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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1995
1940 ACT FILE NO. 811-4096
1933 ACT FILE NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MFS MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-954-5000
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With a Copy to: With a Copy to:
STEPHEN E. CAVAN, ESQ. JEREMIAH J. BRESNAHAN, ESQ. JOHN M. LODER, ESQ.
Massachusetts Financial Bingham, Dana & Gould Ropes & Gray
Services Company 150 Federal Street One International Place
500 Boylston Street Boston, MA 02110 Boston, MA 02110
Boston, MA 02116
(NAME AND ADDRESS OF AGENT FOR
SERVICE)
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Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the registration statement.
NO FILING FEE IS REQUIRED BECAUSE AN INDEFINITE NUMBER OF SHARES HAVE PREVIOUSLY
BEEN REGISTERED PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940.
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES PREVIOUSLY
REGISTERED ON FORM N-1A (FILE NO. 2-92915).
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON
MARCH 26, 1995 PURSUANT TO RULE 488.
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MFS MUNICIPAL INCOME FUND
A SERIES OF
MFS MUNICIPAL SERIES TRUST
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CROSS-REFERENCE SHEET
ITEMS REQUIRED BY FORM N-14
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PART A
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
- -------- ------------ ------------------
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1. Beginning of Registration Statement and Cover Page of Registration Statement;
Outside Front Cover Page of Prospectus Front Cover Page of Prospectus
2. Beginning and Outside Back Cover Page of Table of Contents
Prospectus
3. Synopsis Information and Risk Factors Summary; Special Factors
4. Information about the Transaction Proposal to Approve Agreement and Plan
of Reorganization
5. Information about the Registrant Prospectus Cover Page; Summary; Business
of the MFS Fund; Available Information
6. Information about the Company being Prospectus Cover Page; Introduction;
Acquired Summary; Business of the Advantage
Fund; Available
Information
7. Voting Information Prospectus Cover Page; Notice of Special
Meeting of Shareholders; Summary;
Voting Rights and Required Vote;
Manner of Voting Proxies
8. Interest of Certain Persons and Experts None
9. Additional Information Required for Not Applicable
Re-offering by Persons Deemed to be
Underwriters
PART B
ITEM NO.
- ---------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. Additional Information about the Additional Information about the MFS
Registrant Fund
13. Additional Information about the Company Additional Information about the
being Acquired Advantage Fund
14. Financial Statements Not Applicable
PART C
ITEM NO.
- ---------
15. Indemnification Indemnification
16. Exhibits Exhibits
17. Undertakings Undertakings
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<PAGE> 3
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THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
MARCH , 1995
MESSAGE FROM THE PRESIDENT OF THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Dear Shareholder:
The attached proxy statement and prospectus describes a proposed transaction in
which the assets of The National Portfolio (the "Advantage Fund") of The
Advantage Municipal Bond Fund would be combined with the assets of the MFS
Municipal Income Fund (the "MFS Fund"). As a result of the transaction,
shareholders of the Advantage Fund would become shareholders of the MFS Fund.
Following the transaction, the Advantage Fund would cease operations.
The MFS Fund is sponsored by Massachusetts Financial Services Company ("MFS").
The MFS organization has been in the mutual fund business since 1924, and
currently manages 109 mutual funds with over $30 billion in assets.
The Trustees of The Advantage Municipal Bond Fund have unanimously approved the
proposed transaction. The transaction also requires approval by vote of the
shareholders of the Advantage Fund at a shareholder meeting to be held on April
27, 1995.
Your Trustees recommend that you vote FOR the proposed transaction, by signing
and returning the enclosed proxy card in the enclosed postage-paid envelope. You
are also cordially invited to attend the April 27 shareholders' meeting.
