund operates is
intended to adequately fund all obligations that are general obligations of the
State, or that are secured by the full faith and credit of the State, there can
be no assurance that particular bond issues will not be adversely affected by
expected budget gaps. During the period from fiscal year 1981-82 through fiscal
year 1991-92, the State experienced operating budget deficits in eight of the
ten fiscal years. Exacerbating the operating deficit problem was the highly
dependent nature of the State's budget on mineral revenues and in particular,
the dramatic fluctuations in oil prices over the past decade. Furthermore, a
significant component of Louisiana's annual budget burden arises out of its debt
service obligations which are the highest per capita of any of the 14 southern
states. According to the 1990 United States Census Bureau, Louisiana had a $226
per capita debt service interest payment, compared with $39 per capita in
Mississippi and $28 per capita in the State of Texas. Other factors attributing
to Louisiana's budget gap are the decline in mineral revenues, weak sales tax
collections, expiration of certain taxes, increases in certain tax credits and
the prior utilization of one time monies to balance earlier state budgets.
These same conditions could adversely affect bonds that are not general
obligations of the State or that are not entitled to the full faith and credit
of the State and that therefore are not secured by the Bond Security and
Redemption Fund. Examples of these bonds include general obligation parish bond
issues, revenue bonds issued by the State of Louisiana or a parish or other
political subdivision or agency, and industry development bonds. Revenue bonds
are payable only from revenues derived from a specific facility or revenue
source. Industrial development bonds are generally secured solely by the
revenues derived from payments made by the industrial user. With respect to
bonds issued by local political subdivisions or agencies, because the 64
parishes within the State of Louisiana are subject to their own revenue and
expenditure problems, current and long term adverse developments affecting their
revenue sources and their general economy may have a detrimental impact on such
bonds. Similarly, current adverse developments affecting Louisiana's state and
local economy could have a detrimental impact on revenue bonds and industrial
development bonds.
MARYLAND FUND
The State's total expenditures for the fiscal years ending June 30, 1991, June
30, 1992 and June 30, 1993 were $11.304 billion, $11.585 billion and $11.786
billion, respectively. As of May 16, 1994, it was estimated that total
expenditures for fiscal year 1994 would be $12.726 billion. The State's General
Fund, representing approximately 54% - 60% of each year's total budget, had a
surplus on a budgetary basis of $55 thousand in fiscal year 1991, a deficit of
$56 million in fiscal year 1992 and a surplus of $11 million in fiscal year
1993. The Governor of Maryland reduced fiscal year 1993 appropriations by
approximately $56 million to offset the fiscal year 1992 deficit. The State
Constitution mandates a balanced budget.
In April 1993, the General Assembly approved the $12.5 billion 1994 fiscal year
budget. The Budget includes $2.5 billion in aid to local governments (reflecting
a $233.8 million increase in funding over 1993 that provides for substantial
increases in education, health and police aid), and $72.8 million in general
fund deficiency appropriations for fiscal year 1993, of which $50 million is a
legislatively mandated appropriation to the Revenue Stabilization Account of the
State Reserve Fund. The Revenue Stabilization Account was established in 1986 to
retain State revenues for future needs and to reduce the need for future tax
increases. The 1994 Budget does not include any proposed expenditures dependent
on additional revenue from new or broad-based taxes. When the 1994 Budget was
enacted, it was estimated that the general fund surplus on a budgetary basis at
June 30, 1994, would be approximately $26 million, excluding $50 million that
was mandated to be appropriated in the 1994 session of the General Assembly to
the Revenue Stabilization Account of the State Reserve Fund. As of May 16,1994
it is estimated that the general fund surplus on a budgetary basis at June 30,
1994, will be $24 million.
In April 1994, the General Assembly approved the $13.3 billion 1995 fiscal year
budget. The Budget includes $2.6 billion in aid to local governments (reflecting
a $102.4 million increase over 1994 that provides substantial increases in
education, health and police aid), and $104.8 million in general fund deficiency
appropriations for fiscal year 1994, of which $60.5 million is an appropriation
to the Revenue Stabilization Account of the State Reserve Fund. As of May 16,
1994 it is estimated that the general fund surplus on a budgetary basis at June
30, 1995 will be $9.7 million.
The public indebtedness of Maryland is divided into three basic types. The State
issues general obligation bonds for capital improvements and for various
State-sponsored projects. The Department of Transportation of Maryland issues
limited special obligations bonds for transportation purposes payable primarily
from specific, fixed-rate excise taxes and other revenues related mainly to
highway use. Certain authorities issue obligations solely from specific non-tax
enterprise fund revenues and for which the State has no liability and has given
no moral obligation assurance.
While the factors mentioned above indicate that Maryland and its
instrumentalities are addressing the effects of the economic recession and,
overall, are in satisfactory economic health, there can, of course, be no
assurance that this will continue or that particular Maryland Municipal
Obligations may not be adversely affected by changes in state or local economic
or political conditions.
MASSACHUSETTS FUND
Investments in Massachusetts Municipal Obligations may be affected by a variety
of factors, including the general economic health of the state and local
governments and the availability of federal funding.
Commonwealth spending exceeded revenues in each of the five fiscal years
commencing fiscal year 1987. In particular, from 1987 to 1990, spending in five
major expenditure categories -- Medicaid, debt service, public assistance, group
health insurance and transit subsidies -- grew at rates in excess of the rate of
inflation for the comparable period. In addition, the Commonwealth's tax
revenues during this period repeatedly failed to meet official forecasts. For
the budgeted funds, operating losses in fiscal years 1987 and 1988 of $349
million and $370 million, respectively, were covered by surplus carried forward
from prior years. The operating losses in fiscal years 1989 and 1990, which
totalled $672 million and $1.25 billion, respectively, were covered primarily
through deficit borrowings. During the period, fund balances in the budgeted
operating funds declined from an opening balance of $1.17 billion in fiscal year
1987 to an ending balance of negative $1.1 billion in fiscal year 1990. Fiscal
1991 and 1992 ended with positive fund balances of $237.1 million and $549.4
million, respectively.
Standard & Poor's and Moody's have upgraded their ratings of long-term bonds
issued by the Commonwealth to A+ and A, respectively. The budgetary difficulties
of the Commonwealth are likely to affect the bond ratings and credit standing of
its public authorities and municipalities as well. These difficulties could
affect adversely the market values and marketability of, or possibly even result
in default in payment on, outstanding obligations issued by the Commonwealth or
its public authorities or municipalities.
The Commonwealth is also experiencing an economic slowdown. Earlier in the
1980s, revenue growth and expenditure increases occurred in the context of a
strong performance by the Commonwealth's and the region's economy. However,
since 1988, economic performance has slowed significantly, particularly in the
construction, real estate, financial and manufacturing sectors (including high
technology), with especially adverse results in 1990 and the first half of 1991.
In 1990, for the first time since 1979, the Commonwealth's unemployment rate
significantly exceeded the national average. As of December 1993, the
Commonwealth's unemployment rate was 6.3%, as compared to a national average of
6.4%. Increases in unemployment claims have reduced the balances in the
Commonwealth's unemployment compensation trust fund. In addition, the
Commonwealth's per capita personal income is growing at a rate lower than the
national average.
In fiscal year 1993, which ended June 30, 1993, the revenues of the budgeted
operating funds of the Commonwealth increased by approximately 6.9% over the
prior fiscal year, to approximately $14.710 billion. Expenditures also
increased, by 9.6% over the prior year, to approximately $14.696 billion. As a
result, in fiscal year 1993 the Commonwealth experienced a surplus of revenues
and other sources over expenditures of approximately $13.1 million. The
Commonwealth ended fiscal year 1993 with a positive closing fund balance of
$562.5 million.
On July 19, 1993 the Governor signed the Commonwealth's budget for fiscal year
1994. Budgeted revenues and other sources in fiscal 1994 are currently estimated
by the Executive Office for Administration and Finance to be approximately
$15.483 billion, including estimated tax revenues in the amount of $10.560
billion, an increase of $630 million over tax revenues in fiscal year 1993. The
budget signed by the Governor provided for projected expenditures of $15.467
billion.
In Massachusetts the tax on personal property and real estate is virtually the
only source of tax revenues available to cities and towns to meet local costs.
"Proposition 2 1/2", an initiative petition adopted by the voters of the
Commonwealth in November 1980, limits the power of Massachusetts cities and
towns and certain tax-supported districts and public agencies to raise revenue
from property taxes to support their operations, including the payment of
certain debt service. Proposition 2 1/2 required many cities and towns to reduce
their property tax levies to a stated percentage of the full and fair cash value
of their taxable real estate and personal property, and it limits the amount by
which the total property taxes assessed by all cities and towns might increase
from year to year.
The reductions in local revenues and anticipated reductions in local personnel
and services resulting from Proposition 2 1/2 created strong demand for
substantial increases in state-funded local aid, which increased significantly
in fiscal years 1982 through 1986. The effect of this increase in local aid was
to shift a major part of the impact of Proposition 2 1/2 to the Commonwealth,
but this did not require an increase in Massachusetts state taxes. The recent
difficulties summarized above have resulted in a substantial reduction in local
aid from the Commonwealth and delays in the payment of local aid. These
reductions and delays may create financial difficulties for certain
municipalities. The budget signed by the Governor for fiscal 1994 contains
expenditures of $2.737 billion for direct local aid, an increase of
approximately 7.5% above the fiscal 1993 level.
Limitations on Commonwealth tax revenues have been established both by
legislation enacted in 1986 and by public approval of an initiative petition in
1986. The two measures are inconsistent in several respects, including the
methods of calculating the limits and the exclusions from the limits. The
initiative petition, which took effect in 1986, contains no exclusion for debt
service on Municipal Obligations of the Commonwealth. Commonwealth tax revenues
in fiscal years 1988 through 1993 were lower than the limit set by either the
initiative petition or the legislative enactment. The Executive Office for
Administration and Finance of the Commonwealth has estimated that Commonwealth
tax revenues will not reach the limit imposed by either the initiative petition
or the legislative enactment in fiscal year 1994.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability for the Commonwealth related to local
retirement systems are significant -- estimated to be approximately $8.485
billion as of January 1, 1992, on the basis of certain actuarial assumptions
regarding, among other things, future investment earnings and annual inflation
rates, wage increases and cost of living increases. No assurance can be given
that these assumptions will be realized. As of June 30, 1993, the Commonwealth's
state pension reserve was approximately $3.877 billion. The legislature adopted
a comprehensive pension bill addressing the issue in January 1988, which
requires the Commonwealth, beginning in fiscal 1989, to fund future pension
liabilities currently and amortize the Commonwealth's unfunded liabilities over
40 years, in accordance with funding schedules proposed by the Secretary of
Administration and Finance and approved by new legislation.
MISSISSIPPI FUND
In September 1993 Mississippi's unemployment rate fell considerably to 5.2%. The
growth rate of state product for the year is estimated to have been 5.8%, and is
expected to accelerate to 6.0% in 1994. Mississippi continued to close the per
capita income gap between the State and the average for the country. Per capita
incomes increased 5.7% over this period versus 5.0% for the United States as a
whole.
Approximately 27,400 new jobs were created in 1993, with half of that growth due
to the gaming industry. Total employment in Mississippi is projected to increase
by 23,000 jobs, or 1.8%, in 1994. In the U.S. as a whole, total employment grew
more slowly at 0.3%. Manufacturing accounts for 23% of employment in Mississippi
but considerably less in total U.S. employment. In Mississippi, about 56% of
manufacturing employment is in durable goods, with the remainder in nondurable
goods. Mississippi's employment growth is expected to continue in such sectors
as services, finance, insurance, real estate and construction.
The Mississippi economy is outpacing the rest of the nation, with growth rates
of income and employment well above the national average. U.S. News and World
Report (11/8/93) ranked Mississippi number one in the nation, based on six
indicators of economic health. The strength of Mississippi's economy is evident
by the 9.8% rise in the corporate profits during 1992, and a similar growth is
estimated for 1993.
In recent years, the State has successfully expanded its economy through
technology-based research and education, and the Mississippi banking system has
exhibited strength and stability over the past several years, a period
characterized by a growing number of bank failures nationwide.
The gaming industry started up in Mississippi in August 1992, and as of November
1993 it had already become a $500 million industry, providing more than 12,000
jobs in direct employment and contributing over $60 million in state and local
tax revenues annually.
While the number of workers involved directly in agriculture has declined, it
remains a significant factor in the State's economy. Cotton was the number one
producer of farm income in 1990, poultry and eggs were second while forestry was
third. Research and promotion have provided the State with a number of new
farming alternatives. The production of catfish, poultry, rice, blueberries and
muscadines have grown dramatically in recent years. Timber continues to be
Mississippi's largest natural resource, with the State leading the nation in the
number of tree farms. Of Mississippi's total land area 56% (approximately 17
million acres) is classified as commercial forest.
All or part of 20 states and 136 metropolitan areas lie within 550 miles of
Mississippi. Mississippi is in an excellent location to service this market area
with four interstate highways, which provide access in every direction, 19
railroads, including four of the nation's largest carriers, and seven commercial
airports. International and domestic waterborne commerce is served by
Mississippi's nine major ports.
The population of the State is estimated to be 2,666,000. The population
increased an estimated .3% during 1992 and 1993 with a considerably higher
percentage increase in its urban areas. Mississippi has a relatively young
population, with 29% of its total population below 18 years of age.
Employment in the service industries rose 7% during 1993. Having the most rapid
growth of any sector, the service sector has now surpassed manufacturing as the
leading employer in the State, employing 31% of the total non-agricultural
employment. The other large employment sectors are government, retail trade and
construction. The leading employer by product category remains the apparel
industry, followed by food, furniture and fixtures, and lumber. Although its
importance has declined, agriculture continues to contribute significantly to
the State's economy. With the diversification into livestock, soybeans,
aquaculture, rice and other alternative crops, there is now less dependence on
cotton as the major crop.
Total personal income in Mississippi increased 32.7% from 1983 to 1989 compared
to a 30.6% increase in the U.S. over the same period. Manufacturing, services
and government employment comprise the largest components of earned personal
income in Mississippi. Mississippi continues to rank 50th among the 50 states in
per capita total personal income. However, between 1970 and 1990, per capita
total personal income in Mississippi increased at a compound annual rate of 8.8%
while U.S. per capita total personal income increased at an 8.4% compound annual
rate. In 1993 personal income in Mississippi rose an estimated 5.7% compared to
a 5.0% increase for the U.S. Personal income.
In the State of Mississippi, all State indebtedness must be authorized by
legislation governing the specific programs or projects to be financed. Such
debt may include short- and long-term indebtedness, self-supporting general
obligation bonds, highway bonds and other types of indebtedness. The amount of
bonded indebtedness that may be incurred by the State or any of its direct
agencies is limited by the Mississippi Constitution to an amount equal to one
and one-half times the sum of all revenue collected by the State during any one
of the preceding four fiscal years, whichever year may be higher. As of October
1, 1991, the State's gross debt was approximately $638 million. For the fiscal
year ended June 30, 1992, the constitutional debt limit is expected to be
approximately $3.8 billion, State revenues are expected to be approximately $2.8
billion, and the annual debt service requirement on the State's net direct debt
is expected to be approximately $26 million.
For the fiscal year ended June 30, 1992, State General Fund receipts are
budgeted at approximately $2,000,397,000 and State General Fund Disbursements
are budgeted at approximately $1,999,675,700, and State Special Fund Receipts
and Disbursements are estimated to be approximately $3.47 million and $3.52
million, respectively.
NEW YORK FUND
The fiscal stability of New York State is related, at least in part, to the
fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractural arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.
Constitutional challenges to State laws have limited the amount of taxes which
political subdivisions can impose on real property, which may have an adverse
effect on the ability of issuers to pay obligations supported by such taxes. A
variety of additional court actions have been brought against the State and
certain agencies and municipalities relating to financings, amount of real
estate tax, use of tax revenues and other matters, which could adversely affect
the ability of the State or such agencies or municipalities to pay their
obligations.
Both the State and New York City face potential economic problems which could
seriously affect the ability of both the State and City to meet their respective
financial obligations. The City has had to face greater competition from other
major cities and the State economy has grown more slowly than that of the nation
as a whole, in part as a result of international and national trends beyond the
State's or City's control. Moreover, the current high level of New York State
and New York City taxes limits the ability of the State and the City to impose
higher taxes in the event of future difficulties. The federal and State
governments have proposed various programs to alleviate these trends but no
immediate reversal can be expected.
The State is the second most populous in the nation and has a relatively high
level of personal wealth. The State's economy is diverse with a comparatively
large share of the nation's finance, insurance, transportation, communications
and services employment, and a comparatively small share of the nation's farming
and mining activity. The State's location and its excellent air transport
facilities and natural harbors have made it an important link in international
commerce. The State has a declining proportion of its workforce engaged in
manufacturing, and an increasing proportion engaged in service industries. This
transition reflects a national trend.
Although industry and commerce are broadly spread across the State, particular
activities are concentrated in certain areas. Westchester County is headquarters
for several major corporations. Buffalo's economy relies on heavy industry.
Rochester leads the nation in the manufacture of photographic and optical
equipment. Syracuse and the Utica-Rome area produce machinery and transportation
equipment. The Albany-Troy-Schenectady area is a governmental center and
produces electrical products. Binghamton is the original site of the
International Business Machines Corporation and continues to have a
concentration of employment in computer and other high technology manufacturing.
New York City, which is the most populous city in the State and nation and is
the center of the nation's largest metropolitan area, accounts for approximately
41% of both the State's population and personal income. It is headquarters for
the nation's securities business, six of the ten largest commercial banks in the
nation, five of the ten largest diversified financial institutions, four of the
ten largest life insurance companies and five of the nation's 50 largest
industrial corporations (five others of which have headquarters elsewhere in the
State). In addition, the City houses the home offices of the three major radio
and television broadcasting networks, most of the national magazines and a
substantial portion of the nation's book publishers. The City also retains
leadership in the design and manufacture of men's and women's apparel.
The State has historically been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. The City has also
had to face greater competition as other major cities have developed financial
and business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
During calendar years 1982 and 1983 the State's economy in most respects
performed better than that of the nation. However, in the calendar years 1984
through 1991, the State's rate of economic expansion was somewhat slower than
that of the nation. The unemployment rate in the State dipped below the national
rate in the second half of 1981 and remained lower until 1991. The total
employment growth rate in the State has been below the national average since
1984. Total personal income in the State has risen slightly faster than the
national average every year since 1983, with the exception of 1984, 1985, 1990
and 1991. Overall economic activity declined less than that of the nation as a
whole during the 1982-83 recession. In the current recession, however, the State
and the rest of the Northeast, has been more heavily impacted.
The State has for many years had a very high State and local tax burden relative
to other states. The State and its localities have used these taxes to develop
and maintain their transportation networks, public schools and colleges, public
health systems, other social services and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State.
NORTH CAROLINA FUND
General obligations of a city, town or county in North Carolina are payable from
the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue bonds,
college and hospital revenue bonds and other "private activity bonds" which are
essentially non-governmental debt issues and which are payable exclusively by
private entities such as non-profit organizations and business concerns of all
sizes. State and local governments have no obligation to provide for payment of
such private activity bonds and in many cases would be legally prohibited from
doing so. The value of such private activity bonds may be affected by a wide
variety of factors relevant to particular localities or industries, including
economic developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any city,
town, school district, county or other taxing district to avail itself of the
provisions of Chapter 9 of the United States Bankruptcy Code, but only with the
consent of the Local Government Commission of the State and of the holders of
such percentage or percentages of the indebtedness of the issuer as may be
required by the Bankruptcy Code (if any such consent is required). Thus,
although limitations apply, in certain circumstances political subdivisions
might be able to seek the protection of the Bankruptcy Code.
STATE BUDGET AND REVENUES. The North Carolina State Constitution requires that
the total expenditures of the State for the fiscal period covered by each budget
not exceed the total of receipts during the fiscal period and the surplus
remaining in the State Treasury at the beginning of the period. The State's
fiscal year runs from July 1st through June 30th.
In 1990 and 1991 the State had difficulty meeting its budget projections. The
General Assembly responded by enacting a number of new taxes and fees, which
generated an estimated $665.5 million in fiscal year 1991-92. Revenues for
1992-93 were estimated to include an additional $95.6 million and helped produce
a budget surplus (approximatey $342 million) for the 1992-93 fiscal year.
In addition, the 1993 Session of the General Assembly reduced allowable
departmental operating expenditures by $120.3 and $122.8 million for fiscal
years 1993-94 and 1994-95 respectively, and authorized continuation funding of
approximately $8.33 billion for fiscal year 1993-94 and $8.60 billion for fiscal
year 1994-95. The savings reductions were based on recommendations from the
Governor, the Government Performance Audit Committee and selected savings
identified by the General Assembly.
Both the nation and the State have experienced a modest economic recovery in
recent months. However, it is unclear what effect these developments, as well as
the reduction in government spending or increase in taxes, may have on the value
of the Debt Obligations in the North Carolina Fund. No solid upward econimic
trend has developed, and both the State and the national economies must be
watched carefully.
The fiscal condition of the State might be affected adversely by litigation
concerning the legality of certain State tax provisions following the March 1989
decision of the United States Supreme Court that it is unconstitutional for a
state to exempt from state income taxation retirement benefits paid by the state
or its local governments, but not to exempt retirement benefits paid by the
federal government.
Based on that decision, certain federal retirees and federal military
personnel plaintiffs brought an action in federal court against the North
Carolina Department of Revenue and certain officials of the State alleging the
unconstitutionality of taxes collected under the prior North Carolina tax
statutes and seeking damages for the illegally collected taxes paid on federal
retirement or military pay for the years 1985-88 (covering the asserted 3 year
limitations period), plus interest. Swanson, et al. v. Powers, et al. (United
States District Court for the Eastern District of North Carolina, No. 89-282-
CIV-5-H) ("Swanson Federal"). The individual plaintiffs in Swanson Federal
also brought an action in North Carolina state court seeking refunds of the
illegal taxes. Swanson, et al. v. State of North Carolina, et al. (Wake
County, North Carolina Superior Court, No. 90 CVS 3127) ("Swanson State").
The amounts claimed by federal retirees in the Swanson actions have not been
precisely calculated. Plaintiffs have asserted that the plaintiff class contains
about 100,000 taxpayers; the State has asserted that the claims would aggregate
at least $140 million (which might not include interest).
In Swanson State the North Carolina Supreme Court found for the State, ruling
that the State would not be required to refund taxes illegally collected prior
to the U.S. Supreme Court's decision. The U.S. Supreme Court vacated the
judgment and remanded the case to the North Carolina Supreme Court for
reconsideration in the light of the U.S. Supreme Court's holding in Harper v.
Virginia Department of Taxation (No. 91-794) (decided 6/18/93) ("Harper"). In
Harper, which also involved the disparate income tax treatment of retired state
and federal employees and the question of retroactive appliation of the law, the
U.S. Supreme Court held that the Commonwealth of Virginia must provide
"meaningful backward-looking relief" to the plaintiffs, if the Commonwealth did
not have a predeprivation process adequate to satisfy due process requirements.
The case was remanded to the Supreme Court of Virginia to determine whether a
remedy was required and, if so, what form it would take.
The impact of Harper on the estimated $140 million of refund claims in Swanson
State has yet to be determined. On March 4, 1994, (in an unpublished opinion)
the North Carolina Supreme Court decided in favor of the State dismissing the
Swanson State case. The plaintiffs reportedly will appeal to the United States
Supreme Court.
The decision in Harper also reactivated the damage claims in Swanson Federal,
and the federal court will begin hearing arguments on these claims in February,
1994.
GENERAL. The population of the State has increased 13% from 1980, from 5,880,095
to 6,647,351 as reported by the 1990 federal census. Although North Carolina is
the tenth largest state in population, it is primarily a rural state, having
only five municipalities with populations in excess of 100,000. The labor force
has undergone significant change during recent years. The State has moved from
an agricultural to a service and goods producing economy. Those persons
displaced by farm mechanization and farm consolidations have, in large measure,
sought and found employment in other pursuits. Due to the wide dispersion of
non-agricultural employment, the people have been able to maintain, to a large
extent, their rural habitation practices. During the period 1980 to 1992, the
State labor force grew about 22% (from 2,855,200 to 3,487,500). Per capita
income during the period 1980 to 1990 grew from $7,999 to $16,203, an increase
of 102.6%.
The current economic profile of the State consists of a combination of industry,
agriculture and tourism. As of May 1993, the State was reported to rank tenth
among the states in non-agricultural employment and eighth in manufacturing
employment. Employment indicators have fluctuated somewhat in the annual periods
since June of 1989, but have demonstrated an upward trend since 1991. The
following table reflects the fluctuations in certain key employment categories.
<TABLE>
<CAPTION>
CATEGORY (ALL SEASONALLY ADJUSTED) JUNE 1989 JUNE 1990 JUNE 1991 JUNE 1992 JUNE 1993
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,286,000 3,312,000 3,228,000 3,495,000 3,504,000
Nonagricultural Employment 3,088,000 3,129,000 3,059,000 3,135,000 3,203,400
Goods Producing Occupations (mining, 1,042,200 1,023,100 973,600 980,800 993,600
construction and manufacturing)
Service Occupations 2,045,800 2,106,300 2,085,400 2,154,200 2,209,800
Wholesale/Retail Ocupations 713,900 732,500 704,100 715,100 723,200
Government Employees 482,200 496,400 496,700 513,400 515,400
Miscellaneous Services 563,900 587,300 596,300 638,300 676,900
Agricultural Employment 54,900 58,900 88,700 102,800 88,400
</TABLE>
The adjusted unemployment rate in June 1992 was 5.4% of the labor force, as
compared with an unemployment rate of 7% nationwide.
Gross agricultural income in 1992 was $5.26 billion, including approximately
$5,181,695,000 income from commodities. As of 1992, the State was tenth in the
nation in gross agricultural income. According to the State Commissioner of
Agriculture, in 1992 the State ranked first in the nation in the production of
flue-cured tobacco, total tobacco, turkeys and sweet potatoes; second in the
value of poultry and poultry products, in the production of cucumbers for
pickles and in trout production; fourth in commercial broilers, strawberries and
peanuts; sixth in burley tobacco and hogs; and seventh in the number of chickens
(excluding broilers), pecans and apples.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Nevertheless, tobacco production is the second leading source of agricultural
income in the State, accounting for 20.3% of gross agricultural income. Tobacco
farming in North Carolina has been and is expected to continue to be affected by
major Federal legislation and regulatory measures regarding tobacco production
and marketing and by international competition. Measures adverse to tobacco
farming could have negative effects on farm income and the North Carolina
economy generally. The largest single source for agricultural income in the
State is poultry and eggs, which accounted for revenues of approximately $1.6
billion in 1992 and 31% of gross agricultural income.
The number of farms has been decreasing; in 1993 there were approximately 59,000
farms in the State (down from approximately 72,000 in 1987, a decrease of about
18% in six years). However, a strong agribusiness sector supports farmers with
farm inputs (fertilizer, insecticide, pesticide and farm machinery) and
processing of commodities produced by farmers (vegetable canning and cigarette
manufacturing).
The State Department of Commerce, Travel and Tourism Division, statistics
office, reports that in 1992 approximately $7.8 billion was spent on tourism in
the State, with 1993 revenues from tourism expected to exceed $8 billion. The
statistics office estimates a 6% annual average revenue growth rate in the
tourism industry. In 1991, traveler expenditures directly generated more than
155,000 jobs within the State, 5.1% of total nonagricultural employment in that
year.
BOND RATINGS. Currently, Moody's rates North Carolina general obligation bonds
as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's also
reaffirmed its stable outlook for the State in October 1993.
Standard & Poor's reports that North Carolina's rating reflects the State's
strong economic characteristics, sound financial performance, and low debt
levels.
PENNSYLVANIA FUND
Pennsylvania historically has been identified as a heavy industry state,
although that reputation has changed with the decline of the coal, steel and
railroad industries and the resulting diversification of Pennsylvania's
industrial composition. The major new sources of growth are in the service
sector, including trade, medical and health services, education and financial
institutions. By the mid-1980's, manufacturing had fallen behind the services
sector as the largest single source of employment in Pennsylvania. However,
Pennsylvania continues to have a greater percentage of its workers employed in
manufacturing than the national average, leaving the economy somewhat cyclical
and vulnerable to recessionary forces. As of February 1993, the state's
seasonally adjusted unemployment rate was 7.0% which matched the nation's
seasonally adjusted rate. Unadjusted for seasonal fluctuations, Pennsylvania's
February 1993 unemployment rate was 7.7% as compared to the nationally
unadjusted rate of 6.8%. The population of the state was essentially flat
throughout the 1980's and into the early 1990's.
REVENUES AND EXPENDITURES -- Pennsylvania uses the fund method of accounting.
The General Fund, the Commonwealth's largest fund, receives all tax receipts,
revenues, federal grants and reimbursements that are not specified by law to be
deposited elsewhere. Debt service on all obligations, except those issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
The General Fund closed the fiscal years ended June 30, 1990 and 1992 with
unappropriated balance surpluses of $136 million and $8.8 million, respectively.
The General Fund closed the fiscal year ended June 30, 1991 with an
unappropriated balance deficit of $454 million.
During fiscal 1991, the national economic downturn led to severe revenue
shortfalls compounded by larger than expected human services expenditures. Total
General Fund tax receipts were 1.7% lower than fiscal 1990 levels. In January
1991 the Commonwealth's general obligations and other agency related debt issues
were placed on Standard & Poor's ("S&P") CreditWatch with negative implications.
During fiscal 1992, S&P reported that recent tax increases of about $3 billion,
together with payment-timing charges, should allow the Commonwealth to stabilize
its short-term borrowing, which had increased. In September 1991, S&P removed
the Commonwealth's general obligations and agency debt from CreditWatch.
The fiscal 1993 budget totals $14.1 billion, approximately $0.2 billion higher
than the fiscal 1992 budget.
The Pennsylvania Constitution requires all proceeds of motor fuel taxes, vehicle
registration fees, license taxes, operators' license fees and other excise taxes
imposed on products used in motor transportation to be used exclusively for
construction, reconstruction, maintenance and repair of and safety on highways
and bridges and for the payment of debt service on obligations incurred for such
purposes. The Motor License Fund is the fund through which such revenues are
accounted for and expended.
In fiscal 1992, Motor License Fund revenues totaled $1,471 million, a decrease
of less than one percent from fiscal 1991. The Commonwealth attributes this
decline to the recession. Actual expenditures totaled $1,528 million, more than
two percent higher than fiscal 1991. As of June 30, 1992, the Motor License Fund
had an unappropriated balance of $22 million. For fiscal 1993, revenues and
adjustments are expected to total $1,478 million while budgeted expenditures
total $1,474 million with an expected year-end unappropriated balance of $27
million.
COMMONWEALTH DEBT -- The Pennsylvania Constitution permits the issuance of the
following types of debt: (i) debt to suppress insurrection or rehabilitate areas
affected by disaster; (ii) electorate approved debt; (iii) debt for capital
projects subject to an aggregate outstanding debt limit of 1.75 times the annual
average tax revenues of the preceding five fiscal years; and (iv) tax
anticipation notes payable in the fiscal year of issuance.
Pennsylvania's Auditor General is required to certify to the Governor and the
General Assembly certain information regarding the Commonwealth's indebtedness.
According to the most recent Auditor General's certificate, the average annual
tax revenues deposited in all funds in the five fiscal years ended June 30, 1992
was $14,481 million, and the net debt limitation for the 1993 fiscal year is
$25,342 million. Outstanding net debt totaled $4,083.6 at June 30, 1992, a
decrease of $0.8 million from June 30, 1991. At February 28, 1993, the amount of
debt authorized by law to be issued, but not yet incurred, was $14,635 million.
Pennsylvania engages in short-term borrowing to finance expenses within a fiscal
year through the sale of tax anticipation notes, which must mature within the
fiscal year of issuance. The principal amount issued, when added to that
outstanding, may not exceed in the aggregate 20% of the revenues estimated to
accrue to the appropriate fund or funds in the fiscal year. The state is not
permitted to fund deficits between fiscal years with any form of debt. All year
end deficit balances must be funded within the succeeding fiscal year's budget.
The Commonwealth plans to issue a total of $975 million of tax anticipation
notes for the account of the General Fund for fiscal 1993, $600 million of which
are outstanding as of October 29, 1992.
Pending the issuance of bonds, the Commonwealth may issue bond anticipation
notes subject to the applicable statutory and constitutional limitations
generally imposed on bonds. The term of such borrowings may not exceed three
years.
STATE-RELATED OBLIGATIONS -- Certain state-created agencies have statutory
authorization to incur debt for which no legislation providing for state
appropriations to pay debt service thereon is required. The debt of these
agencies is not supported by assets of, or revenues derived from the various
projects financed and is not an obligation of the Commonwealth. Some of these
agencies, however, are indirectly dependent on Commonwealth appropriations.
State-related agencies and their outstanding debt as of June 30, 1992 include
the Delaware River Joint Toll Bridge Commission ($59 million), the Delaware
River Port Authority ($244 million), the Pennsylvania Economic Development
Financing Authority ($180 million), the Pennsylvania Energy Development
Authority ($174 million), the Pennsylvania Higher Education Assistance Agency
($1,010 million), the Pennsylvania Higher Educational Facilities Authority
($1,721 million), the Pennsylvania Industrial Development Authority ($278
million), the Pennsylvania Infrastructure Investment Authority ($143 million),
the Pennsylvania Turnpike Commission ($1,102 million), and the State Public
School Building Authority ($314 million).
The only obligations of state-created agencies in Pennsylvania that bear a moral
obligation of the state are those issued by the Pennsylvania Housing Finance
Agency ("PHFA"), a state-created agency that provides financing for housing for
lower and moderate income families in the state, and the Hospitals and Higher
Education Facilities Authority of Philadelphia ("HHEFAP"), a municipal authority
organized to acquire and prepare various sites for use as intermediate care
facilities for the mentally retarded. As of June 30, 1992, PHFA had $2,343
million of bonds and $76 million of notes outstanding and HHEFAP had $2 million
of loan principal outstanding.
LOCAL GOVERNMENT DEBT -- Local government in Pennsylvania consists of numerous
individual units. Each unit is distinct and independent of other local units,
although they may overlap geographically. There is extensive general legislation
applying to local governments. For example, the Local Government Unit Debt Act
provides for uniform debt limits for local government units, including
municipalities and school districts, and prescribes methods of incurring,
evidencing, securing and collecting debt.
The City of Philadelphia experienced a series of General Fund deficits for
fiscal years 1988 through 1992 which have culminated in the City's present
serious financial difficulties. For fiscal 1991, Philadelphia experienced a
General Fund balance deficit of $154 million. The City estimates its fiscal 1992
General Fund balance deficit at $248 million.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class cities in
remedying fiscal emergencies was enacted by the General Assembly and approved by
the Governor in June 1991. PICA is designed to provide assistance through the
issuance of funding debt to liquidate budget deficits and to make factual
findings and recommendations to the assisted city concerning its budgetary and
fiscal affairs. An intergovernmental cooperation agreement between Philadelphia
and PICA was approved by City Council on January 3, 1992, and approved by the
PICA Board and signed by the Mayor on January 8, 1992. As of October 29, 1992,
Philadelphia is operating under a five-year fiscal plan approved by PICA on
April 6, 1992. Full implementation of the five-year plan was delayed due to the
labor negotiations that were not completed until October 1992, three months
after the expiration of the old labor contracts. Due to delayed management
initiatives and labor terms more expensive than contained in the five-year plan,
the plan is estimated to be approximately $130 million out of balance over the
five-year period. In June 1992, PICA issued $475 million of its Special Tax
Revenue Bonds to provide financial assistance to Philadelphia.
SOUTH CAROLINA FUND
The South Carolina Constitution requires the General Assembly to provide a
balanced budget and requires that if there be a deficit, such deficit shall be
provided for in the succeeding fiscal year. The State Constitution also provides
that the State Budget and Control Board may, if a deficit appears likely, effect
such reductions in appropriations as may be necessary to prevent a deficit. At
the November 1984, general election there was approved a constitutional
amendment providing that annual increases in State appropriations may not exceed
the average growth rate of the economy of the State and that the annual
increases in the number of State employees may not exceed the average growth of
the population of the State. The State Constitution also establishes a General
Reserve Fund to be maintained in an amount equal to 4% of General Fund revenue
for the latest fiscal year. Despite the efforts of the State Budget and Control
Board, deficits were experienced in the fiscal years ending June 30, 1981, 1982,
1985 and 1986. All deficits have been funded out of the General Reserve Fund.
For the fiscal years ending June 30, 1983 and 1984, the State had cash
surpluses.
At the November 1988, general election there was approved a constitutional
amendment reducing from 4% to 3% the amount of General Fund revenue which must
be kept in the General Reserve Fund, and removing the provisions requiring a
special vote to adjust this percentage. The amendment also created a Capital
Reserve Fund equal to 2% of General Fund revenue. Before March 1 of each year,
the Capital Reserve Fund must be used to offset mid-year budget reductions
before mandating cuts in operating appropriations, and after March 1, the
Capital Reserve Fund may be appropriated by a special vote in separate
legislation by the General Assembly to finance in cash previously authorized
capital improvement bond projects, retire bond principal or interest on bonds
previously issued, and for capital improvements or other nonrecurring purposes
which must be ranked in order of priority of expenditure. Monies in the Capital
Reserve Fund not appropriated or any appropriation for a particular project or
item which has been reduced due to application of the monies to year-end
deficit, must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Fund was $87,999,428.
Because of anticipated revenue shortfalls for the fiscal year 1989-1990, the
State Budget and Control Board committed $42.4 million of the $58.7 million
Capital Reserve Fund in April 1990. Lack of sufficient funding at year end
resulted in an additional use of $4.5 million from the Capital Reserve Fund.
After the above reductions, the State had a fiscal year 1989-90 surplus of
$13,159,892 which was used to fund supplemental appropriations $1,325,000 and
the Capital Reserve Fund at $11,834,892. At June 30, 1990, the balance in the
General Reserve Fund was $94,114,351.
During fiscal year 1990-91, the State Budget Control Board approved mid-year
budget changes in November 1990 and again in February 1991, to offset lower
revenue estimates. Those changes included committing the Capital Reserve Fund
appropriation and reducing agency appropriations in an additional amount
necessary to offset (together with automatic expenditure reductions that are
tied to revenue levels) what would otherwise be a projected deficit of
approximately $132.6 million. In May 1991, the Budget and Control Board,
responding to April revenue figures and unofficial estimates indicating an
additional shortfall of $30 to $50 million, ordered an immediate freeze on all
personnel activities, from hiring to promotions; a freeze on purchasing, with
limited exceptions; and an indefinite halt to new contracts and contract
renewals. The Board also asked the General Assembly for the power to furlough
government workers periodically during the next fiscal year.
In the past, the State's budgetary accounting principles allowed revenue to be
recorded only when the State received the related cash. On July 30, 1991, the
Budget and Control Board approved a change in this principle for sales tax
revenue beginning with the fiscal year ended June 30, 1991. The Board's
resolution requires that sales taxes collected by merchants in June and received
by the State in July be reported as revenue in June rather than in July. This
change resulted in a $5.2 million decrease in reported 1990-91 sales tax revenue
and a one-time $83.1 million addition to fund balance. The one-time adjustment
increases the Fund balance to the level it would be if the new principle had
been in effect in years before 1990-91. Following such action, the year-end
balance in the General Reserve Fund was $33.4 million.
On July 26, 1991, the Board of Economic Advisors advised the Budget and Control
Board that it projected a revenue shortfall of $148 million for the fiscal year
1991-92 budget of $3.581 billion. In response, the Budget and Control Board
eliminated the 2% Capital Reserve Fund appropriation of $65.9 million and
reduced other expenditures across the board by 3%. On February 10, 1992, the
Board of Economic Advisers advised the Budget and Control Board that it had
revised its estimate of revenues for the current fiscal year downward by an
additional $55 million. At its February 11, 1992 meeting, the Budget and Control
Board responded by imposing an additional 1% across the board reduction of
expenditures (except with respect to approximately $10 million for certain
agencies). At its February 13, 1992 meeting the Budget and Control Board
restored a portion of the 1% reduction to four education-related agencies
totalling approximately $5.7 million. These expenditure reduction measures, when
coupled with revenue increases projected by the Budget and Control Board,
resulted in an estimated balance of approximately $1.4 million in the General
Fund for the fiscal year 1991-92. Despite such actions, expenditures exceeded
revenues by $38.2 million and, as required by the South Carolina Constitution,
such amount was withdrawn from the General Reserve Fund to cover the shortfall.
On August 22, 1992, the Budget and Control Board adopted a plan to reduce
appropriations under the 1992 Appropriations Act because of revenue shortfall
projections of approximately $200 million for the 1992-93 fiscal year. These
reductions were based on the rate of growth in each agency's budget over the
past year. On September 15, 1992, the Supreme Court of South Carolina enjoined
the Budget and Control Board from implementing its proposed plan for budget
reductions on the grounds that the Board had authority to make budget reductions
only across the board based on total appropriations. In response to this
decision, the Board instituted a 4% across the board reduction on November 10,
1992, the Budget and Control Board permanently reduced the $88.1 million in
appropriations which were set aside on September 15, 1992. This action along
with improved actual revenue collections created a budgetary surplus of
approximately $101 million.
From the early 1920's to the present time, the State's economy has been
dominated by the textile industry with over one out of every three manufacturing
workers directly or indirectly related to the textile industry. While the
textile industry is still the major industrial employer in the State, since 1950
the State's economy has undergone a gradual transition. The economic base of the
State has diversified as the trade and service sectors developed and with the
added development of the durable goods manufacturing industries, South
Carolina's economy now resembles more closely that of the United States.
In South Carolina in 1992, personal income grew at an average annual rate of
5.9%. During the same period the nation's income grew 6.1% and the Southeast
grew 6.5%. Over the last five (5) years (1987-1992) personal income in South
Carolina rose at a compounded annual rate of 7.0%, outpacing the nation and the
Southeast with income growth rates of 6.2% and 6.8%, respectively, in the same
period. During the first nine months in 1993, personal income in South Carolina
rose 5.7% while the rate of increase in the U.S. for the same period was 5.2%.
Monthly unemployment rates in the State have equalled or been below comparable
national rates for the nation during 1993. The rate for December, 1993, was 7%
compared to the 6.4% national rate.
TENNESSEE FUND
In 1978, the voters of the State of Tennessee approved an amendment to the State
Constitution requiring that (1) the total expenditures of the State for any
fiscal year shall not exceed the State's revenues and reserves, including the
proceeds of debt obligations issued to finance capital expenditures and (2) in
no year shall the rate of growth of appropriations from State tax revenues
exceed the estimated rate of growth of the State's economy. No debt obligation
may be authorized for the current operation of any State service or program
unless repaid within the fiscal year of issuance.
In response to public demand for better public education throughout the State,
the 1992 Tennessee General Assembly temporarily raised the State sales tax by
one-half of one percent to 6%, effective April 1, 1992. This increase became
permanent as a result of the 1993 legislative session. This increase establishes
the maximum total State and local sales tax rate at 8.75%. State Department of
Revenue collections for the fiscal year ended June 30, 1993 increased 5.5% over
fiscal 1992, or $43.9 million over original estimates. In the first four months
of fiscal year 1993, revenue collections were $48.9 million over estimates. In
late 1993, the State's rainy day fund reached $150 million -- the highest in the
State's history. Adjusted for inflation, taxable sales grew by 7.5% from the
third quarter of 1992 to the third quarter of 1993, triple the long-range
inflation-adjusted average of 2.5%. State revenue collections for June 1993
increased 9.8% over June 1992, after factoring out new taxes. August 1993
revenue collection figures were 10.5% over August 1992 figures. State revenue
collections in December, 1993 increased 7.2% over those in December, 1992.
Although the issue of instituting a State income tax is still being discussed by
legislators, most political observers in Tennessee doubt such a proposal will be
passed within the next two-three years. Few candidates for governor have said
they would work for major changes in the current tax system.