Sincerely,
Robert L. Thomas
President
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THE NATIONAL PORTFOLIO
A SERIES OF
THE ADVANTAGE MUNICIPAL BOND FUND
100 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 27, 1995
A Special Meeting of Shareholders of The National Portfolio (the "Advantage
Fund"), a series of The Advantage Municipal Bond Fund, a Massachusetts business
trust (the "Advantage Trust"), will be held at the offices of Ropes & Gray, One
International Place, 36th Floor, Boston, Massachusetts, on Thursday, April 27,
1995, at 11:30 a.m. for the following purposes:
ITEM 1. To consider and act upon a proposal to approve an Agreement and Plan of
Reorganization (the "Agreement") between MFS Municipal Series Trust, a
Massachusetts business trust (the "MFS Trust"), on behalf of MFS
Municipal Income Fund, a series of the MFS Trust (the "MFS Fund"), and
the Advantage Trust, on behalf of the Advantage Fund, providing for the
transfer of all of the assets of the Advantage Fund to the MFS Fund in
exchange solely for shares of beneficial interest of the MFS Fund
designated as Class B shares (the "MFS Fund Shares") and the assumption
by the MFS Fund of the stated liabilities of the Advantage Fund, the
distribution of the MFS Fund Shares to the shareholders of the
Advantage Fund in liquidation of the Advantage Fund and the termination
of the Advantage Trust.
ITEM 2. To transact such other business as may properly come before the meeting
and any adjournments thereof.
YOUR TRUSTEES UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOR OF ITEM 1.
Only shareholders of record on March 20, 1995 will be entitled to vote at the
Meeting.
DAVID A. HOROWITZ, Secretary
March 29, 1995
YOUR VOTE IS IMPORTANT. WE WOULD APPRECIATE YOUR PROMPTLY VOTING, SIGNING AND
RETURNING THE ENCLOSED PROXY, WHICH WILL HELP IN AVOIDING THE ADDITIONAL EXPENSE
OF A SECOND SOLICITATION. THE ENCLOSED ADDRESSED ENVELOPE REQUIRES NO POSTAGE
AND IS INTENDED FOR YOUR CONVENIENCE.
<PAGE> 5
MFS(R) MUNICIPAL INCOME FUND
PROXY STATEMENT AND PROSPECTUS DATED MARCH 29, 1995
500 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02116
TELEPHONE 617-954-5000
SECURITIES OFFERED HEREBY
This Proxy Statement and Prospectus relates to shares of beneficial interest
designated as Class B shares, no par value, of MFS Municipal Income Fund (the
"MFS Fund"), a series of MFS Municipal Series Trust (the "MFS Trust"), to be
issued in exchange for all of the assets of The National Portfolio (the
"Advantage Fund"), a series of The Advantage Municipal Bond Fund (the "Advantage
Trust"). The number of the MFS Fund's shares of beneficial interest designated
as Class B shares (the "MFS Fund Shares") to be issued to the Advantage Fund
will be that number of MFS Fund Shares having an aggregate net asset value equal
to the aggregate value of the Advantage Fund's assets, less liabilities assumed,
transferred to the MFS Fund. Following receipt of the MFS Fund Shares, the
Advantage Fund will be liquidated, the MFS Fund Shares will be distributed to
the former shareholders of the Advantage Fund and the Advantage Trust will be
terminated. The terms and conditions of these transactions are more fully
described in this Proxy Statement and Prospectus and in the Agreement and Plan
of Reorganization attached as Exhibit A hereto.
The MFS Trust is an open-end, management investment company of the series type.
The MFS Trust currently has 19 separate series, one of which is the MFS Fund, a
diversified series of the Trust. The investment objective of the MFS Fund is to
provide as high a level of current income exempt from federal income taxes as is
considered consistent with prudent investing and protection of shareholders'
capital. As a matter of fundamental policy, the MFS Fund seeks to achieve its
investment objective by investing primarily (i.e., at least 80% of its net
assets under normal circumstances) in debt securities issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies or instrumentalities, the
interest on which is exempt from federal income tax ("Municipal Obligations" or
"tax-exempt securities"). The MFS Fund may invest up to 33 1/3% of its assets in
Municipal Obligations rated lower than the three highest grades of recognized
rating agencies and in comparable unrated Municipal Obligations, including
Municipal Obligations commonly known as "junk bonds," that entail greater risks,
including default risks, than those found in higher rated Municipal Obligations.
The MFS Fund Shares may be redeemed at any time at net asset value subject to
any applicable contingent deferred sales charge.
The Advantage Fund's principal place of business is 100 Federal Street, Boston,
Massachusetts 02110 and its telephone number is 617-348-3100.
This Proxy Statement and Prospectus sets forth concisely the information that a
shareholder of the Advantage Fund should know before voting on the proposed
transaction described above. It should be read and retained for future
reference.