The Tennessee economy generally tends to rise and fall in a roughly parallel
manner with the U.S. economy, although in recent years Tennessee has experienced
less economic growth than the U.S. average. Like the U.S. economy, the Tennessee
economy entered recession in the last half of 1990 and continued throughout the
majority of 1991 and into 1992 as the Tennessee index of leading economic
indicators trended downward throughout the period. The Tennessee economy gained
strength during 1992 and this renewed vitality continued into 1993. Current
indicators are for the State to enjoy a year of economic gains in 1994, although
the two-year forecast horizon covering 1994 and 1995 is not expected to be a
boom period for the State. One forecast is for slow growth through 1994, with a
projected growth of real taxable sales in 1994 of 1.9%.
The Tennessee index of leading economic indicators fluctuated in 1992 and, in
late 1993, leading indicators and coincident indicators generally were up,
except for a 5.2% drop in October, 1993. In July, 1993, the composite index was
up 1.52%; in August, 1993, it was up 3.81%; and in September, it was up 7.60%.
In June, 1993, the composite index was up 1.37% over the same month one year
earlier.
In economic development, 1992 was Tennessee's third-best year since records have
been kept, although it must still be regarded as languid, since above average
growth normally occurs during the first two years of an economic expansion.
Current statistics show that inflation-adjusted personal income grew 4.8% from
the second-quarter of 1991 to the second quarter of 1992. A growth of 2.4% in
non-agricultural employment occurred between the third quarter of 1991 and the
third quarter of 1992. According to the U.S. Department of Labor, average annual
pay in Tennessee increased 5.9% in 1992, to $22,807. The national average was
5.4% and $25,903 in pay. For the year ended June 30, 1993, however, Tennessee
led the nation in bankruptcy filings with a rate twice the national average.
Historically, the Tennessee economy has been characterized by a greater
concentration in manufacturing employment than the U.S. as a whole. The economy
is, however, undergoing a structural change through the increase in service
sector employment. Service sector employment has climbed steadily since 1960,
increasing its share of overall state employment from 13.0% to 24.3% in 1993.
From the third quarter of 1992 to the third quarter of 1993, 40.9% of employment
growth occurred in the services sector. Over the same period, employment in
durable goods manufacturing has been flat and employment in the nondurable goods
sector has been in decline. Tennessee's unemployment rate dropped to 5.1% for
November, 1993, which was its lowest level in over three years. By November,
1993, only one county had an unemployment rate over 10% for the first time since
1974. Tennessee's unemployment rate dropped to an average 5.6% during the third
quarter of 1993.
Tennessee's population increased 6.2% from 1980 to 1990, less than the national
increase of 10.2% for the same period. In December 1992 the State's population
reached approximately 4.9 million. Population growth in Tennessee is expected to
come mostly in the major metropolitan areas over the next 10-15 years. The
overall state population is expected to grow 5.5% between 1990 and 2000, then
4.6% for the period between 2000 and 2010. Greatest growth is expected to occur
in the Nashville MSA, and the largest population decline is expected in the
rural counties of northwest Tennessee. This declining rate of population,
coupled with the structural changes in the Tennessee economy and the increased
competition from domestic and international trading partners, comprise three
trends that are likely to influence the State's long-term outlook.
Manufacturing employment in Tennessee declined in 1993 when manufacturing
employment in October 1993 showed a decrease of approximately 1.12% over the
same month in 1992. Total non-agricultural employment in Tennessee was
approximately 2,309,000 in the first quarter of 1994, which represented an
increase over the same quarter in 1993 of 2.02%. Manufacturing employment is one
component of non-agricultural employment. Non-agricultural employment in
Tennessee is relatively uniformly diversified with approximately 23% in the
manufacturing sector, approximately 23% in the wholesale and retail trade
sector, approximately 22% in the service sector, and approximately 16% in
government. The State also continued to attract new manufacturing facilities.
Sector employment figures for fiscal year 1993-94 are not available at this
time.
Tennessee's general obligation bonds are rated Aaa by Moody's and AA+ by
Standard & Poor's. Tennessee's smallest counties have Moody's lower ratings
ranging from Baa to B in part due to these rural counties' limited economies
that make them vulnerable to economic downturns. Tennessee's four largest
counties have the second highest of Moody's nine investment grades, Aa. There
can be no assurance that the economic conditions on which these ratings are
based will continue or that particular obligations contained in the Portfolio of
the Tennessee Fund may not be adversely affected by changes in economic or
political conditions.
TEXAS FUND
The State of Texas is the second largest by size among the states of the United
States. Texas is the third largest state by population, based upon the 1990
census undertaken by the U.S. Census Bureau. The average annual population
growth rate for the State between 1980 and 1990 was approximately 1.8%.
The Texas output accounts for about 7% of the total output of the United States.
Long identified with the oil and gas industry, these businesses today account
for only approximately 12% of the State's economy. The service- producing
sectors (e.g. transportation, public utilities, finance, insurance, real estate,
trade, services and government) are the major sources of job growth in Texas.
Further, manufacturing job growth is anticipated by the Comptroller of Public
Accounts to be significant to the State's future growth.
Employment in the State increased steadily through the 1970's and the early
1980's. The precipitous decline in oil prices in early 1986 and changes in the
Federal income tax laws affecting real estate resulted in a weaker Texas economy
in general. However, by early 1987 the Texas economy had moved into a period of
recovery; economic expansion has continued since 1988. Based upon information
gathered by the Texas Employment Commission and the U.S. Bureau of Labor
Statistics, Texas nonfarm employment reached an all-time high of 7.46 million
jobs in 1993. At the same time, the jobless rate has fallen from a peak of
approximately 10% in the summer of 1986 to about 6.0% in the middle of 1990
before rising to a current rate of approximately 7% as of October, 1993.
The State does not levy any property tax for general revenue purposes; however,
such taxes are an important source of revenue for local political subdivisions
in the State. The total property tax levied by all taxing jurisdications
(counties, cities, school districts and special districts) reached approximately
$14.0 billion in 1992, including approximately $2.3 billion levied by cities,
$2.0 billion levied by counties, approximately $8.2 billion levied by school
districts and approximately $1.5 billion levied by special districts. The total
value of taxable property in the State amounted to approximately $628 billion in
1991, according to state records.
Historically, the primary sources of the State's revenues have been sales taxes,
mineral severance taxes and federal grants. Due to the collapse of oil and gas
prices and the resulting enactment by recent Legislatures of new tax measures,
including those increasing the rates of existing taxes and expanding the tax
base for certain taxes, there has been a reordering in the relative importance
of the State's taxes in terms of their contribution to the State's revenue in
any year. In 1993, Federal receipts became the State's largest revenue source,
accounting for approximately 28.4% of total revenue during fiscal year 1992.
Sales taxes which had been the State's main revenue source, fell to second
place, accounting for 27% of state revenues during fiscal year 1993. Interest
and investment income became the third largest revenue source, accounting for
6.4% of the total state revenue during fiscal year 1993. The motor fuel tax
became the State's fourth largest revenue source, accounting for approximately
6.2% of the total revenue during fiscal year 1992, while licenses, fees and
permits fell to being the State's fifth largest revenue source, accounting for
approximately 6.1% of the total revenue. The State also imposes motor vehicle,
oil and gas severance and other taxes. The State does not impose any personal or
corporate income tax (although it does impose a corporate franchise tax
measured, in part, by the net earned surplus of the corporation).
In each of the past five years the State has ended the year with a cash surplus
in the General Revenue Fund: at the end of fiscal year 1989, that surplus was
$297 million; at the end of fiscal year 1990, that surplus was $767 million; at
the end of fiscal year, 1991 that surplus was $1,005 billion; at the end of
fiscal year 1992, that surplus was $609 million; and at the end of the most
recent fiscal year, 1993, that surplus was $1.623 billion.
Except as specifically authorized, the Constitution generally prohibits the
creation of debt by or on behalf of the State; further, the Constitution
prohibits the lending or pledging of the credit of the State in any manner to or
in support of the payment of liabilities of any person (including
municipalities). For purposes of this limitation, "debt" generally comprises
obligations which are payable over a period extending beyond the end of the
current budget period and out of monies other than funds available or expected
to become available during that budget period. However, "debt" does not include
revenue bonds which are not payable from tax sources (or the payment of which is
subject to appropriation).
At various times, the voters of the State, by adoption of constitutional
amendments, have authorized the issuance of debt of the State, including general
obligation indebtedness for which the full faith and credit and the taxing power
of the State may be pledged. The total amount of such debt which has been
authorized is in excess of $10.03 billion; as of November 30, 1993, there was
outstanding such debt in the amount of approximately $3.603 billion.
In addition to the issuance of general obligation indebtedness, certain state
agencies have the authority to issue revenue bonds indirectly payable from funds
appropriated from the General Revenue Fund. Further, additional state programs
may be financed with revenue bonds or similar obligations payable from revenues
generated by the specific programs authorized, and not from the general revenues
of the State or its taxing power.
On December 6, 1987, a class action suit was filed on behalf of the League of
United Latin American Citizens, and other persons, mostly students, alleging
that the State discriminated against Mexican-American students by denying them
equal access to first class universities. On January 21, 1992, after a jury
trial, the Court ruled that the State's higher education system violated the
state constitution and enjoined the defendants from applying sections of the
Texas Education Code and present and future appropriations of the Legislature
relating to the financing of public universities, or distributing monies from
the Texas General Revenue Fund, the Permanent University Fund, or the Texas
Higher Education Assistance Fund, and from financing any permanent improvements
at the schools. On October 6, 1993, the State Supreme Court reversed the lower
court's decision and held that the method of financing higher education was not
in violation of the State's Constitution.
The State is a party to various legal proceedings relating to its operations and
governmental functions; the Texas Attorney General has rendered opinions with
respect to recent state bond issues that, none of such proceedings, if decided
adversely to the State, would have a material adverse effect on the financial
condition of the State.
Over the past several years, the state Legislature has passed several public
education financing systems which have ultimately been declared
unconstitutional. In 1991, the Legislature approved an appropriations bill
funding public education at a level of $16,038 billion for the 1992-93 biennium
under a school finance bill that was passed in 1990. On January 30, 1992, the
Texas Supreme Court held that the public school finance system enacted in 1990
levies an unconstitutional ad valorem tax; however, the Texas Supreme Court also
held that its decision will not adversely affect the validity, incontestability,
obligation of payment or source of payment of any bonds issued by Texas school
districts for authorized purposes prior to June 1, 1993, the distribution to
school districts of state and federal funds before June 1, 1993, in accordance
with present procedures and laws, or the assessment and collection after June 1,
1993, of any taxes or other revenues levied or imposed for or pledged to the
payment of any bonds issued or debt incurred prior to June 1, 1993. On July 7,
1992, a trial judge denied a request to appoint a court master to develop an
alternative school finance plan in the event the Texas Legislature failed to
develop a plan by June 1, 1993. In its 1993 regular session, the Legislature had
adopted legislation, including a call for an electoral referendum to approve the
amendment of state Constitution; that referendum was held on May 1, 1993, at
which time the constitutional amendment was defeated. The Legislative
subsequently passed SB7, which directed that the State's wealthiest school
districts choose from among various alternatives at sharing their wealth with
poorer districts. Upon review, the trial court upheld the constitutionality of
SB7, but required that the Legislature provide for the maintenance and efficient
funding of school facilities. It preserved the right of the plaintiffs to seek
further relief, under certain circumstances. An appeal of the decision is
likely.
VIRGINIA FUND
The Constitution of Virginia limits the ability of the Commonwealth to create
debt. An amendment to the Constitution requiring a balanced budget was approved
by the voters on November 6, 1984.
General obligations of cities, towns or counties are payable from the general
revenues of the entity, including ad valorem tax revenues on property within the
jurisdiction. The obligation to levy taxes could be enforced by mandamus, but
such a remedy may be impracticable and difficult to enforce. Under the Code of
Virginia, a holder of any general obligation bond in default may file an
affidavit setting forth such default with the Governor. If, after investigating,
the Governor determines that such default exists, he is directed to order the
State Comptroller to withhold State funds appropriated and payable to the entity
and apply the amount so withheld to unpaid principal and interest.
The economy of the Commonwealth of Virginia is based primarily on manufacturing,
the government sector, agriculture, mining and tourism.
The Commonwealth has maintained a high level of fiscal stability for many years
due in large part to conservative financial operations and diverse sources of
revenue. No significant new taxes or increases in the scope or amount of
existing taxes were passed at the 1994 session of the General Assembly.
In Davis v. Michigan (decided March 28, 1989), the United States Supreme Court
ruled unconstitutional Michigan's statute exempting from state income tax the
retirement benefits paid by the state or local governments and not exempting
retirement benefits paid by the federal government. At the time of this ruling,
under legislation subsequently amended in 1989 to provide uniform exemptions for
all pensioners, Virginia exempted state and local but not federal government
benefits. Several suits for refunds, some with multiple plaintiffs, were filed.
A state trial court ruling in favor of the Commonwealth was affirmed by the
Virginia Supreme Court on March 1, 1991, but on June 28, 1991, the decision of
the Virginia Supreme Court was vacated by the U.S. Supreme Court, and the case
was remanded to the Virginia Supreme Court for reconsideration in light of an
intervening U.S. Supreme Court decision on retroactive application of decisional
constitutional law. On November 8, 1991, Virginia Supreme Court affirmed its
March 1, 1991 ruling denying refunds. On June 18, 1993, the U.S. Supreme Court
reversed the November 8, 1991, ruling of the Virginia Supreme Court and remanded
the case to the Virginia Supreme Court for further procedings consistent with
the opinion of the U.S. Supreme Court. The Virginia Supreme Court remanded the
case to the trial court, which on January 7, 1994, denied refunds to the
plaintiffs. The trial court's decision has been appealed to the Virginia Supreme
Court. The Attorney General of Virginia cannot predict the outcome of this
lawsuit. The estimated potential financial impact on the Commonwealth of claims
for refunds by all federal pensioners is approximately $707.5 million, including
interest through December 31, 1993.
WASHINGTON FUND
Based on the U.S. Census Bureau's 1990 Census, the State of Washington is the
18th largest of the 50 states by population. The State is the 20th largest by
land area. From 1980 to 1990, the State's population increased at an average
annual rate of 1.8% while the United States' population grew at an annual rate
of 1.1% over the same period.
Seattle, the State's largest city, is situated on the Puget Sound and is part of
the strong international trade, manufacturing, high technology and business
service corridor which extends from Everett to Tacoma. The Pacific Coast-Puget
Sound region of the State includes 75% of the population, the major portion of
industrial activity and the major part of the State's forests which are
important to the timber and paper industries. The balance of the State includes
rich agricultural areas primarily devoted to grain, apple and other fruit
orchards, and dairy operations.
The economic base of the State includes manufacturing and service industries, as
well as agricultural and timber production. Overall, during 1987 through 1993,
employment within the State experienced growth in manufacturing as well as
non-manufacturing industries. Sectors in which growth has exceeded comparable
figures reported in the United States include durable and non-durable goods,
manufacturing, services and government. The Boeing Company, the State's largest
employer, is a preeminent aircraft manufacturer. Boeing exerts a significant
impact on overall State production, employment and labor earnings.
Between 1987 and 1991 employment within the State experienced growth in
manufacturing as well as non-manufacturing industries. Sectors of the State's
employment base in which growth has exceeded comparable figures reported for the
U.S. include durable and non-durable goods manufacturing, services and
government.
Washington's economy consists of both export and local industries. Exports to
other states account for 32% of Washington's goods and services while 10% of
Washington's goods and services are sold internationally. Washington ranks
number one in international exports per capita.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. On a combined basis, the aerospace, timber and
food processing industries employ about 9% of the State's non-farm workers. In
recent years, however, the non-manufacturing sector has played an increasingly
significant role in contributing to the State's economy.
The aerospace industry currently represents approximately 8% of all taxable
business income. The largest employer in the State is the Boeing Company, one of
the world's major aerospace firms. In terms of production, employment and labor
earnings, the Boeing Company has a significant impact on the State's economy.
The Boeing Company operates principally in three industry segments: commercial
transportation and products services; military transportation products; and
related systems and missiles and space. Financial performance of this company
has been extremely strong in recent years as measured by increased sales,
airplane deliveries and backlogs of orders. However, demand for military
production is diminishing. Also, recent cancellations and delayed deliveries of
commercial aircraft have been announced. Boeing reduced its workforce in the
State by 11,289 as of the end of 1993 and stated it expects to eliminate a total
of 7,000 jobs at its Washington operations, with the majority of the reductions
expected to occur in the first half of 1994 through attrition and layoffs.
By most measures, agriculture combined with food processing is Washington's most
important industry. Although Washington produces a variety of agricultural
products, its major products are wheat, milk, apples and cattle. The value of
agricultural production was $2.6 billion in 1992. Growth in agricultural
production, including potatoes and hay, was an integral factor in the State's
economic growth in the late 1980's and early 1990's.
Washington benefits from an abundance of natural forests which cover over 40% of
the land area. This abundance places forest products behind aerospace as the
State's second most important manufacturing industry. Employment in the forest
products industry makes up 2.6% of non-farm employment, and the largest employer
is The Weyerhaeuser Company. Productivity in the Washington forest products
industry increased steadily from 1980 to 1990; however, since 1991 recessionary
influences have resulted in a production decline, although a leveling and slight
increase in employment is projected for 1994. A continued decline in overall
production over the next few years is expected due to federally imposed
limitations on the harves of old growth timber and the inability to maintain the
recent record levels of production increases. Although some unemployment is
expected to occur in certain regions of the State, it is not expected to affect
the overall economic performance of the State materially.
Employment in the finance, insurance and real estate segments of the market is
estimated to represent 5.4% of all wage and salary employment within the State
in 1991. Since 1987 annual growth of employment in this sector of the economy
has averaged 2.3%, compared to 1.3% for the U.S. as a whole.
Washington is the closest U.S. mainland point to Asia. Consequently, the State
is a major trans-shipment point for commodities moving to and from the Pacific
Rim nations. The Port of Seattle and the Port of Tacoma each rank among the top
20 largest ports in the world based on volume of containerized cargo shipped.
The Pacific Rim countries, the Middle East, Europe, Central and South America
serve as major trading partners for both ports.
On a combined basis employment in the government sector represents approximately
18% of all wage and salary employment in the State. Seattle serves as the home
to several regional offices of federal government agencies and the State
receives an above average share of defense expenditures.
Tourism and services play a significant role in Washington's economy. The
highest employment growth between 1981 and the present occurred in the services
sector. As the business, legal and financial center of the State, Seattle ranks
ninth in the country in the number of downtown hotel rooms. The State's
mountains, beaches and wineries attract numerous tourists.
Boeing is a significant contributor to the high technology sector of the State's
economy. However, the State is also home of approximately 1,000 advanced
technology firms. Nearly 50% of these firms are computer related businesses.
Software development and programming services are by far the fastest growing
segments. In addition, several biotechnical firms located in the State have
attained international acclaim for their research and development. The State's
universities and research institutions serve as catalysts in expansion of high
tech industries. Other key factors which support continued growth of this area
include the State's existing industry base, well trained labor force, relatively
low cost power, and a progressive business climate with excellent transportation
access to world wide markets.
The State began the 1991-93 Biennium with a $468 million surplus and $260
million in the Budget Stabilization Account. The 1991-93 Biennium Budget assumed
use of an undesignated fund balance from the 1989-91 biennium of $498.5 million.
Weaker than expected revenue collections during the first six months of fiscal
year 1992 caused the State Economic and Revenue Forecast Council to reduce
projected revenues, resulting in a forecast of a General Fund shortfall.
Therefore, in December 1991, the Governor implemented a 2.5% reduction in agency
biannual General Fund-State appropriations. In April 1992, a 1991-93
Supplemental Budget was adopted by the Legislature and, following vetoes of
selected provisions, was signed by the Governor. The ending 1991-93 balance was
$234 million.
The Legislature passed a 1993-95 Operating Budget which contains $650 million in
general tax increases, $163 million in other revenues, $700 million in program
and administrative reductions, and $622 million in fund shifts (such as to
federal funding sources). The 1994 Supplemental Operating Budget includes $48
million in tax cuts, and $11 million revenue increase from a variety of sources
and $168 million in additional expenditures, many of which represent one-time
investments. The projected 1993-95 General Fund-State Balance is $164 million.
State tax revenue growth is limited so that it does not exceed the growth rate
of State personal income averaged over a three-year period. State tax revenues,
as defined, represent about one-half of all revenues coming to the State or
roughly 97% of General Fund-State revenues. The State may not impose on local
governments responsibility for new programs or increased levels of service under
existing programs without providing the financing to pay for the added services.
The proportion of State tax revenues which consist of direct State
appropriations to local governments cannot be decreased below the proportion
appropriated in the 1997 Biennium. To date, State revenue increases have
remained substantially below these limits.
Initiative 601, which became law in November 1993, limits increases in General
Fund-State expenditures to the average rate of population and inflation growth.
This initiative will replace the limitations described in the preceding
paragraph effective July 1, 1995, and sets forth a series of guidelines for
limiting tax and expenditure increases and stabilizing long-range budget
planning. It establishes a procedure for computing a fiscal year growth factor
based on a lagged, three-year average of population and inflation growth. This
growth factor is used to determine a State spending limit for programs and
expenditures supported by the General Fund. Two new reserve funds (the Emergency
Reserve Fund and Education Construction Fund) are created for depositing
revenues in excess of the spending limit and the current Budget Stabilization
Account is abolished. Like existing limitations, restrictions are placed on the
addition or transfer of functions to local government unless there is
reimbursement. Two provisions of Initiative 601 are currently applicable: the
requirement for legislative approval of fee increases beyond the fiscal year
growth factor, and restriction on new taxes being imposed without voter
approval. At the beginning of Fiscal Year 1996, the requirement for voter
approval of new tax measures expires. Taxes can then be enacted with a
two-thirds majority of both houses of the legislature if resulting General
Fund-State expenditures do not exceed the spending limit.
WEST VIRGINIA FUND
West Virginia's economy is heavily dependent upon the coal mining industry. A
reduction in the demand of certain types of coal has had an adverse impact upon
the industry and upon the economy of the State. Notwithstanding the importance
of the coal mining industry on the West Virginia economy, over the course of the
past few years, West Virginia's economy has benefitted from a developing tourism
industry. Tourism, directly and indirectly, accounts for a large portion of the
West Virginia economy. The Governor's Office and the State Legislature have
placed great emphasis upon developing the tourism industry in the State and,
accordingly, the Legislature has recently enacted a number of statutes designed
to foster the growth in tourism.
Real and personal property is currently being reappraised on a statewide basis
for ad valorem property tax purposes.
Data compiled by the State of West Virginia Bureau of Employment Programs
indicates that unemployment in West Virginia rose during 1991 and 1992. This
increase in unemployment is in contrast to a prior trend of year-over-year
improvements. The Bureau of Employment Programs indicates that this reflects the
impact of the national recession upon the economy of West Virginia.
During the 1991 regular session, the Legislature created the Division of Debt
Management under the auspices of the West Virginia State Board of Investments.
Through this division, the Board is now responsible for monitoring the State's
total debt position and developing a comprehensive long-term debt plan for the
State and its agencies.
In July of 1993 the West Virginia Supreme Court of Appeals ruled in the matter
of William S. E. Winkler and Diane Hickle v. State of West Virginia School
Building Authority et. al., 434, S.E. 2d 420 (W. Va 1993), that revenue bonds
authorized under the School Building Authority Act violated Section 4 of Article
X of the West Virginia Constitution in that such bonds create without voter
approval financial obligations of the State which must be satisfied by the State
legislature out of the State's general revenue funds. The Court's opinion
invalidated approximately $160 million in proposed new bonds to be issued by the
School Building Authority (SBA). The Court specified that its ruling would be
applied prospectively and not retroactively. Therefore, the Court did not
invalidate the approximately $331 million in SBA bonds already outstanding. The
Court also authorized the SBA to issue $154 million in new bonds which will be
used to refund the existing bonds at a lower interest rate. The ruling of the
Court is limited in scope and provides that the State Constitution does not
prohibit the issuance of revenue bonds to be redeemed from a special fund and
does not prohibit the State or its agencies from issuing revenue bonds to be
liquidated from contracts requiring rental payments from another State agency or
from contracts for necessary services such as utilities. Some State officials
have speculated that the Court's opinion may provide precedent for the challenge
of other State bonds issued in a manner similar to the SBA bonds, such as the
bonds issued for the regional jail system and to replace Weston Hospital. In the
future it is assumed that test cases addressing the constitutionality of a bond
issue will be instituted if there is a question as to whether State bonds are
revenue or general obligation bonds. The Court noted and was critical of the
fact that no such test case had been used for the SBA bonds.
<PAGE>
West Virginia's economy should be enhanced by the West Virginia Highway System
Improvements initiative which is anticipated to involve the expenditure of
approximately $4.62 billion of Federal and State funds over the next several
years to construct new roadways in the State.
<PAGE>
INVESTMENT ADVISER SHAREHOLDER SERVICING AGENT
Massachusetts Financial Services Company MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116 500 Boylston Street, Boston, MA 02116
(617) 954-5000 Toll free: 800-225-2606
DISTRIBUTOR MAILING ADDRESS:
MFS Financial Services, Inc. P.O. Box 2281, Boston, MA 02107-9906
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company Deloitte & Touche
225 Franklin Street, Boston, MA 02110 125 Summer Street, Boston, MA 02110
500 Boylston Street, Boston, Mass. 02116
MFS(R) Alabama Municipal Bond Fund MFS(R) New York Municipal Bond Fund
MFS(R) Arkansas Municipal Bond Fund MFS(R) North Carolina Municipal
MFS(R) California Municipal Bond Fund Bond Fund
MFS(R) Florida Municipal Bond Fund MFS(R) Pennsylvania Municipal
MFS(R) Georgia Municipal Bond Fund Bond Fund
MFS(R) Louisiana Municipal Bond Fund MFS(R) South Carolina Municipal
MFS(R) Maryland Municipal Bond Fund Bond Fund
MFS(R) Massachusetts Municipal Bond Fund MFS(R) Tennessee Municipal Bond Fund
MFS(R) Mississippi Municipal Bond Fund MFS(R) Texas Municipal Bond Fund
MFS(R) Virginia Municipal Bond Fund
MFS(R) Washington Municipal
Bond Fund
MFS(R) West Virginia Municipal
Bond Fund
MST-1-6/94/345M
<PAGE>
MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) NEW YORK MUNICIPAL BOND FUND
SUPPLEMENT TO THE CURRENT PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
Effective April 16, 1993 MFS Financial Services, Inc. will pay dealers an
additional commission equal to 0.25% of the public offering price of shares of
the Fund sold by such dealers. These commissions are in addition to the regular
dealer allowance or commission described in the Prospectus. Purchases of $1
million or more for each shareholder account will not entitle a dealer to such
additional commission.
THE DATE OF THIS SUPPLEMENT IS APRIL 16, 1993
MST-16N 4/93 36M
<PAGE>
MFS(R) MUNICIPAL STATEMENT OF
SERIES TRUST ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) June 1, 1994
- ------------------------------------------------------------------------------
Page
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1. The Trust ............................................................ 2
2. Investment Objective, Policies and Restrictions ...................... 2
3. Performance Information .............................................. 8
4. Determination of Public Offering Price and Net Asset Value;
Valuation of Portfolio Securities .................................... 10
5. Management of the Trust .............................................. 10
Trustees ........................................................... 10
Officers ........................................................... 10
Investment Adviser ................................................. 13
Custodian .......................................................... 14
Shareholder Servicing Agent ........................................ 14
Distributor ........................................................ 15
6. Taxation ............................................................. 16
7. Shareholder Services ................................................. 17
8. Description of Shares, Voting Rights and Liabilities ................. 20
9. Portfolio Transactions ............................................... 20
10. Distribution Plans ................................................... 21
11. Independent Accountants and Financial Statements ..................... 22
Appendix A -- Performance Results .................................... 24
Appendix B -- Sales Charges Received ................................. 28
Appendix C -- Amounts Paid Under the Distribution Plans .............. 30
MFS MUNICIPAL SERIES TRUST
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Trust's
Prospectus dated June 1, 1994. This Statement of Additional Information should
be read in conjunction with the Prospectus, a copy of which may be obtained
without charge by contacting the Shareholder Servicing Agent (see last page for
address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
1. THE TRUST
MFS Municipal Series Trust (the "Trust") is an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1984. On August 27, 1993, the Trust changed its
name from MFS Multi-State Municipal Bond Trust. On August 3, 1992 the Trust
changed its name from "MFS Managed Multi-State Municipal Bond Trust." The Trust
was known as "MFS Managed Multi-State Tax-Exempt Trust" until its name was
changed effective August 12, 1988. The Trust presently consists of 19 separate
series, including: the Alabama Fund, the Arkansas Fund, the California Fund, the
Florida Fund, the Georgia Fund, the Louisiana Fund, the Maryland Fund, the
Massachusetts Fund, the Mississippi Fund, the New York Fund, the North Carolina
Fund, the Pennsylvania Fund, the South Carolina Fund, the Tennessee Fund, the
Texas Fund, the Virginia Fund, the Washington Fund and the West Virginia Fund,
each of which is referred to as either a "State Fund" or a "Fund." Shares of MFS
Municipal Income Fund, the nineteenth series of the Trust, are offered and sold
pursuant to a separate prospectus and statement of additional information. The
California Fund was organized as a series of the Trust on June 3, 1993. Prior
thereto, the California Fund was organized as a separate Massachusetts business
trust.
Massachusetts Financial Services Company, a Delaware corporation ("MFS" or the
"Adviser"), is the Trust's investment adviser. References in this Statement of
Additional Information to the "Prospectus" are to the Prospectus dated June 1,
1994.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE -- The investment objective of each State Fund is to
provide current income exempt from federal income taxes and from the personal
income taxes, if any, of that State. There can be no assurance that any State
Fund will achieve its investment objective. Shareholder approval is not required
to change the investment objective of any State Fund.
INVESTMENT POLICIES -- As a fundamental policy, the Trust seeks to achieve the
investment objective of each State Fund by investing the assets of that State
Fund primarily (i.e., at least 80% of its assets under normal conditions) in
municipal bonds and notes and other debt instruments the interest on which is
exempt from federal income taxes and from the personal income taxes, if any, of
that State. These obligations are issued primarily by that State, its political
subdivisions, municipalities, agencies, instrumentalities or public authorities.
The Trust may purchase for any Fund municipal bonds the interest on which may be
subject to an alternative minimum tax. The investment policies of the Funds are
described in detail in the Prospectus.
"WHEN-ISSUED" SECURITIES: As described in the Prospectus under "Investment
Objective and Policies", each Fund may purchase new issues of tax-exempt
securities on a "when-issued" basis. In order to invest the Funds' assets
immediately, while awaiting delivery of securities purchased on a "when- issued"
basis, short-term obligations that offer same day settlement and earnings will
normally be purchased. Although short-term investments will normally be in
tax-exempt securities, short-term taxable securities may be purchased if
suitable short-term tax-exempt securities are not available. When a commitment
to purchase a security on a "when-issued" basis is made, procedures are
established consistent with the General Statement of Policy of the Securities
and Exchange Commission (the "SEC") concerning such purchases. Since that policy
currently recommends that an amount of the Funds' assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
cash, short-term money market instruments or high quality debt securities
sufficient to cover any commitments are always expected to be available.
However, although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a "when-issued" basis may
involve more risk than other types of purchases. For example, when the time
comes to pay for a "when-issued" security, portfolio securities of the Fund may
have to be sold in order for the Fund to meet its payment obligations, and a
sale of securities to meet such obligations carries with it a potential for the
realization of capital gain, which is not tax-exempt. Also, if it is necessary
to sell the "when-issued" security before delivery, the Fund may incur a loss
because of market fluctuations since the time the commitment to purchase the
"when-issued" security was made. Moreover, any gain resulting from any such sale
would not be tax-exempt. Additionally, because of market fluctuations between
the time of commitment to purchase and the date of purchase, the "when-issued"
security may have a lesser (or greater) value at the time of purchase than the
Fund's payment obligations with respect to the security.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
sellers who are member firms or a subsidiary thereof of the New York Stock
Exchange or members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has determined
to be of comparable creditworthiness. The securities that a Fund purchases and
holds through its agent are U.S. Government securities, the values of which are
equal to or greater than the repurchase price agreed to be paid by the seller.
The repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If, at the
time the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
VARIABLE AND FLOATING RATE OBLIGATIONS: Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime rate
at a major commercial bank, and that a bondholder can demand payment of the
obligations on behalf of the Fund on short notice at par plus accrued interest,
which amount may be more or less than the amount the bondholder paid for them.
The maturity of floating or variable rate obligations (including participation
interests therein) is deemed to be the longer of (i) the notice period required
before the Fund is entitled to receive payment of the obligation upon demand or
(ii) the period remaining until the obligation's next interest rate adjustment.
If not redeemed by the Fund through the demand feature, the obligations mature
on a specified date which may range up to thirty years from the date of
issuance.
INVERSE FLOATING RATE OBLIGATIONS. Each Fund may invest in so called "inverse
floating rate obligations" or "residual interest bonds" or other obligations or
certificates relating thereto structured to have similar features. In creating
such an obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short-term
obligations, the interest rate of which is reset at short intervals, typically
35 days. The other half of the debt is issued as inverse floating rate
obligations, the interest rate of which is calculated based on the difference
between a multiple of (approximately two times) the interest paid by the issuer
and the interest paid on the short-term obligation. Under usual circumstances,
the holder of the inverse floating rate obligation can generally purchase an
equal principal amount of the short-term obligation and link the two obligations
in order to create long-term fixed-rate bonds. Because the interest rate on the
inverse floating rate obligation is determined by subtracting the short-term
rate from a fixed amount, the interest rate will decrease as the short-term rate
increases and will increase as the short-term rate decreases. The magnitude of
increases and decreases in the market value of inverse floating rate obligations
may be approximately twice as large as the comparable change in the market value
of an equal principal amount of long-term bonds which bear interest at the rate
paid by the issuer and have similar credit quality, redemption and maturity
provisions.
OPTIONS: Each Fund may, subject to any applicable laws, write covered put and
call options and purchase put and call options on fixed income securities that
are traded on U.S. securities exchanges and over-the-counter on behalf of the
Fund only for hedging purposes. Call options written by the Funds give the
holder the right to buy the underlying securities from the Fund at a fixed
exercise price; put options written by the Fund give the holder the right to
sell the underlying securities to the Fund at a fixed exercise price. A call
option written by a Fund is "covered" if the Fund owns the underlying security
covered by the call on the Fund or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) on behalf of a
Fund upon conversion or exchange of other securities held in its portfolio. A
call option is also covered if the Fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or high grade government securities in a
segregated account with its custodian. A put option written by a Fund is
"covered" if the Fund maintains in a segregated account with its custodian cash
or high grade government securities with a value equal to the exercise price, or
else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is equal to or greater than
the exercise price of the put written or less than the exercise price of the put
written if the difference is maintained by the Fund in cash or high grade
government securities in a segregated account with its custodian. Put and call
options written by a Fund may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded, and applicable laws and regulations. The
writer of an option may have no control over when the underlying securities must
be sold, in the case of a call option, or purchased, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Such transactions permit a Fund to generate additional premiums,
which will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired for that Fund. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If a Fund desires to sell a particular security on which it
has written a call option, it will effect a closing transaction for that Fund
prior to or concurrent with the sale of the security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; a Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the closing out of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result a Fund would have to exercise the options in order to realize any profit.
If the Fund is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
A Fund may write options in connection with buy-and-write transactions; that is,
the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at- the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by a Fund
in the same market environments that call options are used in equivalent
buy-and-write transactions.
A Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price, This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
A Fund may purchase put options to hedge against a decline in the value of the
Fund's portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs.
A Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing for the Fund's portfolio in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund, upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Fund. The Fund may also purchase put and call
options for hedging and non-hedging purposes.
A Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, up to a stated
time in the future or, in some cases, on a future date. A Fund may purchase
detachable call options either in connection with its purchase of the underlying
municipal securities or in separate transactions unrelated to purchases of the
underlying municipal securities. In general, however, a Fund will only purchase
detachable call options that are issued at the same time as the underlying
municipal securities. A Fund may or may not purchase the underlying municipal
securities. Because detachable call options may be long term instruments, their
value could be subject to greater volatility and, if the Fund seeks to sell an
option it has purchased, it could sustain a loss of all or a portion of the
amount paid to purchase the option. In this regard, detachable call options have
only recently been introduced and there is not yet an established market for the
sale of such instruments. In addition, depending on changes in the value of the
underlying municipal security, it may not be profitable for the Fund to exercise
an option it has purchased. In that event, the Fund will lose the amount of the
purchase price paid for the option.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets. Although the Adviser disagrees with this
position, the Adviser intends to limit each Fund's writing of over-the-counter
options in accordance with the following procedure. Except as provided below,
each Fund intends to write over-the-counter options only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York. Also, the contracts each Fund has in place with such primary dealers will
provide that the Fund has the absolute right to repurchase an option it writes
at any time at a price which represents the fair market value, as determined in
good faith through negotiation between the parties, but which in no event will
exceed a price determined pursuant to a formula in the contract. Although the
specific formula may vary between contracts with different primary dealers, the
formula will generally be based on a multiple of the premium received by the
Fund for writing the option, plus the amount, if any, of the option's intrinsic
value (i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the security
and the strike price of the option if the option is written out-of-the-money.
Each Fund will treat all or a portion of the formula amount as illiquid for
purposes of the 15% test imposed by the SEC staff. Each Fund may also write
over-the-counter options with non-primary dealers and will treat the assets used
to cover these options as illiquid for purposes of such 15% test.
FUTURES CONTRACTS: Each Fund intends to enter into Futures Contracts for hedging
purposes and for non-hedging purposes, to the extent permitted by applicable
law. A Futures Contract is a bilateral agreement providing for the purchase and
sale for future delivery of a fixed income security, a contract for the purchase
or sale for future delivery of Eurodollar deposits or a futures contract based
on municipal bond or other financial indices, including any index of fixed
income securities. A "sale" of a Futures Contract means a contractual obligation
to deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a Futures Contract means a contractual
obligation to acquire the securities called for by the contract at a specified
price on a specified date. Futures Contracts have been designed by exchanges
which have been designated as "contract markets" by the Commodity Futures
Trading Commission (the "CFTC"), and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Presently, Futures Contracts are based on such debt securities
as long-term U.S. Treasury Bonds, Treasury Notes, three-month U.S. Treasury
Bills and bank certificates of deposit and on an index of municipal bonds and
Eurodollar deposits. Existing contract markets include the Chicago Board of
Trade and the International Monetary Market of the Chicago Mercantile Exchange.
Futures Contracts are traded on these markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
At the same time a Futures Contract is purchased or sold for a Fund, the Fund
must allocate cash or securities as a deposit payment ("initial deposit"). The
initial deposit varies but may be as low as 5% or less of the value of the
contract. Daily thereafter, the Futures Contract is valued on a marked-to-
market basis and the Fund may be required to pay or receive additional
"variation margin", based on any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment equal to the amount, if any,
by which the value of the index at maturity is above or below the value of the
index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index and its composition is changed periodically. In addition, Futures
Contracts on Eurodollar deposits also provide for the payment and acceptance of
a cash settlement, based on changes in the value of the underlying instrument.
Although Futures Contracts call for the actual delivery or acquisition of
securities or, in the case of Futures Contracts based on an index, the making or
acceptance of a cash settlement at a specified future time, the contractual
obligation is usually fulfilled before such date by buying or selling, as the
case may be, on a commodities exchange, an identical Futures Contract calling
for settlement in the same month, subject to the availability of a liquid
secondary market. A Fund incurs brokerage fees when the Trust purchases and
sells Futures Contracts for it.
The purpose of the purchase or sale of a Futures Contract entered into for
hedging purposes, in the case of a portfolio such as that of each of the Funds
which holds or intends to acquire long-term fixed income securities, is to
attempt to protect the Funds from fluctuations in interest rates without
actually buying or selling long-term fixed income securities. For example, if a
Fund owns long-term bonds, and interest rates were expected to increase, the
Fund might enter into Futures Contracts for the sale of debt securities. Such a
sale would have much the same effect as selling an equivalent value of the
long-term bonds owned by the Fund. If interest rates did increase, the value of
the debt securities in the portfolio would decline, but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities
investing in bonds with short maturities when interest rates are expected to
increase. However, the use of Futures Contracts as an investment technique
allows the Fund to maintain a hedging position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent a Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts, on behalf of the
Fund, will consist of cash or short-term money market instruments from its
portfolio in an amount equal to the difference between the fluctuating market
value of such Futures Contracts and the aggregate value of the initial and
variation margin payments made by the Fund, with respect to such Futures
Contracts. The Funds also may enter into transactions in Futures Contracts for
non-hedging purposes, to the extent permitted by applicable law.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although each Fund believes that
use of such contracts will benefit the Fund, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if a Fund, has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash, it may have to sell bonds
from its portfolio to meet daily variation margin requirements. Such sales of
bonds may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund, may have to sell securities at a time when it may be
disadvantageous to do so. Transactions entered into for non-hedging purposes
involve greater risk and could result in losses which are not offset by gains on
other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: Each Fund, subject to any applicable laws, may
purchase and write options on Futures Contracts ("Options on Futures Contracts")
for hedging purposes and for non-hedging purposes. An Option on a Futures
Contract provides the holder with the right to enter into a "long" position in
the underlying Futures Contract (i.e., a purchase of the Futures Contract), in
the case of a call option, or a "short" position in the underlying Futures
Contract (i.e., a sale of the Futures Contract), in the case of a put option, at
a fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. Such Options on Futures Contracts will be traded on
contract markets regulated by the CFTC. Depending on the pricing of the option
compared to either the price of the Futures Contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the Futures Contract or underlying debt securities. As with
the purchase of Futures Contracts, when a Fund's portfolio is not fully invested
the Fund may purchase a call Option on a Futures Contract on behalf of that Fund
to hedge against a market advance due to declining interest rates.
The writing of a call Option on a Futures Contract by a Fund may constitute a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the Futures Contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund portfolio holdings. The writing of a put Option on a
Futures Contract may constitute a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the options is higher than the exercise price,
the Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund may incur a loss which will be
reduced by the amount of the premium it receives, less related transaction
costs. Depending on the degree of correlation between changes in the value of
the portfolio securities of a Fund and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts, may to
some extent be reduced or increased by changes in the value of the Fund's
portfolio securities. The writer of an Option on a Futures Contract is subject
to the requirement of initial and variation margin payments.
Each Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
security or securities included in the index underlying the Futures Contract, or
(c) through the holding of a call on the same Futures Contract and in the same
principal amount as the call written where the exercise price of the call held
(i) is equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, cash equivalents or U.S. Treasury securities in
a segregated account with its custodian. The Trust may cover the writing of put
Options on Futures Contracts on behalf of a Fund (a) through sales of the
underlying Futures Contract, (b) through segregation of cash, cash equivalents
or U.S. Treasury securities in an amount equal to the value of the security or
index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held is (i) equal to or greater than the
exercise price of the put written or (ii) less than the exercise price of the
put written if the difference is maintained by the Fund in cash, cash
equivalents or U.S. Treasury securities in a segregated account with its
custodian. Put and call Options on Futures Contracts written by a Fund may also
be covered in such other manner as may be in accordance with the requirements of
the exchange on which they are traded and applicable laws and regulations.