A Statement of Additional Information dated March 29, 1995 (the "Combined SAI")
relating to the MFS Fund and the Advantage Fund, including historical financial
statements, and the Prospectus and Statement of Additional Information for the
Advantage Fund, each dated April 18, 1994, as supplemented (the "Advantage Fund
Prospectus and SAI"), are on file with the Securities and Exchange Commission.
The Advantage Fund Annual Report for the fiscal year ended December 31, 1994
(the "Advantage Fund Annual Report") has previously been sent to shareholders of
the Advantage Fund. The Prospectus and a Statement of Additional Information
dated March 1, 1995 of the MFS Fund (the "MFS Fund Prospectus and SAI") are also
on file with the Securities and Exchange Commission. The MFS Fund Prospectus is
enclosed with this Proxy Statement and Prospectus. The other documents
identified above are available, upon oral or written request, and at no charge,
from Advest Transfer Services, Inc. at 280 Trumbull Street, Hartford,
Connecticut 06103, telephone number 800-544-9268. The Combined SAI is
incorporated by reference into this Proxy Statement and Prospectus. The
Advantage Fund Prospectus and SAI, the financial statements from the Advantage
Fund Annual Report and the MFS Fund Prospectus and SAI are also incorporated by
reference into this Proxy Statement and Prospectus.
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.
<PAGE> 6
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TABLE OF CONTENTS
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PAGE
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ITEM 1: PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION..................... 2
SUMMARY.......................................................................... 2
SPECIAL FACTORS.................................................................. 10
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION......................... 16
DESCRIPTION OF AGREEMENT......................................................... 17
CAPITALIZATION................................................................... 20
TAX CONSIDERATIONS............................................................... 20
COMPARATIVE PERFORMANCE INFORMATION.............................................. 21
BUSINESS OF THE MFS FUND......................................................... 22
BUSINESS OF THE ADVANTAGE FUND................................................... 23
NO APPRAISAL RIGHTS.............................................................. 24
LEGAL MATTERS.................................................................... 24
EXPERTS.......................................................................... 24
AVAILABLE INFORMATION............................................................ 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE MFS AND
ADVANTAGE FUNDS................................................................. 25
VOTING RIGHTS AND REQUIRED VOTE.................................................. 25
SECURITY OWNERSHIP OF THE ADVANTAGE FUND.............................................. 25
MANNER OF VOTING PROXIES.............................................................. 25
SUBMISSION OF CERTAIN PROPOSALS....................................................... 26
ADDITIONAL INFORMATION................................................................ 26
EXHIBITS
A -- Agreement and Plan of Reorganization dated February 23, 1995 by and between
the MFS Trust, on behalf of the MFS Fund, and the Advantage Trust, on behalf of
the Advantage Fund.............................................................. A-1
ENCLOSURES
Prospectus of the MFS Fund, dated March 1, 1995.
</TABLE>
<PAGE> 7
PROXY STATEMENT AND PROSPECTUS
This Proxy Statement and Prospectus (the "Proxy Statement and Prospectus") is
furnished in connection with the solicitation of proxies by and on behalf of the
Board of Trustees of The Advantage Municipal Bond Fund (the "Advantage Trust")
to be used at the Special Meeting of Shareholders of The National Portfolio (the
"Advantage Fund"), a series of the Advantage Trust, to be held at the offices of
Ropes & Gray, One International Place, 36th Floor, Boston, Massachusetts, on
April 27, 1995, for the purposes set forth in the accompanying Notice (the
"Meeting"). If the enclosed form of proxy is executed and returned, it may
nevertheless be revoked prior to its exercise by a signed writing filed with the
transfer agent, Advest Transfer Services, Inc. ("ATS"), 280 Trumbull Street,
Hartford Connecticut 06103, or delivered at the Meeting. On March 20, 1995,
there were outstanding shares of the Advantage Fund. Shareholders of
record at the close of business on March 20, 1995 will be entitled to one vote
for each share held. This Proxy Statement and Prospectus includes and
incorporates by reference the Prospectus (which is enclosed) and Statement of
Additional Information of the MFS Municipal Income Fund (the "MFS Fund"), a
series of the MFS Municipal Series Trust (the "MFS Trust"), each dated March 1,
1995 (the "MFS Fund Prospectus and SAI") and incorporates by reference the
Prospectus and Statement of Additional Information of the Advantage Fund, each
dated April 18, 1994, as supplemented (the "Advantage Fund Prospectus and SAI").