Each Fund may purchase a put option on a Futures Contract to hedge its
portfolio. Purchases of such put options will therefore be made for the same
types of purposes as protective put options on portfolio securities. A Fund will
purchase a put option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk a Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the option
and close out the underlying Futures Contract, subject to the risks of futures
trading described herein. In addition to the correlation risks discussed above,
the purchase of an option also entails the risk that changes in the value of the
underlying Futures Contract will not be fully reflected in the value of the
option purchased. The writing of an Option on a Futures Contract, however,
involves all of the risks of futures trading, including the requirement to make
initial and variation margin payments. Transactions in Options on Futures
Contracts entered into for non-hedging purposes involve greater risk and could
result in losses which are not offset by gains on other portfolio assets.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS: Various additional risks exist with respect to the trading of
options, Futures Contracts and Options on Futures Contracts. For example, a
Fund's ability effectively to hedge all or a portion of its portfolio through
transactions in such instruments will depend on the degree to which price
movements in the underlying index or instrument correlate with price movements
in the relevant portion of the Fund's portfolio. The trading of Futures
Contracts and options entails the additional risk of imperfect correlation
between movements in the Futures or option price and the price of the underlying
index or obligation, while the writing of options also entails the risk of
imperfect correlation between securities used to cover options written and the
securities underlying such options. The anticipated spread between the prices
may be distorted because of various factors, which are set forth under
"Investment Objective, Policies and Restrictions -- Futures Contracts".
Transactions in options, Futures Contracts and Options on Futures Contracts
entered into for non-hedging purposes involve greater risk and may result in
losses which are not offset by gains on other portfolio assets.
A Fund's ability to engage in options and futures strategies will also depend on
the availability of liquid markets in such instruments. "Options" above sets
forth certain reasons why a liquid secondary market may not exist. Transactions
in these instruments are also subject to the risk of brokerage firm or clearing
house insolvencies.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit, which could
make it difficult or impossible to establish or liquidate positions. In
addition, the exchanges on which futures and options are traded may impose
limitations governing the maximum number of positions on the same side of the
market and involving the same underlying instruments which may be held by a
single investor, whether acting alone or in concert with others (regardless of
whether such contracts are held on the same or different exchanges or held or
written in one or more accounts or through one or more brokers.)
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees. In addition, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost.
In order to assure that the Funds will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts and Options on Futures
Contracts only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the aggregate
initial margin and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Fund's assets. In addition, the Funds must comply
with the requirements of various state securities laws in connection with such
transactions. Neither of the restrictions would be changed by the Trust's Board
of Trustees without considering the policies and concerns of the various federal
and state regulatory agencies.
PORTFOLIO TRADING: The Funds intend to fully manage their portfolios by buying
and selling securities, as well as by holding securities to maturity. In
managing the portfolio of each Fund, the Trust seeks to take advantage of market
developments, yield disparities and variations in the creditworthiness of
issuers, which may include use of the following strategies:
(1) shortening the average maturity of a Fund's portfolio in anticipation
of a rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the
relative values of each; and
(4) changing from one debt security to an essentially similar debt security
when their respective yields are distorted due to market factors.
Distribution of gains, if any, realized from the sale of Municipal Obligations
or other securities are subject to federal income taxes and state personal
income taxes. (See "Taxation" in this Statement and "Tax Status" in the
Prospectus.) The Trust cannot predict the annual portfolio turnover rate for any
Fund, but it is anticipated that the annual turnover rate of a Fund generally
should not exceed 200% (excluding turnover of obligations having a maturity of
one year or less). A 200% annual turnover rate would occur, for example, if all
the securities in a Fund's portfolio (excluding short-term obligations) were
replaced twice in a period of a year. A high turnover rate may involve greater
expenses to a Fund.
SPECIAL FACTORS AFFECTING INVESTORS IN STATE OBLIGATIONS: Investors should be
aware of special factors affecting investments in each State's Municipal
Obligations. For a discussion of these special factors, which does not purport
to be complete, see Appendix D to the Prospectus which pertains to the relevant
Fund.
INVESTMENT RESTRICTIONS -- The Trust has adopted the following restrictions
which apply to each of the Funds and which cannot be changed with respect to any
Fund without the approval of the holders of a majority of the shares of that
Fund (which, as used in this Statement of Additional Information, means the
lesser of (i) more than 50% of the outstanding shares of that Fund (or the Trust
or class, as applicable) or (ii) 67% or more of the outstanding shares of that
Fund (or the Trust or class, as applicable) present at a meeting at which
holders of more than 50% of the Fund's outstanding shares (or the Trust or
class, as applicable) are represented in person or by proxy).
The Trust may not, on behalf of any Fund:
(1) borrow money or pledge, mortgage or hypothecate assets of the Fund,
except that as a temporary measure for extraordinary or emergency purposes it
may borrow in an amount not to exceed 1/3 of the current value of the net
assets of the Fund, including the amount borrowed, and may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings (it is
intended that the Trust would borrow money on behalf of a Fund only from banks
and only to accommodate requests for the repurchase of shares of the Fund
while effecting an orderly liquidation of portfolio securities) (for the
purpose of this restriction, collateral arrangements with respect to options,
Futures Contracts and Options on Futures Contracts and payment of initial and
variation margin in connection therewith are not considered a pledge of
assets); for additional related restrictions, see clause (i) under the caption
"State and Federal Restrictions" below.
(2) purchase any security or evidence of interest therein on margin, except
that the Trust may obtain such short-term credit on behalf of a Fund as may be
necessary for the clearance of purchases and sales of securities and except
that the Trust may make deposits on behalf of a Fund on margin in connection
with Options, Futures Contracts and Options on Futures Contracts;
(3) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale
of Futures or the writing (in the case of each Fund except the California
Fund), purchasing and selling of puts, calls or combination thereof with
respect to securities and Futures Contracts;
(4) underwrite securities issued by other persons except insofar as the
Trust may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
(5) make loans to other persons except by purchase of debt instruments
consistent with a Fund's investment policies or except through the use of
repurchase agreements or the purchase of short-term obligations and provided
that not more than 10% of a Fund's total assets will be invested in repurchase
agreements maturing in more than seven days;
(6) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except in connection with Futures Contracts, Options on Futures Contracts
and, in the case of each Fund except the California Fund, options) in the
ordinary course of business (the Trust reserves the freedom of action to hold
for a Fund's portfolio and to sell real estate acquired as a result of that
Fund's ownership of securities);
(7) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be held
by any Fund; or
(8) issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "1940 Act")) if such issuance is specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder.
For purposes of the investment restrictions described above and the state and
federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security.
As a non-fundamental policy, each Fund will not knowingly invest in illiquid
securities including securities subject to legal or contractual restrictions on
resale or for which there is no readily available market (e.g., trading in the
security is suspended, or, in the case of unlisted securities, where no market
exists) if more than 15% of the Fund's assets (taken at market value) would be
invested in such securities. Securities that are not registered under the
Securities Act of 1933, as amended, and sold in reliance on Rule 144A
thereunder, but are determined to be liquid by the Trust's Board of Trustees (or
its delegee), will not be subject to this 15% limitation.
In addition, the Trust has adopted the following operating policy for each Fund
which is not fundamental and which may be changed without shareholder approval.
The Trust may enter into repurchase agreements (a purchase of and a simultaneous
commitment to resell a security at an agreed upon price on an agreed upon date)
on behalf of a Fund (other than the California Fund) only with member banks of
the Federal Reserve System and broker-dealers and only for U.S. Government
securities. The Trust may enter into repurchase agreements on behalf of the
California Fund with a vendor, which is usually a member bank of the Federal
Reserve or a member firm (or a subsidiary thereof) of the New York Stock
Exchange, and only for U.S. Government securities. If the vendor of a repurchase
agreement fails to pay the sum agreed to on the agreed upon delivery date, the
Trust would have the right to sell the U.S. Government securities for that Fund,
but might incur a loss in so doing and in certain cases may not be permitted to
sell the U.S. Government securities. As noted in paragraph (5) above, the Trust
may not invest more than 10% of the total assets of any Fund in repurchase
agreements maturing in more than seven days.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain federal and
state statutes and regulatory policies, as a matter of operating policy of the
Trust, the Trust will not, on behalf of: (i) any Fund borrow money for any
purpose in excess of 10% of the Fund's total assets (taken at cost) (moreover,
the Trust will not purchase any securities for the portfolio of the Fund at any
time at which borrowings exceed 5% of the Fund's total assets (taken at market
value)); (ii) any Fund (except the California Fund) invest more than 5% of the
Fund's total assets at the time of investment in unsecured obligations of
issuers which, including predecessors, controlling persons, general partners and
guarantors, have a record of less than three years' continuous business
operation or relevant business experience; (iii) any Fund (except the California
Fund) purchase or retain in the Fund's portfolio any securities of an issuer any
of whose officers, directors, trustees or security holders is an officer or
Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser if, after the purchase of the securities of such issuer, one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, of such issuer and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5% of such shares or
securities, or both; (iv) any Fund sell any security which the Fund does not own
unless by virtue of its ownership of other securities the Fund has at the time
of sale a right to obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and provided that if such
right is conditional the sale is made upon the same conditions; (v) any Fund
invest for the purpose of exercising control or management; (vi) any Fund
purchase securities issued by any registered investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that the Trust will not purchase
on behalf of any Fund the securities of any registered investment company if
such purchase at the time thereof would cause more than 10% of the total assets
of the Fund (taken at the greater of cost or market value) to be invested in the
securities of such issuers or would cause more than 3% of the outstanding voting
securities of any such issuer to be held by the Fund; and provided, further,
that the Trust shall not purchase on behalf of any Fund securities issued by any
open-end investment company; (vii) any Fund (except the California Fund) invest
more than 15% of the Fund's total assets (taken at the greater of cost or market
value) in unmarketable securities (included under the 15% limit on investments
in illiquid securities are OTC options, repurchase agreements maturing in more
than seven days and unmarketable securities) or; (viii) any Fund (except the
California Fund) purchase securities (other than bonds, notes, and obligations
issued or guaranteed by the United States or any agency or instrumentality of
the United States, which may be purchased without limitation) if as a result, at
the close of any quarter in the Trust's taxable year, more than 25% of a Fund's
total assets would be invested in securities of any one issuer. In addition, the
Trust will not on behalf of the California Fund: (i) pledge, mortgage or
hypothecate for any purpose in excess of 15% of such Fund's net assets (taken at
market value); or (ii) invest more than 10% of such Fund's total assets (taken
at the greater of cost or market value) in securities that are not readily
marketable. These policies are not fundamental and may be changed by the Trust
with respect to any Fund without shareholder approval in response to changes in
the various state and federal requirements.
PERCENTAGE AND RATING RESTRICTIONS: Except for Investment Restriction (1), these
investment restrictions are adhered to at the time of purchase or utilization of
assets; a subsequent change in circumstances will not be considered to result in
a violation of policy.
3. PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Trust will calculate the total rate of return for each
class of shares of a Fund for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment of
$1,000 (made with all distributions reinvested and reflecting the CDSC or
maximum offering price) to reach the value of that investment at the end of the
periods. The Trust may also calculate on behalf of each class of shares of a
Fund (i) a total rate of return, which is not reduced by the CDSC (5% maximum
for Class B shares purchased on and after January 1, 1993, but before September
1, 1993 and 4% maximum for Class B shares purchased on and after September 1,
1993) and therefore may result in a higher rate of return, (ii) a total rate of
return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the sales charge applicable to Class A shares (4.75% maximum), and/or (iii)
total rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC. Total rate of return quotations for each
Class of each Fund are presented in Appendix A attached hereto under the heading
"Performance Quotations."
PERFORMANCE RESULTS: The performance results presented in Appendix A attached
hereto under the heading "Performance Results" assume an initial investment of
$10,000 in Class A shares and cover the period from the initial public offering
date of Class A shares, as indicated, to December 31, 1993. It has been assumed
that dividends and capital gain distributions for each Fund were reinvested in
additional shares. These performance results, as well as any yield,
tax-equivalent yield, current distribution rate or total rate of return
quotation provided by the Trust, on behalf of a Fund, and presented in Appendix
A, should not be considered as representative of the performance of the Fund in
the future since the net asset value and public offering price of shares of the
Fund will vary based not only on the type, quality and maturities of the
securities held in the Fund's portfolio, but also on changes in the current
value of such securities and on changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate performance
quotations should be considered when comparing performance quotations of a Fund
to performance quotations published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD: Any yield quotation for a class of shares of a Fund is based on the
annualized net investment income per share of the Fund attributable to that
class over a 30-day period. The yield for a class of shares of a Fund is
calculated by dividing the net investment income per share allocated to that
class earned during the period by the maximum offering price per share of that
class of shares on the last day of that period. The resulting figure is then
annualized. Net investment income per share of a class is determined by dividing
(i) the dividends and interest earned by the Fund allocated to that class during
the period, minus accrued expenses of that class for the period, by (ii) the
average number of shares of the class entitled to receive dividends during the
period multiplied by the maximum offering price per share on the last day of the
period. The yield calculations for Class A shares assume a maximum sales charge
of 4.75%. The yield calculations for Class B shares assume no CDSC is paid.
Yield quotations for each class of each Fund are presented in Appendix A
attached hereto under the heading "Performance Quotations."
TAX-EQUIVALENT YIELD: The tax-equivalent yield for a class of shares of a Fund
is calculated by determining the rate of return that would have to be achieved
on a fully taxable investment in such shares to produce the after-tax equivalent
of the yield of that class. In calculating tax-equivalent yield, a Fund assumes
certain federal tax brackets for shareholders and does not take into account
state taxes. Tax-equivalent yield quotations for each class of each Fund are
presented in Appendix A attached hereto under the heading "Performance
Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 12 months by the maximum public offering price of that class at the end of
such period. Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the yield computation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains and return of invested capital, and is calculated over a different
period of time. The Fund's current distribution rate calculation for Class A
shares assumes a maximum sales charge of 4.75%. The Fund's current distribution
rate calculation for Class B shares assumes no CDSC is paid. (See "Appendix A"
attached hereto.) Current distribution rate quotations for each Class of each
Fund are presented in Appendix A attached hereto under the heading "Performance
Quotations."
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first mutual
fund in America.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933.
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS Municipal Bond Fund is among the first municipal bond funds
established.
-- 1981 -- MFS World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first mutual fund to seek
high tax-free income from lower- rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1986 -- MFS Lifetime Investment ProgramSM is established as the first
complete family of 12b-1 mutual funds with no initial sales charge.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1990 -- MFS World Total Return Fund is the first global balanced fund.
4. DETERMINATION OF PUBLIC OFFERING PRICE AND NET ASSET VALUE; VALUATION OF
PORTFOLIO SECURITIES
Descriptions of the manner in which the shares of the State Funds are offered to
the public, including the methods used in determining the public offering price
of shares in each Fund, appear in the Prospectus under the heading "Purchases."
The net asset value per share of each class of shares of each Fund is determined
each day during which the New York Stock Exchange (the "Exchange") is open for
trading. (As of the date of this Statement of Additional Information, the
Exchange is open for trading every weekday except for the following holidays or
the days on which they are observed: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) This determination is made once during each such day as of the
close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to a class from the value of the assets attributable to
the class and dividing the difference by the number of shares of the class
outstanding. As described in the Prospectus, debt securities (other than
short-term obligations) in each Fund's portfolio are valued on the basis of
valuations furnished by a pricing service since such valuations are believed to
reflect the fair value of such securities. In making such valuations, the
pricing service utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Use of the pricing service has
been approved by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued based upon dealer supplied
valuations. Other short-term obligations are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Positions in
listed options, Options on Futures Contracts and Futures Contracts will normally
be valued at the closing settlement price on the commodities exchange on which
they are primarily traded. Portfolio securities (other than short-term
obligations) for which there are no such valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
5. MANAGEMENT OF THE TRUST
The Trust's Board of Trustees provides broad supervision over the affairs of the
Trust. The Adviser is responsible for the investment management of the portfolio
of each Fund, and the officers of the Trust are responsible for its operations.
The Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor; Skane Knit, Inc., President and Treasurer (prior to June
1989)
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery.
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; Bank of NT Butterfield & Son
Limited, Chairman.
Address: 21 Reid Street, Hamilton, Bermuda HM 12
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: Room 5600, 30 Rockefeller Plaza, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (financial consultants), President and Treasurer
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
January, 1990); The Kendall Company (health care products), Chairman and Chief
Executive Officer (prior to January, 1990); Colgate-Palmolive Company, Senior
Executive Vice President (prior to January, 1990).
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman; Sundstrand Corporation
(diversified mechanical manufacturer), Director
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
CYNTHIA M. BROWN,* Vice President
Massachusetts Financial Services Company, Vice President -- Investments
ROBERT A. DENNIS,* Vice President -- Investments
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary (since December 1989); The Boston Company
Advisors, Inc., President and General Counsel (prior to December 1989)
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since June, 1989);
Deloitte & Touche, Manager (prior to June, 1989)
JAMES R. BORDEWICK, JR.,* Assistant Secretary and Assistant Clerk
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); Ropes & Gray (attorneys), Associate (prior to
August 1990)
LINDA J. HOARD,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Assistant General
Counsel
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*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Brodkin, the Chairman of FSI,
Messrs. Scott and Shames, Directors of FSI, and Mr. Cavan, the Secretary of
FSI, hold similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Trust has adopted a retirement plan for non-interested Trustees. Under this
plan, a Trustee will retire upon reaching age 75 and if the Trustee has
completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 75 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for the interested Trustees. However, Mr.
Bailey retired as Chairman of MFS as of September 30, 1991 and will eventually
become eligible for retirement benefits. The Trust will accrue compensation
expenses each year to cover current year's service and amortize past service
cost.
As of April 30, 1994, officers and Trustees of the Trust owned less than 1% of
the outstanding shares of any class of any Fund of the Trust.
Listed in the chart below are the name, address and percentage of ownership of
each person who owns of record or is known by the Trust to own of record or
beneficially five percent or more of any class of any Fund's outstanding
securities as of April 30, 1994.
<TABLE>
<CAPTION>
FUND NUMBER % OF
OWNER & ADDRESS AND CLASS OF SHARES CLASS
- --------------- --------- --------- -----
<S> <C> <C> <C>
Smith Barney Shearson, Inc., 388 Greenwich Street, Alabama 2,488,443 30.83
New York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Alabama 2,198,140 27.24
45286, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Alabama 103,624 35.02
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Arkansas 4,444,754 22.10
45286, Jacksonville, Florida Class A
Stephens Inc. for the Exclusive Benefit of our Arkansas 1,562,371 7.77
Customers, P.O. Box 34127, Little Rock, Arkansas Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Arkansas 152,570 23.74
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Florida 1,916,889 16.93
45286, Jacksonville, Florida Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New Florida 694,122 6.13
York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Florida 91,268 10.49
45286, Jacksonville, Florida Class B
Lester Muenchow & Donald Muenchow, Lake Worth, Florida Florida 48,040 5.52
Class B
Smith Barney Shearson, Inc., 388 Greenwich Street, New Georgia 2,231,376 27.10
York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Georgia 797,613 9.69
45286, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Georgia 48,340 7.47
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Louisiana 109,651 7.55
45286, Jacksonville, Florida Class A
Bill G. Halley, Farmerville, Louisiana 105,423 7.26
Louisiana Class A
Alan C. Fernbaugh & Carolyn Fernbaugh, Baton Rouge, Louisiana 10,192 5.21
Louisiana Class B
Edwin K. Hunter, Lake Charles, Louisiana Louisiana 24,485 12.52
Class B
Michael Scaffidi & Steven Louisiana 9,950 5.09
Scaffidi, Kenner, Louisiana Class B
Cora Lee Mixon Smith, Baton Rouge, Louisiana Louisiana 13,151 6.72
Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Louisiana 21,148 10.81
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Maryland 1,563,001 10.64
45286, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Maryland 69,193 10.53
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Massachusetts 4,180,356 16.55
45286, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Mississippi 1,364,948 15.54
45286, Jacksonville, Florida Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New Mississippi 577,193 6.57
York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Mississippi 159,045 21.52
45286, Jacksonville, Florida Class B
Smith Barney Shearson, Inc., 388 Greenwich Street, New New York 1,820,482 11.74
York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box New York 1,860,589 11.99
45286, Jacksonville, Florida Class A
BHC Securities, Inc., 100 N. 20th Street, Philadelphia, New York 1,301,336 8.39
Pennsylvania Class A
Stanley Waxman & Linda New York 39,102 6.00
Waxman, Sands Point, New York Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box New York 32,967 5.06
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box North Carolina 2,252,419 5.64
45286, Jacksonville, Florida Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New North Carolina 2,838,144 7.11
York, New York Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New North Carolina 122,205 19.60
York, New York Class C
Smith Barney Shearson, Inc., 388 Greenwich Street, New North Carolina 40,734 6.53
York, New York Class C
Smith Barney Shearson, Inc., 388 Greenwich Street, New North Carolina 40,453 6.49
York, New York Class C
Alex Brown & Sons, Inc., P.O., Box 1346, Baltimore, North Carolina 33,941 5.44
Maryland Class C
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box North Carolina 100,112 16.05
45286, Jacksonville, Florida Class C
R & R Investment Assoc., 1062 Lancaster Ave., Rosemont, Pennsylvania 133,961 8.43
Pennsylvania Class A
Evora Morgan, Bryn Mawr, Pennsylvania 81,654 16.39
Pennsylvania Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box South Carolina 1,470,333 10.08
45286, Jacksonville, Florida Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New South Carolina 1,170,038 8.02
York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box South Carolina 139,749 16.08
45286, Jacksonville, Florida Class B
Smith Barney Shearson, Inc., 388 Greenwich Street, New Tennessee 690,359 6.02
York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Tennessee 1,081,498 9.44
45286, Jacksonville, Florida Class A
Garney B. Scott, Jr., Nashville, Tennessee Tennessee 42,675 7.91
Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Tennessee 89,119 16.52
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Texas 148,967 7.97
45286, Jacksonville, Florida Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New Texas 166,839 8.92
York, New York Class A
Alfreda M. Taylor, Taylor Living Trust, Friendswood, Texas 101,843 5.45
Texas Class A
Wes-Tex Telecommunications Texas 286,486 15.32
Inc., P.O. Box 1329 W. Loop 214, Stanton, Texas Class A
John P. Marcum, Hurst, Texas Texas 9,251 7.79
Class B
Clem Lyons, San Antonio, Texas Texas 17,169 14.46
Class B
Texas Commerce Bank, Texas 6,892 5.81
Trustee, P.O. Box 311388, Class B
New Braunfels, Texas
Annice M. Elliott, Fort Worth, Texas Texas 7,448 6.27
Class B
Jaqueline M. Robertson & Texas 9,259 7.80
Ronald B. Robertson, Class B
Hitchcock, Texas
Gladys L. Wallace, Longview, Texas Texas 9,257 7.80
Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Virginia 3,074,118 7.75
45286, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Virginia 228,270 18.23
45286, Jacksonville, Florida Class B
Painewebber, Newtown, Virginia 8,320 6.62
Virginia Class C
Dale Daniels & Atha Daniels, Newport News, Virginia Virginia 8,000 6.37
Class C
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Virginia 7,164 5.70
45286, Jacksonville, Florida Class C
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Washington 168,885 8.63
45286, Jacksonville, Florida Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New Washington 264,739 13.54
York, New York Class A
Patricia Burke, Medina, Washington 201,827 10.32
Washington Class A
Esther M. Austin, Seattle, Washington 13,813 6.55
Washington Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box Washington 22,959 10.90
45286, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box West Virginia 783,006 6.73
45286, Jacksonville, Florida Class A
Smith Barney Shearson, Inc., 388 Greenwich Street, New West Virginia 853,009 7.33
York, New York Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box West Virginia 31,047 5.89
45286, Jacksonville, Florida Class B
</TABLE>
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition or by a reasonable determination pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Prospectus
contains information with respect to the management of the Adviser and to the
investment companies for which MFS serves as investment adviser.
The Adviser manages each Fund (except the Arkansas, California, Florida,
Louisiana, Mississippi, Pennsylvania, Texas and Washington Funds) pursuant to an
Investment Advisory Agreement, dated as of August 24, 1984 (the "Advisory
Agreement"). The Adviser manages the Arkansas, Florida, and Texas Funds pursuant
to separate Investment Advisory Agreements, each dated as of February 1, 1992.
The Advisor manages the Mississippi and Washington Funds pursuant to separate
Investment Advisory Agreements each dated August 1, 1992. The Adviser manages
the Louisiania and Pennsylvania Funds pursuant to separate Investment Advisory
Agreements each dated February 1, 1993. The Adviser manages the California Fund
pursuant to an Investment Advisory Agreement dated August 1, 1993. The Adviser
provides each Fund with overall investment advisory and administrative services,
and general office facilities and administrative services for the Trust. Subject
to such policies as the Trustees may determine, the Adviser makes investment
decisions for each Fund. For these services and facilities the Adviser receives
a management fee from each Fund computed and paid monthly at the annual rate of
0.55% of the average daily net assets of the Fund for its then-current fiscal
year. The Adviser has voluntarily reduced the management fee for an indefinite
period with respect to each of the Arkansas, California, Florida, Louisiana,
Mississippi, New York, Pennsylvania, Texas and Washington Funds. See "Management
of the Trust -- Investment Adviser" in the Prospectus.
For the Trust's fiscal years ended January 31, 1994, 1993 and 1992, MFS received
the following aggregate fees and MFS waived the following fees, in whole or in
part, for the same periods. For the Fiscal Year Ended January 31, 1994:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS MFS
- ---- ----------- ---------
Alabama .................................... $ 439,235 $ --
Arkansas ................................... 940,077 502,194
Florida .................................... 552,640 444,758
Georgia .................................... 449,179 --
Louisiana .................................. 54,035 54,035
Maryland ................................... 903,650 --
Massachusetts .............................. 1,591,974 --
Mississippi ................................ 367,101 349,609
New York ................................... 916,193 340,615
North Carolina ............................. 2,501,986 --
Pennsylvania ............................... 56,065 56,065
South Carolina ............................. 947,476 --
Tennessee .................................. 627,398 --
Texas ...................................... 75,954 75,954
Virginia ................................... 2,459,087 --
Washington ................................. 80,180 80,180
West Virginia .............................. 728,874 --
For the Fiscal Year Ended January 31, 1993:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS MFS
- ---- ----------- ---------
Alabama ................................... $ 314,930 $ --
Arkansas .................................. 420,294 401,418
Florida ................................... 198,400 198,400
Georgia ................................... 306,527 --
Louisiana ................................. -- --
Maryland .................................. 722,388 --
Massachusetts ............................. 1,403,440 --
Mississippi ............................... 63,783 63,783
New York .................................. 582,415 --
North Carolina ............................ 1,936,501 530,016
South Carolina ............................ 659,247 --
Tennessee ................................. 497,708 --
Texas ..................................... 23,750 23,750
Virginia .................................. 1,975,139 --
Washington ................................ 13,388 13,388
West Virginia ............................. 527,345 --
For the Fiscal Year Ended January 31, 1992:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS MFS
- ---- ----------- ---------
Alabama ................................... $ 189,857 $ 867
Georgia ................................... 213,349 1,080
Maryland .................................. 603,450 --
Massachusetts ............................. 1,240,475 --
New York .................................. 308,894 223,175
North Carolina ............................ 1,496,200 --
South Carolina ............................ 485,856 --
Tennessee ................................. 443,707 --
Virginia .................................. 1,675,215 --
West Virginia ............................. 390,061 --
See "Expenses" in the Prospectus.
For the 11-month period ended January 31, 1994 and the fiscal years ended
February 28, 1993 and February 29, 1992, MFS received aggregate fees from the
California Fund under the Advisory Agreement of $1,641,620 (of which $585,888
was not imposed), $1,202,697 (of which $837,662 was not imposed), $679,423 (of
which $304,852 was not imposed).
The Adviser pays the compensation of the officers of the Trust and of any
Trustee who is an officer of MFS. The Adviser furnishes at its own expense all
necessary administrative services, office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the investments of the Funds, effecting the portfolio
transactions of the Funds and, in general, administering the Trust's affairs
(with the exception of the services, facilities and personnel provided by the
Shareholder Servicing Agent or the Custodian, see below). See "Expenses" in the
Prospectus for a description of expenses paid by the Trust and reimbursement
arrangements in effect between the Adviser and the Trust.
The Advisory Agreements will remain in effect until August 1, 1994 (or, in the
case of the California Fund, August 1, 1995) and will continue in effect
thereafter with respect to any Fund only if such continuance is specifically
approved at least annually by the Trustees or by vote of the holders of a
majority of the shares of that Fund (as defined in "Investment Restrictions"
above) and, in either case, by a majority of the Trustees who are not parties to
the Advisory Agreement or interested persons of any such party. The Advisory
Agreements terminate automatically if they are assigned and may be terminated
without penalty by vote of the holders of a majority of the shares of that Fund
(as defined in "Investment Restrictions") or by either party on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreements provide
that if MFS ceases to serve as the Adviser for each Fund of the Trust, the Trust
will change its name so as to delete the term "MFS". The Advisory Agreements
further provide that MFS may render similar services to others and may permit
investment company clients in addition to the Trust to use the term "MFS" in
their names. The Advisory Agreements also provide that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution and management of the Trust, except for wilful misfeasance, bad faith
or gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the Advisory
Agreements.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Trust's assets. The Custodian's responsibilities include safekeeping and
controlling the Trust's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Trust's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of each Fund. The Custodian does not
determine the investment policies of the Trust or decide which securities the
Trust will buy or sell. The Trust may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also serves as the dividend disbursing agent of the
Trust. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc., a wholly owned subsidiary of MFS (the "Shareholder
Servicing Agent"), is the Trust's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, effective August 1, 1985 (the "Agency
Agreement") with the Trust. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records, in connection with the issuance, transfer
and redemption of each class of shares of each Fund. For these services, the
Shareholder Servicing Agent will receive a fee based on the net assets of each
class of shares of each Fund, computed and paid monthly. In addition, the
Shareholder Servicing Agent will be reimbursed by the Trust for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Trust. For the year
ended January 31, 1994, each Fund paid the Shareholder Servicing Agent the
following amounts under the Agency Agreement for services rendered to each such
Fund:
FUND CLASS AMOUNT PAID
- ---- ----- -----------
Alabama .................................... A $120,071
Alabama .................................... B 1,192
Arkansas ................................... A 254,967
Arkansas ................................... B 2,489
California* ................................ A 443,991
California* ................................ B 10,010
California* ................................ C 18
Florida .................................... A 148,754
Florida .................................... B $ 3,323
Georgia .................................... A 120,863
Georgia .................................... B 2,662
Louisiana .................................. A 14,232
Louisiana .................................. B 776
Maryland ................................... A 246,218
Maryland ................................... B 2,480
Massachusetts .............................. A 435,306
Massachusetts .............................. B 1,995
Mississippi ................................ A 97,793
Mississippi ................................ B 3,356
New York ................................... A 249,913
New York ................................... B 2,205
North Carolina ............................. A 680,484
North Carolina ............................. B 6,100
North Carolina ............................. C 140
Pennsylvania ............................... A 14,283
Pennsylvania ............................... B 1,554
South Carolina ............................. A 258,192
South Carolina ............................. B 3,745
Tennessee .................................. A 170,752
Tennessee .................................. B 2,044
Texas ...................................... A 20,364
Texas ...................................... B 510
Virginia ................................... A 670,876
Virginia ................................... B 5,541
Virginia ................................... C 24
Washington ................................. A 21,402
Washington ................................. B 786
West Virginia .............................. A 199,099
West Virginia .............................. B 2,124
- ---------
*For the 11-month period ended January 31, 1994.
State Street Bank and Trust Company, the dividend and distribution disbursing
agent of the Trust, has contracted with the Shareholder Servicing Agent to
administer and perform certain dividend and distribution disbursing functions
for the Trust.
DISTRIBUTOR
FSI, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement,
dated as of December 19, 1986, as amended and restated April 14, 1993 (the
"Distribution Agreement"), with the Trust.
CLASS A SHARES: FSI acts as agent in selling shares of the Trust to dealers. The
public offering price of Class A shares of each Fund is their net asset value
next computed after the sale plus a sales charge which varies based upon the
quantity purchased. The public offering price of Class A shares of each Fund is
calculated by dividing the net asset value of a Class A share of such Fund by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of each Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this Statement of Additional Information).
Class A shares of each Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, FSI and/or the Trust have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
FSI allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to a Fund
and (b) the dealer commission is the commission paid to the distributor. Because
of rounding in the computation of offering price, the portion of the sales
charge paid to the distributor may vary and the total sales charge may be more
or less than the sales charge calculated using the sales charge expressed as a
percentage of offering price or as a percentage of the net amount invested as
listed in the Prospectus. In the case of the maximum sales charge, the dealer
retains 4% and FSI retains approximately 3/4 of 1% of the public offering price.
In addition, FSI pays a commission on purchases of $1 million or more as
described in the Prospectus.
CLASS B AND CLASS C SHARES: FSI acts as agent in selling Class B and Class C
shares of the Trust to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: From time to time FSI, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to dealers
which sell shares of the Trust. The staff of the SEC has indicated that dealers
who receive more than 90% of the sales charge may be considered underwriters.
Such concessions provided by FSI may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives and members of their families or
other invited guests to various locations for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. In some instances,
these concessions may be offered to dealers or only to certain dealers who have
sold or may sell, during specified periods, certain minimum amounts of shares of
the Trust. From time to time, FSI may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. In addition, FSI may, from time to time, pay
additional compensation to MFS Investor Services, Inc., an affiliated
broker-dealer, in connection with assistance provided by such broker-dealer in
selling Trust shares. In some instances, promotional incentives to dealers may
be offered only to certain dealers who have sold or may sell significant amounts
of Fund shares, From time to time, FSI or its affiliate may offer a small gift
of nominal value to shareholders who elect to participate in certain investment
programs (e.g., the Automatic Exchange Plan) or other shareholder services.
Other concessions may be offered to the extent not prohibited by the laws of any
state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. (the "NASD"). On occasion, FSI may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. FSI may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares. Neither FSI nor dealers are permitted to delay
placing orders to benefit themselves by a price change.
See Appendix B attached hereto for information regarding the amount of sales
charges received by FSI, dealers, banks and certain other financial
institutions.
The Distribution Agreement will remain in effect until August 1, 1994 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
applicable Fund's shares and, in either case, by a majority of the Trustees who
are not parties to the Distribution Agreement or interested persons of any such
party. The Distribution Agreement terminates automatically if it is assigned and
may be terminated without penalty by either party on not more than 60 days' nor
less than 30 days' notice.
6. TAXATION
The Trust intends to qualify each Fund each year as a separate "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), by having each of them meet all applicable requirements of
Subchapter M, including the requirements as to the nature of their gross income,
the amount of their distributions (as a percentage of both overall income and
tax-exempt income) and the composition and holding period of their portfolio
assets. Because the Funds intend to distribute all of their net investment
income and net realized capital gains to shareholders in accordance with the
timing requirements imposed by the Code, it is not expected that any Fund will
be required to pay any federal income or excise taxes. If any Fund should fail
to qualify as a "regulated investment company" in any year, such Fund would
incur a regular corporate federal income tax upon its taxable income and Fund
distributions would generally be taxable as ordinary dividend income to the
shareholders.
That part of a Fund's net investment income which is attributable to interest
from tax-exempt securities and which is distributed to shareholders will be
designated by the Trust 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 a tax preference item for purposes of the alternative
minimum tax, and all exempt-interest dividends may increase a corporate
shareholder's alternative minimum tax. The percentage of income designated as
tax-exempt will be applied uniformly to all distributions by a Fund during each
fiscal year and may differ from the actual tax-exempt percentage for any
particular month. Shareholders are required to report exempt-interest dividends
received from the Fund on their federal income tax returns.
A Fund may also recognize some net investment income that is not tax-exempt from
investments in taxable securities and from certain securities (including
Municipal Obligations) purchased at a market discount, as well as capital gains
and losses as a result of the disposition of securities and from certain options
and futures transactions. Shareholders of any such Fund will have to pay federal
income taxes on the non-exempt interest dividends and capital gain distributions
they receive from the Fund; however, the Funds do not expect that the
non-tax-exempt portion of their net investment income, if any, will be
substantial.
That portion of net investment income distributions not designated as tax-exempt
and any distributions from net short-term capital gains (whether received in
cash or reinvested in additional shares) are taxable to shareholders as ordinary
income. Distributions from net capital gains (i.e., the excess of net capital
gains over net short-term capital losses) are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time shareholders have owned their shares. Distributions will be
treated in the same manner for Federal income tax purposes whether paid in cash
or additional shares. No portion of a Fund's distributions will qualify for the
dividends received deduction. For Federal income tax purposes, dividends, if
any, declared in October, November or December as of a record date in such a
month and paid the following January will be treated as if received on December
31 of the year in which they are declared.
Any distribution of net capital gains or net short-term capital gains will have
the effect of reducing the per share net asset value of shares in a Fund by the
amount of the taxable distribution. Shareholders purchasing shares shortly
before the record date of any such distribution may thus pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of a
Fund by a shareholder that holds such shares as a capital asset will be treated
as long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise as short-term capital gain or loss. However, any
loss realized upon a disposition of shares held for six months or less will be
disallowed to the extent of any exempt-interest income received with respect to
those shares and, if not disallowed, any such loss will be treated as a
long-term capital loss to the extent of any distributions of net capital gain
made with respect to those shares. Any loss realized upon a redemption of shares
may also be disallowed under rules relating to wash sales. Gain may be increased
(or loss reduced) upon a redemption of Class A shares of a Fund within 90 days
after their purchase followed by any purchase (including purchases by exchange
or by reinvestment) without payment of an additional sales charge of Class A
shares of any Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Trust's current dividend and accounting policies may affect the amount,
timing and character of distributions to shareholders, and may under certain
circumstances make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities, securities calling for deferred interest
and certain securities purchased at a market discount will cause a Fund to
realize income prior to the receipt of cash payments with respect to these
securities. In order to distribute this income 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 Funds' transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example, certain
positions held by a Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on such day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by a fund that
substantially diminish its risk of loss with respect to other positions on its
portfolio may constitute "straddles" and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles which may alter the effects of these
rules. Each Fund will limit its activities in options, Futures Contracts, and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Fund is not deductible for federal income tax purposes.
Exempt-interest dividends are taken into account in calculating the amount of
social security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by certain private activity bonds
should consult their tax advisers before purchasing shares of a Fund.
"Substantial user" is defined generally as including a "non-exempt person" who
regularly uses in its trade or business a part of a facility financed from the
proceeds of certain private activity bonds.
Federal income tax information will be reported to shareholders annually, as
described under "Tax Status" in the Prospectus and under "Shareholder Services
- -- Account and Confirmation Statements" below. Shareholders are required to
report their receipt of tax-exempt distributions on their federal income tax
returns.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Trust intends
to withhold tax at the rate of 30% on taxable dividends and other payments made
to Non-U.S. Persons that are subject to such withholding regardless of whether a
lower treaty rate may be permitted. Any amounts over withheld may be recovered
by such persons by filing a claim for refund with the U.S. Internal Revenue
Service within the time period applicable to such claims. The Trust is also
required in certain circumstances to apply backup withholding of 31% of taxable
dividends and redemption proceeds paid to any shareholder (including a Non-U.S.
Person) who does not furnish to the Trust certain information and certifications
or who is otherwise subject to backup withholding. However, backup withholding
will not be applied to payments which have been subject to 30% withholding.
Distributions received from the Trust by Non-U.S. Persons may also be subject to
tax under the laws of their own jurisdiction.
The Trust is organized as a Massachusetts business trust, and each Fund will not
be subject to any Massachusetts income or excise taxes so long as it qualifies
as a regulated investment company under the Code.
Fund distributions that are derived from interest on obligations of the U.S.
government and certain of its agencies and instrumentalities (but generally not
from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. In other states, arguments can be made on the
basis of a U.S. Supreme Court decision to the effect that such distributions
should be exempt from state and local taxes. Each Fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisors regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in any
Fund.
7. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Trust makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Trust.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of a Fund alone
or in combination with shares of any class of other MFS Funds or MFS Fixed Fund
(a bank collective investment fund) within a 13-month period (or a 36-month
period in the case of purchases of $1 million or more), the shareholder may
obtain Class A shares of such Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by FSI and the conditions
mentioned below, each purchase of Class A shares will be made at a public
offering price applicable to a single transaction of the dollar amount specified
in the Letter of Intent application. The shareholder or his dealer must inform
FSI that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other funds
in the MFS Family of Funds (the "MFS Funds") automatically reinvested in shares
of a Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month (or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. For example, if a shareholder owns
shares with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of a Fund, the sales charge for the $25,000
purchase would be at the rate of 4% (the rate applicable to single transactions
of $100,000). A shareholder must provide the Shareholder Servicing Agent (or his
investment dealer must provide FSI) with information to verify that the quantity
sales charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of net investment income and
capital gains made by a Fund with respect to a particular class of shares may be
automatically invested in the same class of shares of one of the other MFS Funds
if shares of the fund are available for sale. Such investments will be subject
to additional purchase minimums. Distributions will be invested at net asset
value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Option
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder (except a $3 Million Shareholder)
may direct the Shareholder Servicing Agent to send him (or anyone he designates)
regular periodic payments, as designated on the Account Application and based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of the establishment
of the SWP. SWP payments are drawn from the proceeds of the redemption of shares
held in the shareholder's account (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B shares will be made
in the following order: (i) to the extent necessary, any "Free Amount"; (ii) any
"Reinvested Shares"; (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B shares pursuant to a SWP, but will not be waived in the
case of SWP redemptions of Class A shares which are subject to the CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the shareholder's account. All dividends and
capital gain distributions for an account with a SWP will be reinvested in
additional full and fractional shares of a Fund at the net asset value in effect
at the close of business on the last day of the month for such distributions. To
initiate this service, shares having an aggregate value of at least $10,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A shares,
maintaining a withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases and the
imposition of a CDSC on certain redemptions. The shareholder by written
instruction to the Shareholder Servicing Agent may deposit into the account
additional shares of a Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Trust with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Trust ceases to assume the cost of these services. The Trust may terminate any
SWP for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
a Fund for shares of another MFS Fund. Any SWP may be terminated at any time by
either the shareholder or the Trust.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds and in the case of Class C shares for shares of MFS Money
Market Fund under the Automatic Exchange Plan. The Automatic Exchange Plan
provides for automatic transfers of funds from the shareholder's account in an
MFS Fund for investment in the same class of shares of other MFS Funds selected
by the shareholder. Under the Automatic Exchange Plan, transfers of at least $50
each may be made to up to four different funds effective on the seventh day of
each month or of every third month, depending whether monthly or quarterly
transfers are elected by the shareholder. If the seventh day of the month is not
a business day, the transaction will be processed on the next business day.
Generally, the initial transfer will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Transfers will
continue to be made from a shareholder's account in any MFS Fund as long as the
balance of the account is sufficient to complete the transfers. Additional
payments made to a shareholder's account will extend the period that transfers
will continue to be made under the Automatic Exchange Plan. However, if
additional payments are added to an account subject to the Automatic Exchange
Plan shortly before a transfer is scheduled, such funds may not be available for
transfers until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion of the
account balance.
No transaction fee for transfers will be charged in connection with the
Automatic Exchange Plan. However, transfers of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
transferred to each fund, the funds to which transfers are to be made and the
timing of transfers (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing --signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's transfer.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding Automatic Transfer Plan, including the treatment of any
CDSC, see "Exchange Privilege" below.
INVEST BY MAIL: Additional investments of $50 or more may be made at any
time by mailing a check payable to the Trust directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his investment
dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of FSI.