This Proxy Statement and Prospectus also includes and incorporates by reference
the financial statements from the Advantage Fund Annual Report for the year
ended December 31, 1994 (the "Advantage Fund Annual Report"). This Proxy
Statement and Prospectus is being sent to shareholders of the Advantage Fund on
or before March 29, 1995. The mailing address of the Advantage Fund is 100
Federal Street, Boston, Massachusetts 02110. The MFS Fund and the Advantage Fund
are sometimes referred to herein individually as a "Fund" and collectively as
the "Funds."
The information concerning the MFS Fund in this Proxy Statement and Prospectus
has been supplied by the MFS Fund, and the information regarding the Advantage
Fund in this Proxy Statement and Prospectus has been supplied by the Advantage
Fund.
ITEM 1--PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement and Prospectus and is qualified by reference to the more
complete information contained herein and in the attached Exhibit as well as in
the Advantage Fund Prospectus and the enclosed MFS Fund Prospectus. Shareholders
should read this entire Proxy Statement and Prospectus carefully.
OVERVIEW OF PROPOSED REORGANIZATION
The Board of Trustees of the Advantage Trust has reviewed various alternatives
and determined that it is in the best interest of the Advantage Fund and its
shareholders that Advantage Fund shareholders become shareholders of the MFS
Fund. The MFS Fund, like the Advantage Fund, invests to provide a high level of
current income exempt from federal income taxes. The investment adviser of the
Advantage Fund is Boston Security Counsellors, Inc. ("BSC"), a wholly-owned
subsidiary of The Advest Group, Inc., a publicly-owned holding company. The
investment adviser of the MFS Fund is Massachusetts Financial Services Company
("MFS"), a wholly-owned subsidiary of Sun Life Assurance Company of Canada
(U.S.), which in turn is a wholly-owned subsidiary of Sun Life Assurance Company
of Canada. The investment adviser of each Fund is sometimes referred to herein
as that Fund's "Adviser."
If the transaction is consummated, shareholders of the Advantage Fund will
become holders of Class B shares of the MFS Fund ("MFS Fund Shares"). Class B
shares of the MFS Fund are not subject to a front-end sales charge but may be
subject upon redemption to a contingent deferred sales charge (a "CDSC"). No new
sales charges will apply to the MFS Fund Shares issued to Advantage Fund
shareholders in this transaction, but, if any Advantage Fund shares on the date
the transaction is consummated are subject to a CDSC, the MFS Fund Shares
acquired in respect of such Advantage Fund shares will be subject to a CDSC in
accordance with the MFS Fund CDSC schedule as described under "Other Significant
Fees" below. For purposes of calculating the CDSC and determining when any MFS
Fund Shares issued in the Reorganization will convert to Class A shares of the
MFS Fund (which are subject to a lower distribution
2
<PAGE> 8
fee than Class B shares), the MFS Fund Shares will be treated as if purchased
forty-two months prior to the date the transaction is consummated. Therefore,
assuming that the transaction is consummated on May 1, 1995 as scheduled, the
MFS Fund Shares received by Advantage Fund shareholders will be treated as if
purchased on November 1, 1991, and, with respect to such MFS Fund Shares which
are subject to a CDSC on the date the transaction is consummated, will be
treated as held during the fourth year after purchase and subject to a 3% CDSC
until November 30, 1995, which will decline thereafter to 2% after November 30,
1995, 1% after November 30, 1996 and 0% after November 30, 1997, and, with
respect to all MFS Fund Shares issued in the transaction, will convert to Class
A shares of the MFS Fund on or about November 1, 1999 (approximately four and a
half years after consummation of the transaction).
The Class B shares of the MFS Fund are subject to a 0.75% annual distribution
fee and a 0.25% annual service fee payable pursuant to a distribution plan (a
"Distribution Plan") adopted pursuant to Section 12(b) of the Investment Company
Act of 1940, as amended (the "1940 Act") and Rule 12b-1 thereunder. Shares of
the Advantage Fund are currently subject to a 0.40% annual distribution fee and
a 0.10% annual service fee payable under a Distribution Plan with respect to
such shares.