REINSTATEMENT PRIVILEGE: Shareholders of each Fund and shareholders of the
other MFS Funds (except the MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
shares of such funds are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of shares
reinvested in the MFS Money Market Fund, MFS Government Money Market Fund and
Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange such shares for shares of another MFS Fund at net asset value pursuant
to the exchange privilege described below. Such a reinvestment must be made
within 90 days of the redemption and is limited to the amount of the redemption
proceeds. If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or 12 months of the
initial purchase in the case of Class A shares, such CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of any loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of any Fund for which payment has been received by the Fund (i.e.
an established account) may be exchanged for shares of the same class of any
other Fund or any of the other MFS Funds (if available for sale), at their net
asset value. In addition, Class C shares may be exchanged for shares of MFS
Money Market Fund at net asset value. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing, signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 (except that the minimum is $50 for accounts of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by MFS
Service Center, Inc.) or all the shares in the account. Each exchange involves
the redemption of the shares of the Fund to be exchanged and the purchase at net
asset value (i.e., without a sales charge) of the shares of the same class of
the other Fund or the other MFS Fund. Any gain or loss on the redemption of the
shares exchanged is reportable on the shareholder's federal income tax return,
unless both the shares received and the shares surrendered in the exchange are
held in a tax-deferred retirement plan or other tax-exempt account. If the
Exchange Request is received by the Shareholder Servicing Agent on any business
day prior to the close of regular trading on the Exchange, the exchange usually
will occur on that day if all the restrictions set forth above have been
complied with at that time. However, payment of the redemption proceeds by the
Trust, and thus the purchase of shares of the other MFS Fund, may be delayed for
up to seven days if the Trust determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by FSI may also communicate a shareholder's Exchange
Request to FSI by facsimile subject to the restrictions set forth above. No more
than five exchange requests may be made in any one telephone Exchange Request.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers, or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except the MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of any Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each Fund may only
benefit residents of such states. Investors should consult with their own tax
advisers to be sure this is an appropriate investment, based on their residency
and each state's income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. FSI makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non- employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents and forms provided by FSI designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or FSI, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
FSI may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) if the retirement
plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar 401(a) or 403(b) recordkeeping program made available by
the Shareholder Servicing Agent.
8. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust presently has 19 series of shares and has reserved the right to create
additional series of shares. In addition to the Funds described in this
Statement of Additional Information, the Trust offers shares of MFS Municipal
Income Fund pursuant to a separate prospectus and statement of additional
information. Each share of a class of a series represents an equal proportionate
interest in that series with each other share of that series subject to any
expenses attributable to that class. The shares of a class of each series
participate equally in the earnings, dividends and assets of the particular
series subject to any expenses attributable to that class. Shares have no
pre-emptive or conversion rights (except as set forth in "Purchases --
Conversion to Class B Shares" in the Prospectus). Shares when issued are fully
paid and non-assessable. Shareholders are entitled to one vote for each share
held and may vote in the election of Trustees and on other matters submitted to
meetings of shareholders. Although Trustees are not elected annually by the
shareholders, shareholders have under certain circumstances the right to remove
one or more Trustees. Shareholders of each series would be entitled to share pro
rata in the net assets of that series available for distribution to shareholders
should the Trust or that series be liquidated. Any series may be terminated (i)
upon the merger or consolidation of the series with another organization or upon
the sale of all or substantially all of its assets to another open-end
management investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the series, except that if the Trustees
recommend such merger, consolidation or sale of assets, the approval by vote of
the holders of a majority of the shares of the series (as defined in "Investment
Restrictions" above) will be sufficient, or (ii) upon liquidation and
distribution of the assets of the series, if approved by the vote of the holders
of a majority of the shares of the series (as defined in "Investment
Restrictions" above) or by the Trustees. Unless each series is so terminated,
the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for any
shareholder held personally liable for the obligations of the Trust. The Trust's
Declaration of Trust also provides that it shall maintain appropriate insurance
(for example, fidelity bonding and errors and omissions insurance) for the
protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort 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 Trust's Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to act,
but nothing in the Declaration of Trust protects a Trustee against any liability
to which he would otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
9. PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for each Fund are made by a
portfolio committee consisting of employees of the Adviser who are appointed and
supervised by its senior officers. Changes in the Funds' investments are
reviewed by the Board of Trustees. The portfolio committee or any of its members
may serve other Fund and other clients of the Adviser or any subsidiary of the
Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. Municipal
Obligations and other debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. The cost of securities purchased from underwriters
includes an underwriter's commission or concession, and the prices at which
securities are purchased and sold from and to dealers include a dealer's mark-up
or mark-down. Securities firms may receive brokerage commissions on transactions
involving futures. The Adviser attempts to negotiate with underwriters to
decrease the commission or concession for the benefit of the Fund. The Adviser
normally seeks to deal directly with the primary market makers unless, in its
opinion, better prices are available elsewhere. Securities firms or futures
commission merchants may receive brokerage commissions on transactions involving
Futures Contracts or Options on Futures Contracts. Consistent with the foregoing
primary consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of each Fund and of the other
investment company clients of FSI as a factor in the selection of broker-dealers
to execute the Trust's portfolio transactions. Also, subject to the requirement
of seeking execution at the best available price, securities may, as authorized
by the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser.
In certain instances there may be securities which are suitable for a Fund as
well as that of another Fund or one or more other clients of the Adviser or any
subsidiary of the Adviser. Investment decisions for the Trust and for such other
clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as any Fund is concerned.
In some cases, however, it is believed that the ability of a Fund to participate
in volume transactions will produce better executions for the Fund.
10. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is
a reasonable likelihood that each distribution plan would benefit the applicable
funds and the respective classes of shareholders. The Distribution Plans are
designed to promote sales, thereby increasing the net assets of each Fund. Such
an increase may reduce the expense ratio to the extent the Fund's fixed costs
are spread over a larger net asset base. Also, an increase in net assets may
lessen the adverse effects that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance that
the net assets of a Fund will increase or that the other benefits referred to
above will be realized.
Each Distribution Plan is described below. Appendix C attached hereto contains
information concerning amounts paid with respect to each class of each Fund
under the Distribution Plans for the period ended January 31, 1994.
CLASS A DISTRIBUTION PLAN: Each Class A Distribution Plan provides that the Fund
will pay FSI up to (but not necessarily all of) an aggregate of 0.35% per annum
of the average daily net assets attributable to the Class A shares of a Fund in
order that FSI may pay expenses on behalf of that Fund related to the
distribution and servicing of its Class A shares. The expenses to be paid by FSI
on behalf of each Fund include a service fee to securities dealers which enter
into a sales agreement with FSI of up to 0.25% of the portion of the Fund's
average daily net assets attributable to the Class A shares owned by investors
for whom that securities dealer is the holder or dealer of record. These
payments are partial consideration for personal services and/or account
maintenance performed by such dealers with respect to Class A shares. FSI may
from time to time reduce the amount of the service fee paid for shares sold
prior to a certain date. Service fees may be reduced for a securities dealer
that is the holder or dealer of record for an investor who owns shares of a Fund
having a net asset value at or above a certain dollar level. No service fee will
be paid (i) to any securities dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time (FSI,
however, may waive this minimum amount requirement from time to time if the
dealer satisfies certain criteria), or (ii) to any insurance company which has
entered into an agreement with the Trust and FSI that permits such insurance
company to purchase shares from a Fund at their net asset value in connection
with annuity agreements issued in connection with the insurance company's
separate accounts. FSI may also retain a distribution fee of 0.10% of a Fund's
average daily net assets attributable to Class A shares. Any remaining funds may
be used to pay for other distribution related expenses as described in the
Prospectus. FSI has voluntarily waived all or a portion of the fee payable under
the Class A Distribution Plan for certain Funds and payments under the Class A
Distribution Plan have not commenced for certain Funds (see "Distribution Plans"
in the Prospectus). FSI or its affiliates are entitled to retain all service
fees payable under each Class A Distribution Plan for which there is no dealer
of record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by FSI or its affiliates for shareholder accounts. Certain banks and
other financial institutions that have agency agreements with FSI will receive
agency transaction and service fees that are the same as commissions and service
fees to dealers.
CLASS B DISTRIBUTION PLAN: Each Class B Distribution Plan provides that the Fund
shall pay FSI a daily distribution fee equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class B shares and will pay FSI
a service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class B shares (which FSI will in turn pay to securities dealers
which enter into a sales agreement with FSI at a rate of up to 0.25% per annum
of the Fund's average daily net assets attributable to Class B shares owned by
investors for whom that securities dealer is the holder or dealer of record).
The first year service fee will be paid as noted below. This service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class B shares. FSI
will advance to dealers the first year service fee at a rate equal to 0.25% of
the amount invested. As compensation therefor, FSI may retain the service fee
paid by a Fund with respect to such shares for the first year after purchase.
Dealers will become eligible for additional service fees with respect to such
shares commencing in the thirteenth month following purchase. Except in the case
of the first year service fee, no service fee will be paid to any securities
dealer who is the holder or dealer of record for investors who own Class B
shares having an aggregate net asset value of less than $750,000 or such other
amount as may be determined from time to time by FSI. FSI, however, may waive
this minimum amount requirement from time to time if the dealer satisfies
certain criteria. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees. FSI has voluntarily waived all
or a portion of the service fee payable under the Class B Distribution Plan for
certain Funds (see "Distribution Plans" in the Prospectus). FSI or its
affiliates are entitled to retain all service fees payable under the Class B
Distribution Plans for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by FSI or its affiliates
for shareholder accounts.
The purpose of distribution payments to FSI under each Class B Distribution Plan
is to compensate FSI for its distribution services to the Funds. FSI pays
commissions to dealers as well as expenses of printing prospectuses and reports
used for sales purposes, expenses with respect to the preparation and printing
of sales literature and other distribution related expenses, including, without
limitation, the cost necessary to provide distribution- related services, or
personnel, travel office expenses and equipment. Each Class B Distribution Plan
also provides that FSI will receive all CDSCs attributable to Class B shares
(see "Distribution Plans" and "Purchases" in the Prospectus).
CLASS C DISTRIBUTION PLAN: Each Class C Distribution Plan (applicable to the
California, North Carolina and Virginia Funds only) provides that the Fund will
pay FSI a distribution fee of up to 0.75% per annum of the Fund's average daily
net assets attributable to Class C shares and will pay FSI a service fee of up
to 0.25% per annum of the Fund's average daily net assets attibutable to Class C
shares (which FSI will in turn pay to securities dealers which enter into a
sales agreement with FSI at a rate of up to 0.25% per annum of the Fund's daily
net assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing FSI to compensate
broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. FSI or its affiliates are entitled to retain all service fees
payable under the Class C Distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by FSI or its affiliates for
shareholder accounts.
The purpose of the distribution payments to FSI under the Class C Distribution
Plan is to compensate FSI for its distribution services to the Fund.
Distribution payments under the Plan will be used by FSI to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) FSI also pays expenses of printing prospectuses and
reports used for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution-related expenses, including,
without limitation, the compensation of personnel and all costs of travel,
office expense and equipment. Since FSI's compensation is not directly tied to
its expenses, the amount of compensation received by FSI during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by FSI in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with FSI will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1994, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Trust and FSI each shall
provide to the Trustees, and the Trustees shall review, at least quarterly, a
written report of the amounts expended (and purposes therefor) under such Plan.
Each of the Distribution Plans may be terminated at any time by vote of a
majority of the Distribution Plan Qualified Trustees or by vote of the holders
of a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions"). All agreements relating to any of the Distribution
Plans entered into between the Trust or FSI and other organizations must be
approved by the Board of Trustees, including a majority of the Distribution Plan
Qualified Trustees. Agreements under any of the Distribution Plans must be in
writing, will be terminated automatically if assigned, and may be terminated at
any time without payment of any penalty, by vote of a majority of the
Distribution Plan Qualified Trustees or by vote of the holders of a majority of
the respective class of the Fund's shares. None of the Distribution Plans may be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may be materially amended in any
case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in any of the Distribution Plans or in any related agreement.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche are the Trust's independent certified public accountants.
For each Fund, except the California Fund, the Portfolios of Investments at
January 31, 1994, the Statements of Assets and Liabilities at January 31, 1994,
the Statements of Operations for the year ended January 31, 1994, the Statements
of Changes in Net Assets for each of the two years in the period ended January
31, 1994, the Financial Highlights for each of the ten years in the period ended
January 31, 1994, the Notes to Financial Statements and the Reports of
Independent Auditors, each of which is included in the Annual Reports to
shareholders of the Trust, are incorporated by reference into this Statement of
Additional Information and have been so incorporated in reliance upon the report
of Deloitte & Touche, independent certified public accountants, as experts in
accounting and auditing.
For the California Fund, the Portfolio of Investments at January 31, 1994, the
Statement of Assets and Liabilities at January 31, 1994, the Statements of
Operations for the eleven months ended January 31, 1994 and the year ended
February 28, 1993, the Statements of Changes in Net Assets for the eleven months
ended January 31, 1994 and each of the two years ended February 28, 1993, the
Financial Highlights for the eleven months ended January 31, 1994 and for each
of the eight years in the period ended February 28, 1993, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders, are incorporated by reference into this
Statement of Additional Information and have been so incorporated in reliance
upon the report of Deloitte & Touche, independent certified public accountants,
as experts in accounting and auditing. A copy of the Annual Reports accompany
this Statement of Additional Information.
APPENDIX A
The performance results and quotations below should not be considered as
representative of the performance of any Fund in the future since the net asset
value and public offering price of shares of the Funds will vary. See
"Performance Information" in the Statement of Additional Information.
PERFORMANCE RESULTS
CLASS A SHARES
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------- --------------- ------------- --------- -----
ALABAMA FUND
December 31, 1990(1) $ 9,629 $ 0 $ 517 $10,146
December 31, 1991 9,999 66 1,272 11,337
December 31, 1992 10,260 81 1,998 12,339
December 31, 1993 10,930 110 2,851 13,891
ARKANSAS FUND
December 31, 1992(2) $ 9,780 $ 0 $ 549 $10,329
December 31, 1993 10,400 2 1,209 11,611
CALIFORNIA FUND
December 31, 1985(3) $ 9,320 $ 0 $ 225 $ 9,545
December 31, 1986 10,520 45 1,006 11,571
December 31, 1987 9,760 68 1,622 11,450
December 31, 1988 10,160 71 2,462 12,693
December 31, 1989 10,480 73 3,389 13,942
December 31, 1990 10,460 73 4,304 14,837
December 31, 1991 10,940 124 5,604 16,668
December 31, 1992 11,200 151 6,839 18,190
December 31, 1993 11,820 229 8,483 20,532
FLORIDA FUND
December 31, 1992(2) $ 9,800 $ 0 $ 547 $10,347
December 31, 1993 10,540 25 1,321 11,886
GEORGIA FUND
December 31, 1988(4) $ 9,690 $ 0 $ 211 $ 9,901
December 31, 1989 9,860 20 919 10,799
December 31, 1990 9,790 44 1,638 11,472
December 31, 1991 10,270 78 2,539 12,887
December 31, 1992 10,480 80 3,373 13,933
December 31, 1993 11,210 86 4,425 15,721
LOUISIANA FUND
December 31, 1993(5) $10,050 $ 0 $ 517 $10,567
MARYLAND FUND
December 31, 1984(6) $ 9,660 $ 0 $ 76 $ 9,736
December 31, 1985 10,130 67 975 11,172
December 31, 1986 11,010 73 1,940 13,023
December 31, 1987 10,310 88 2,617 13,015
December 31, 1988 10,700 92 3,629 14,421
December 31, 1989 10,940 104 4,674 15,718
December 31, 1990 10,900 115 5,698 16,713
December 31, 1991 11,240 152 7,104 18,496
December 31, 1992 11,320 179 8,330 19,829
December 31, 1993 11,730 291 9,868 21,889
MASSACHUSETTS FUND
December 31, 1985(7) $10,080 $ 0 $ 426 $10,506
December 31, 1986 11,020 11 1,326 12,357
December 31, 1987 10,280 12 2,033 12,325
December 31, 1988 10,590 12 3,003 13,605
December 31, 1989 10,690 12 3,993 14,695
December 31, 1990 10,630 12 5,008 15,650
December 31, 1991 11,110 13 6,466 17,589
December 31, 1992 11,310 13 7,762 19,085
December 31, 1993 11,660 308 9,233 21,221
<PAGE>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------- --------------- ------------- --------- -----
MISSISSIPPI FUND
December 31, 1992(8) $ 9,290 $ 0 $ 205 $ 9,495
December 31, 1993 9,930 0 812 10,742
NEW YORK FUND
December 31, 1988(4) $ 9,740 $ 0 $ 189 $ 9,929
December 31, 1989 9,910 80 904 10,894
December 31, 1990 9,820 80 1,652 11,552
December 31, 1991 10,370 148 2,612 13,130
December 31, 1992 10,670 194 3,558 14,422
December 31, 1993 11,270 248 4,811 16,329
NORTH CAROLINA FUND
December 31, 1984(6) $ 9,670 $ 0 $ 70 $ 9,740
December 31, 1985 10,690 48 992 11,730
December 31, 1986 11,530 240 1,987 13,757
December 31, 1987 10,790 225 2,737 13,752
December 31, 1988 11,070 231 3,788 15,089
December 31, 1989 11,320 236 4,909 16,465
December 31, 1990 11,230 311 5,967 17,508
December 31, 1991 11,600 404 7,425 19,429
December 31, 1992 11,710 408 8,677 20,795
December 31, 1993 12,290 438 10,308 23,036
PENNSYLVANIA FUND
December 31, 1993(5) $10,050 $ 0 $ 488 $10,538
SOUTH CAROLINA FUND
December 31, 1984(6) $ 9,680 $ 0 $ 69 $ 9,749
December 31, 1985 10,490 14 1,004 11,508
December 31, 1986 11,340 47 2,011 13,398
December 31, 1987 10,830 99 2,845 13,774
December 31, 1988 11,200 103 3,976 15,279
December 31, 1989 11,460 105 5,103 16,668
December 31, 1990 11,390 187 6,155 17,732
December 31, 1991 11,810 273 7,639 19,722
December 31, 1992 11,940 356 8,916 21,212
December 31, 1993 12,660 402 10,649 23,711
TENNESSEE FUND
December 31, 1988(9) $ 9,650 $ 0 $ 117 $ 9,767
December 31, 1989 9,900 0 821 10,721
December 31, 1990 9,850 20 1,531 11,401
December 31, 1991 10,140 82 2,379 12,601
December 31, 1992 10,320 102 3,198 13,620
December 31, 1993 10,840 108 4,141 15,089
TEXAS FUND
December 31, 1992(2) $ 9,930 $ 0 $ 533 $10,463
December 31, 1993 10,750 0 1,270 12,020
VIRGINIA FUND
December 31, 1984(6) $ 9,630 $ 0 $ 78 $ 9,708
December 31, 1985 10,340 11 966 11,317
December 31, 1986 11,120 17 1,923 13,060
December 31, 1987 10,470 94 2,658 13,222
December 31, 1988 10,860 97 3,742 14,699
December 31, 1989 11,110 99 4,870 16,079
December 31, 1990 11,100 99 5,972 17,171
December 31, 1991 11,500 103 7,451 19,054
December 31, 1992 11,620 110 8,738 20,468
December 31, 1993 11,990 441 10,277 22,708
WASHINGTON FUND
December 31, 1992(10) $ 9,450 $ 0 $ 193 $ 9,643
December 31, 1993 10,170 10 889 11,069
<PAGE>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------- --------------- ------------- --------- -----
WEST VIRGINIA FUND
December 31, 1984(6) $ 9,620 $ 0 $ 78 $ 9,698
December 31, 1985 10,330 13 1,022 11,365
December 31, 1986 11,100 51 2,061 13,212
December 31, 1987 10,250 149 2,816 13,215
December 31, 1988 10,620 154 3,973 14,747
December 31, 1989 10,850 157 5,104 16,111
December 31, 1990 10,870 158 6,213 17,241
December 31, 1991 11,250 177 7,703 19,130
December 31, 1992 11,410 188 9,031 20,629
December 31, 1993 11,970 351 10,761 23,082
(1) Based on initial investment made on February 1, 1990, the initial public
offering date of Class A shares.
(2) Based on initial investment made on February 3, 1992, the initial public
offering date of Class A shares.
(3) Based on initial investment made June 18, 1985, the initial public offering
date of the predecessor of Class A shares.
(4) Based on initial investment made on June 6, 1988, the initial public
offering date of Class A shares.
(5) Based on initial investment made February 1, 1993, the initial public
offering date of the predecessor of Class A shares.
(6) Based on initial investment made on October 31, 1984, the initial public
offering date of Class A shares.
(7) Based on initial investment made on April 9, 1985, the initial public
offering date of Class A shares.
(8) Based on initial investment made on August 6, 1992, the initial public
offering date of Class A shares.
(9) Based on initial investment made on August 12, 1988, the initial public
offering date of Class A shares.
(10) Based on initial investment made on August 7, 1992, the initial public
offering date of Class A shares.
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for any income taxes, if
any, payable by shareholders.
<PAGE>
PERFORMANCE QUOTATIONS
All performance quotations are for the periods ending January 31, 1994.
<TABLE>
<CAPTION>
ACTUAL
ACTUAL TAX EQUIVALENT TAX EQUIVALENT
30-DAY 30-DAY 30-DAY YIELD 30-DAY YIELD
AVERAGE ANNUAL TOTAL RETURNS YIELD YIELD (INCLUDING (WITHOUT
---------------------------- AGGREGATE (INCLUDING (WITHOUT ANY WAIVERS) ANY WAIVERS) CURRENT
LIFE OF TOTAL ANY ANY ------------ ------------- DISTRIBUTION
FUND 1 YEAR 5 YEAR FUND RETURN WAIVERS) WAIVERS) TAX BRACKETS: TAX BRACKETS: RATE<F14>
- ----------------------- ------ ------- ------- ------- ------- ------- -------------- -------------- -------------
28% 31% 28% 31%
----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama Fund Class A
with sales charge 6.9% --% 8.8%<F1> --% 4.50% 4.41% 6.25% 6.52% 6.13% 6.39% 4.77%
Alabama Fund Class A
without sales charge 12.3 -- 10.1<F1> --
Alabama Fund Class B
with CDSC -- -- -- -1.7<F2> 3.59 4.99 5.20 4.09
Alabama Fund Class B
without CDSC -- -- -- 2.3<F2>
Arkansas Fund Class A
with sales charge 6.7 -- 8.4<F3> -- 4.98 4.79 6.92 7.22 6.65 6.94 5.10
Arkansas Fund Class A
without sales charge 12.0 -- 11.1<F3> --
Arkansas Fund Class B
with CDSC -- -- -- -1.8<F2> 3.99 3.79 5.54 5.78 5.26 5.49 4.13
Arkansas Fund Class B
without CDSC -- -- -- 2.2<F2>
California Fund Class A
with sales charge 2.6<F6> 9.0 8.8<F4> -- 4.88 4.73 6.78 7.07 6.57 6.86 5.21
California Fund Class A
without sales charge 7.6<F6> 10.1 9.4<F4> --
California Fund Class B
with CDSC -- -- -- -2.3<F2> 4.12 3.97 5.72 5.97 5.51 5.75 4.18
California Fund Class B
without CDSC -- -- -- 1.7<F2>
California Fund Class C -- -- -- 1.2<F5> 1.51 2.10 2.19 2.69
Florida Fund Class A
with sales charge 9.3 -- 9.8<F3> -- 4.89 4.55 6.79 7.09 6.32 6.59 5.17
Florida Fund Class A
without sales charge 14.7 -- 12.5<F3> --
Florida Fund Class B
with CDSC -- -- -- -2.0<F2> 3.94 3.58 5.47 5.71 4.97 5.19 4.18
Florida Fund Class B
without CDSC -- -- -- 2.0<F2>
Georgia Fund Class A
with sales charge 7.3 8.7 8.6<F7> -- 4.40 4.31 6.11 6.38 5.99 6.25 4.85
Georgia Fund Class A
without sales charge 12.7 9.7 9.5<F7> --
Georgia Fund Class B
with CDSC -- -- -- -1.9<F2> 3.62 5.03 5.25 4.14
Georgia Fund Class B
without CDSC -- -- -- 2.1<F2>
Louisiana Fund Class A
with sales charge 7.0 -- 7.0<F8> -- 5.34 4.43 7.42 7.74 6.15 6.42 4.91
Louisiana Fund Class A
without sales charge 12.3 -- 12.3<F8> --
Louisiana Fund Class B
with CDSC -- -- -- -1.5<F2> 4.48 3.52 6.22 6.49 4.89 5.10 4.46
Louisiana Fund Class B
without CDSC -- -- -- 2.5<F2>
Maryland Fund Class A
with sales charge 5.0 7.7 9.0<F9> -- 4.64 6.44 6.72 5.25
Maryland Fund Class A
without sales charge 10.3 8.7 9.5<F9> --
Maryland Fund Class B
with CDSC -- -- -- -2.2<F2> 4.19 5.82 6.07 4.63
Maryland Fund Class B
without CDSC -- -- -- 1.8<F2>
Massachusetts Fund
Class A with
sales charge 5.7 8.3 9.1<F10> -- 5.11 7.10 7.41 5.81
Massachusetts Fund
Class A without
sales charge 11.0 9.3 9.7<F10> --
Massachusetts Fund
Class B with CDSC -- -- -- -1.6<F2> 4.24 5.89 6.14 4.95
Massachusetts Fund
Class B without
CDSC -- -- -- 2.3<F2>
Mississippi Fund
Class A with
sales charge 7.4 -- 5.8<F11> -- 5.28 4.51 7.33 7.65 6.26 6.54 5.26
Mississippi Fund
Class A without
sales charge 12.8 -- 9.3<F11> --
Mississippi Fund
Class B with CDSC -- -- -- -1.7<F2> 4.47 3.66 6.21 6.48 5.08 5.30 4.52
Mississippi Fund
Class B without
CDSC -- -- -- 2.3<F2>
New York Fund
Class A with
sales charge 7.3 9.4 9.3<F7> -- 4.69 4.50 6.51 6.80 6.25 6.52 5.05
New York Fund
Class A without
sales charge 12.7 10.5 10.2<F7> --
New York Fund
Class B with CDSC -- -- -- -1.9<F2> 4.00 3.89 5.56 5.80 5.40 5.64 4.35
New York Fund
Class B without
CDSC -- -- -- 2.1<F2>
North Carolina Fund
Class A with
sales charge 5.3 7.7 9.6<F9> -- 4.35 6.04 6.30 5.18
North Carolina Fund
Class A without
sales charge 10.6 8.8 10.1<F9> --
North Carolina Fund
Class B with CDSC -- -- -- -2.2<F2> 3.92 5.44 5.68 4.28
North Carolina Fund
Class B without CDSC -- -- -- 1.8<F2>
North Carolina Fund
Class C -- -- -- 1.2<F5> 2.28 3.17 3.30 2.32
Pennsylvania Fund
Class A with
sales charge 6.8 -- 6.8<F8> -- 5.18 4.27 7.19 7.51 5.93 6.19 4.72
Pennsylvania Fund
Class A without
sales charge 12.1 -- 12.1<F8> --
Pennsylvania Fund
Class B with CDSC -- -- -- -1.3<F2> 4.44 3.49 6.17 6.43 4.85 5.06 4.22
Pennsylvania Fund
Class B without
CDSC -- -- -- 2.7<F2>
South Carolina Fund
Class A with
sales charge 6.4 8.2 9.9<F9> -- 4.34 6.03 6.29 4.79
South Carolina Fund
Class A without
sales charge 11.7 9.1 10.5<F9> --
South Carolina Fund
Class B with CDSC -- -- -- -1.8<F2> 3.67 5.10 5.32 4.25
South Carolina Fund
Class B without
CDSC -- -- -- 2.2<F2>
Tennessee Fund
Class A with
sales charge 5.9 8.1 8.1<F12> -- 4.72 6.56 6.84 4.93
Tennessee Fund
Class A without
sales charge 11.2 9.4 9.0<F12> --
Tennessee Fund
Class B with CDSC -- -- -- -1.5<F2> 4.57 6.35 6.62 4.07
Tennessee Fund
Class B without
CDSC -- -- -- 2.5<F2>
Texas Fund Class A
with sales charge 9.6 -- 10.5<F3> -- 5.17 4.26 7.18 7.49 5.92 6.17 5.34
Texas Fund Class A
without sales charge 15.1 -- 13.2<F3> --
Texas Fund Class B
with CDSC -- -- -- -1.3<F2> 4.49 3.54 6.24 6.51 4.92 5.13 4.55
Texas Fund Class B
without CDSC -- -- -- 2.7<F2>
Virginia Fund
Class A with
sales charge 5.5 8.1 9.4<F9> -- 4.47 6.21 6.48 5.20
Virginia Fund
Class A without
sales charge 10.7 9.1 10.0<F9> --
Virginia Fund
Class B with CDSC -- -- -- -2.0<F2> 4.01 5.57 5.81 4.47
Virginia Fund
Class B without
CDSC -- -- -- 2.0<F2>
Virginia Fund
Class C -- -- -- 1.2<F5> 1.64 2.28 2.38 2.50
Washington Fund
Class A with
sales charge 9.1 -- 8.0<F13> -- 5.29 4.37 7.35 7.67 6.07 6.33 5.29
Washington Fund
Class A without
sales charge 14.6 -- 11.6<F13> --
Washington Fund
Class B with CDSC -- -- -- -1.7<F2> 4.43 3.47 6.15 6.42 4.82 5.03 4.50
Washington Fund
Class B without
CDSC -- -- -- 2.3<F2>
West Virginia Fund
Class A with
sales charge 6.5 8.3 9.6<F9> -- 4.72 6.56 6.84 5.09
West Virginia Fund
Class A without
sales charge 11.8 9.4 10.2<F9> --
West Virginia Fund
Class B with CDSC -- -- -- -1.8<F2> 4.12 5.72 5.97 4.44
West Virginia Fund
Class B without CDSC -- -- -- 2.2<F2>
<FN>
- -----------
<F1>From the initial public offering date of Class A shares on February 1, 1990.
<F2>Aggregate total return from September 7, 1993 (commencement of public
offering of Class B shares).
<F3>From the initial public offering date of Class A shares on February 3, 1992.
<F4>From the initial public offering date of Class A shares on June 18, 1985.
<F5>Aggregate total return from January 3, 1994 (commencement of public offering
of Class C shares).
<F6>Due to a change in the Fund's fiscal year end, the performance figures cited
are for the 11-month period ended January 31, 1994.
<F7>From the intitial public offering date of Class A shares on June 6, 1988.
<F8>From the initial public offering date of Class A shares on February 1, 1993.
<F9>From the initial public offering date of Class A shares on October 31, 1984.
<F10>From the initial public offering date of Class A shares on April 9, 1985.
<F11>From the initial public offering date of Class A shares on August 6, 1992.
<F12>From the initial public offering date of Class A shares on August 12, 1988.
<F13>From the initial public offering date of Class A shares on August 7, 1992.
<F14>Class B and Class C current distribution rates have been annualized.
</FN>
</TABLE>
<PAGE>
APPENDIX B
SALES CHARGES
<TABLE>
<CAPTION>
CDSC CDSC IMPOSED
IMPOSED ON ON CLASS A CLASS A CLASS A
REDEMPTION REDEMPTION SALES SALES CHARGES GROSS SALES
OF CLASS B OF CLASS A CHARGES RECEIVED CHARGES
SHARES SHARES RECEIVED BY FSI BY DEALERS<F1> 12 MONTHS
9/7/93 THRU 12 MONTHS 12 MONTHS 12 MONTHS ENDED
FUND 1/31/94 ENDED 1/31/94 ENDED 1/31/94 ENDED 1/31/94 1/31/94
<S> <C> <C> <C> <C> <C>
Alabama Fund Class A $ 73 $ 91,928 $ 558,082 $ 650,010
Alabama Fund Class B $ 39
Arkansas Fund Class A 3 455,067 2,809,535 3,264,602
Arkansas Fund Class B 4,730
California Fund Class A<F2> 55,328 231,916 1,967,665 2,199,581
California Fund Class B<F2> 7,146
California Fund Class C<F2>
Florida Fund Class A 10,737 219,779 1,359,226 1,579,005
Florida Fund Class B 939
Georgia Fund Class A 366 89,931 573,488 663,419
Georgia Fund Class B 393
Louisiana Fund Class A 0 40,802 422,946 463,748
Louisiana Fund Class B 9,891
Maryland Fund Class A 162 161,689 1,043,078 1,204,767
Maryland Fund Class B 2,407
Massachusetts Fund Class A 9,456 128,547 811,164 939,711
Massachusetts Fund Class B 753
Mississippi Fund Class A 2,460 217,195 1,368,892 1,586,087
Mississippi Fund Class B 212
New York Fund Class A 129 170,823 1,592,278 1,763,101
New York Fund Class B --
North Carolina Fund Class A 989 421,999 2,666,700 3,088,699
North Carolina Fund Class B 2,001
North Carolina Fund Class C
Pennsylvania Fund Class A -- 39,557 466,418 505,975
Pennsylvania Fund Class B --
South Carolina Fund Class A 39,579 184,187 1,120,745 1,304,932
South Carolina Fund Class B --
Tennessee Fund Class A 438 113,280 681,131 794,411
Tennessee Fund Class B 1,775
Texas Fund Class A . 0 36,054 221,631 257,685
Texas Fund Class B . 316
Virginia Fund Class A 12 380,623 2,323,173 2,703,796
Virginia Fund Class B 417
Virginia Fund Class C
Washington Fund Class A 0 44,300 289,144 333,444
Washington Fund Class B 2,004
West Virginia Fund Class A 77 160,768 1,036,761 1,197,529
West Virginia Fund Class B 6,028
CDSC
IMPOSED ON CLASS A
REDEMPTION CLASS A SALES CHARGES
CLASS A OF CLASS A SALES CHARGES RECEIVED
FUND ASSETS SHARES RECEIVED BY FSI BY DEALERS <F1>
SOLD 12 12 MONTHS 12 MONTHS 12 MONTHS
MONTHS ENDED ENDED ENDED
FUND ENDED 1/31/94 1/31/93 1/31/93 1/31/93
<S> <C> <C> <C> <C>
Alabama Fund Class A $ 22,229,059 $ 54 $117,454 $ 461,270
Alabama Fund Class B
Arkansas Fund Class A 80,468,316 3 586,418 4,816,692
Arkansas Fund Class B
California Fund Class A<F2> 114,935,752 23,687 262,500 2,258,987
California Fund Class B<F2>
California Fund Class C<F2>
Florida Fund Class A 52,007,077 -- 179,386 1,899,665
Florida Fund Class B
Georgia Fund Class A 29,940,646 162 102,867 642,144
Georgia Fund Class B
Louisiana Fund Class A 13,166,947 -- 0 0
Louisiana Fund Class B
Maryland Fund Class A 35,398,730 -- 190,010 994,473
Maryland Fund Class B
Massachusetts Fund Class A 40,161,491 2 179,413 910,590
Massachusetts Fund Class B
Mississippi Fund Class A 43,993,195 -- 41,412 1,530,908
Mississippi Fund Class B
New York Fund Class A 57,532,037 1 226,320 1,980,698
New York Fund Class B
North Carolina Fund Class A 106,750,838 48 535,492 2,751,651
North Carolina Fund Class B
North Carolina Fund Class C
Pennsylvania Fund Class A 12,814,354 -- -- --
Pennsylvania Fund Class B
South Carolina Fund Class A 48,658,649 1 204,106 1,081,263
South Carolina Fund Class B
Tennessee Fund Class A 23,309,416 20 109,307 574,113
Tennessee Fund Class B
Texas Fund Class A . 9,215,825 -- 35,238 337,875
Texas Fund Class B .
Virginia Fund Class A 90,094,203 298 496,098 2,515,485
Virginia Fund Class B
Virginia Fund Class C
Washington Fund Class A 9,944,597 -- 14,925 396,025
Washington Fund Class B
West Virginia Fund Class A 31,951,976 -- 178,376 931,283
West Virginia Fund Class B
</TABLE>
<PAGE>
SALES CHARGES
<TABLE>
<CAPTION>
CDSC
IMPOSED ON CLASS A
CLASS A REDEMPTION SALES CHARGES
GROSS SALES CLASS A OF CLASS A RECEIVED
CHARGES FUND ASSETS SHARES BY FSI
12 MONTHS SOLD 12 MONTHS 12 MONTHS 12 MONTHS
FUND ENDED 1/31/93 ENDED 1/31/93 ENDED 1/31/92 ENDED 1/31/92
<S> <C> <C> <C> <C>
Alabama Fund Class A $ 578,724 $ 20,784,102 -- $ 63,250
Alabama Fund Class B
Arkansas Fund Class A 5,403,110 125,078,925 -- 20
Arkansas Fund Class B
California Fund Class A<F2> 2,521,487 109,995,843 -- 141,689
California Fund Class B<F2>
California Fund Class C
Florida Fund Class A 2,079,051 61,449,275 -- -
Florida Fund Class B
Georgia Fund Class A 745,011 21,866,434 -- 51,199
Georgia Fund Class B
Louisiana Fund Class A --
Louisiana Fund Class B
Maryland Fund Class A 1,184,483 31,512,575 -- 113,369
Maryland Fund Class B
Massachusetts Fund Class A 1,090,003 42,927,270 --
Massachusetts Fund Class B 143,180
Mississippi Fund Class A 1,572,320 40,051,576 --
Mississippi Fund Class B
New York Fund Class A 2,207,018 56,353,466 -- 124,739
New York Fund Class B
North Carolina Fund Class A 3,287,143 97,502,355 -- 496,183
North Carolina Fund Class B
North Carolina Fund Class C
Pennsylvania Fund Class A
Pennsylvania Fund Class B
South Carolina Fund Class A 1,285,369 42,987,052 -- 156,093
South Carolina Fund Class B
Tennessee Fund Class A 683,420 18,954,377 -- 93,375
Tennessee Fund Class B
Texas Fund Class A 373,113 8,735,109 --
Texas Fund Class B
Virginia Fund Class A 3,011,583 84,365,465 -- 327,398
Virginia Fund Class B
Virginia Fund Class C
Washington Fund Class A 410,950 9,272,688 --
Washington Fund Class B
West Virginia Fund Class A 1,109,659 36,961,767 -- 106,391
West Virginia Fund Class B
</TABLE>
<TABLE>
<CAPTION>
CLASS A
SALES CHARGES CLASS A
RECEIVED GROSS SALES CLASS A
BY DEALERS<F1> CHARGES FUND ASSETS
12 MONTHS 12 MONTHS SOLD 12 MONTHS
FUND ENDED 1/31/92 ENDED 1/31/92 ENDED 1/31/92
<S> <C> <C> <C>
Alabama Fund Class A $ 897,745 $ 960,995 $ 26,539,178
Alabama Fund Class B
Arkansas Fund Class A 2,138 2,158 42,942
Arkansas Fund Class B
California Fund Class A<F2> 2,174,353 2,316,042 95,066,044
California Fund Class B <F2>
California Fund Class C
Florida Fund Class A - - --
Florida Fund Class B
Georgia Fund Class A 672,960 724,159 20,040,344
Georgia Fund Class B
Louisiana Fund Class A
Louisiana Fund Class B
Maryland Fund Class A 744,810 858,179 23,467,526
Maryland Fund Class B
Massachusetts Fund Class A
Massachusetts Fund Class B 879,779 1,022,959 37,527,014
Mississippi Fund Class A
Mississippi Fund Class B
New York Fund Class A 1,927,809 2,052,548 47,285,442
New York Fund Class B
North Carolina Fund Class A 3,246,058 3,742,241 100,110,856
North Carolina Fund Class B
North Carolina Fund Class C
Pennsylvania Fund Class A
Pennsylvania Fund Class B
South Carolina Fund Class A 967,522 1,123,615 29,155,908
South Carolina Fund Class B
Tennessee Fund Class A 608,472 701,847 19,647,528
Tennessee Fund Class B
Texas Fund Class A
Texas Fund Class B
Virginia Fund Class A 2,177,131 2,504,529 69,576,145
Virginia Fund Class B
Virginia Fund Class C
Washington Fund Class A
Washington Fund Class B
West Virginia Fund Class A 678,096 784,487 19,614,647
West Virginia Fund Class B
<FN>
<F1> Includes dealers, banks and other financial institutions.
<F2> For the eleven months ended January 31, 1994 and the years ended February 28/29, 1993 and 1992.
</TABLE>
<PAGE>
<TABLE>
APPENDIX C
AMOUNTS PAID UNDER EACH OF THE DISTRIBUTION PLANS
<CAPTION>
TOTAL
PAID
UNDER % OF AVG. AMOUNT % OF AVG. % OF AVG. AMOUNT % OF AVG.
DISTRIBUTION DAILY NET WAIVED BY DAILY NET AMOUNT PAID DAILY NET RETAINED DAILY NET
FUND PLAN<F1> ASSETS FSI ASSETS TO DEALERS<F2> ASSETS BY FSI ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama Fund Class A $ 199,518 .25% $79,373 .10% $ 199,518 .25% -- --
Alabama Fund Class B 5,420 1.0 -- -- 1,354 .25 $4,068 .75%
Arkansas Fund Class A -- -- -- -- -- -- -- --
Arkansas Fund Class B 11,348 1.0 -- -- 2,837 .25 8,511 .75
California Fund Class A<F3> -- -- -- -- -- -- -- --
California Fund Class B<F3> 45,499 1.0 -- -- 11,375 .25 34,124 .75
California Fund Class<F3> 117 1.0 -- -- 117 1.0 -- --
Florida Fund Class A -- -- -- -- -- -- -- --
Florida Fund Class B 15,105 1.00 -- -- 3,776 .25 11,329 .75
Georgia Fund Class A 205,165 .25 80,561 .10 205,165 .25 -- --
Georgia Fund Class B 12,102 1.00 -- -- 3,025 .25 9,077 .75
Louisiana Fund Class A -- -- -- -- -- -- -- --
Louisiana Fund Class B 3,592 1.0 -- -- 898 .25 2,694 .75
Maryland Fund Class A 574,461 .35 -- -- 410,329 .25 164,132 .10
Maryland Fund Class B 11,271 1.00 -- -- 2,818 .25 8,453 .75
Massachusetts Fund Class A 1,015,715 .35 -- -- 725,511 .25 290,204 .10
Massachusetts Fund Class B 9,068 1.00 -- -- 2,267 .25 6,801 .75
Mississippi Fund Class A -- -- -- -- -- -- -- --
Mississippi Fund Class B 15,256 1.0 -- -- 3,814 .25 11,442 .75
New York Fund Class A 416,521 .25 165,700 .10 416,521 .25 -- --
New York Fund Class B 10,025 1.00 -- -- 2,506 .25 7,519 .75
North Carolina Fund Class A 1,600,277 .35 -- -- 1,146,621 .25 453,656 .10
North Carolina Fund Class B 27,726 1.00 -- -- 6,931 .25 20,795 .75
North Carolina Fund Class C 935 1.00 -- -- 935 1.00 -- --
Pennsylvania Fund Class A -- -- -- -- -- -- -- --
Pennsylvania Fund Class B 7,063 1.00 -- -- 1,766 .25 5,297 .75
South Carolina Fund Class A 600,720 .35 -- -- 429,081 .25 171,639 .10
South Carolina Fund Class B 17,021 1.00 -- -- 4,255 .25 12,766 .75
Tennessee Fund Class A 398,420 .35 -- -- 284,586 .25 113,834 .10
Tennessee Fund Class B 9,294 1.0 -- -- 2,329 .25 6,965 .75
Texas Fund Class A -- -- -- -- -- -- -- --
Texas Fund Class B 2,372 1.0 -- -- 593 .25 1,779 .75
Virginia Fund Class A 1,565,376 .35 -- -- 1,118,126 .25 447,250 .10
Virginia Fund Class B 25,182 1.00 -- -- 6,296 .25 18,886 .75
Virginia Fund Class C 162 1.00 -- -- 162 1.00 -- --
Washington Fund Class A -- -- -- -- -- -- -- --
Washington Fund Class B 3,575 1.0 -- -- 894 .25 2,681 .75
West Virginia Fund Class A 463,603 .35 -- -- 330,870 .25 132,733 .10
West Virginia Fund Class B 9,655 1.00 -- -- 2,414 .25 7,241 .75
<FN>
<F1> Amounts paid under the Class A Distribution Plan for the 12 months ended
January 31, 1994. Amounts paid under the Class B Distribution Plan for the
period September 7, 1993 (commencement of public offering of Class B
shares) through January 31, 1994. Amounts paid under the Class C
Distribution Plan for the period January 3, 1994 (commencement of public
offering of Class C shares) through January 31, 1994.
<F2> Includes securities dealers, certain banks and other financial
institutions.
<F3> For the 11-month period ended January 31, 1994.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Financial Services, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche
125 Summer Street, Boston, MA 02110
MFS(R)
MUNICIPAL
SERIES TRUST
500 BOYLSTON STREET
BOSTON. MA 02116
MST-13-6/94/1M