The Boards of Trustees of the Advantage Trust and the MFS Trust have each
approved the acquisition of the assets of the Advantage Fund by the MFS Fund,
and the Advantage Trust and the MFS Trust have entered into an Agreement and
Plan of Reorganization on behalf of the Advantage Fund and the MFS Fund,
respectively. See Exhibit A hereto. The consummation of the transaction,
however, is subject to the approval of the Advantage Fund's shareholders and
certain other conditions. See "Description of Agreement" below.
As noted below, the transaction provides for the transfer of all the assets of
the Advantage Fund in exchange for MFS Fund Shares and the assumption by the MFS
Fund of the Advantage Fund's stated liabilities, as set forth on a schedule of
assets and liabilities delivered by the Advantage Trust to the MFS Trust on the
date the transaction is consummated. The MFS Fund Shares will then be
distributed to the Advantage Fund's shareholders (the "Reorganization"). Each
Advantage Fund shareholder will receive MFS Fund Shares that will have an
aggregate net asset value equal to the aggregate net asset value of his or her
shares of the Advantage Fund on the date the Reorganization occurs. The
Reorganization is being structured as a tax-free reorganization, and the
consummation of the Reorganization is subject to the receipt of an opinion from
legal counsel to this effect.
Class B shares of the MFS Fund may be exchanged for Class B shares of certain
other funds advised by MFS (if available for sale) or may be redeemed at net
asset value less any applicable CDSC. No CDSC is imposed upon any such exchange;
rather, the CDSC is carried over to the shares received in the exchange. There
are currently 49 funds advised by MFS which are available for exchange
privileges with the MFS Fund. Advantage Fund shareholders may redeem (subject to
any applicable CDSC) or may exchange their Advantage Fund shares for shares of
certain other funds sponsored by Advest, Inc. ("Advest"), the Advantage Fund's
distributor, at any time prior to the consummation of the Reorganization. There
are currently eight other Advantage Funds, including the two other series of the
Advantage Trust, sponsored by Advest which are available for exchange privileges
with the Advantage Fund. Prior to the consummation of the Reorganization,
Advantage Fund shareholders may also redeem their Advantage Fund shares and
invest the proceeds in the Advantage Insured Account (the "AIA"), which is a
money market deposit account maintained at Advest Bank. Deposits of up to
$100,000 in the AIA are insured by the Federal Deposit Insurance Corporation
(the "FDIC"). Withdrawals from the AIA may be subject to a CDSC, as described in
the Advantage Fund Prospectus under "Shareholder Services." Any redemption or
exchange from the MFS Fund or the Advantage Fund would be a taxable event on
which a shareholder may recognize a gain or loss under applicable income tax
provisions.
Upon consummation of the Reorganization, and the related Reorganizations (as
defined below under "Description of Agreement -- Conditions Precedent to
Closing"), MFS will pay $1.2 million to The Advest Group, Inc.
The Board of Trustees of the Advantage Trust believes that the proposed
Reorganization will be advantageous to the shareholders of the Advantage Fund in
several respects which they considered in approving the Reorganization. The
Reorganization will permit the shareholders of the Advantage Fund to become
shareholders of a fund with a similar investment objective and similar
investment policies that has in the past achieved a higher total return than the
Advantage Fund. See "Comparative Performance Information" below. Also, to the
extent that the MFS Fund has a substantially larger asset base than the
Advantage Fund as a result of the Reorganization, its investment portfolio can
be spread over a greater number of securities. Greater diversification is
beneficial to shareholders because it
3
<PAGE> 9
reduces the negative effect which the adverse performance of any one portfolio
security may have on the performance of the entire portfolio. Finally, as
shareholders of the MFS Fund, shareholders will enjoy exchange privileges with
49 other funds advised by MFS.
BUSINESS OF THE ADVANTAGE FUND
The Advantage Trust is an open-end, diversified, management investment company
organized as a Massachusetts business trust under a Declaration of Trust dated
February 25, 1993. The investment objective of the Advantage Fund is to earn a
high level of current income exempt from federal income taxes by investing in a
diversified group of obligations, including 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 tax
("Municipal Obligations"). The Advantage Fund commenced investment operations on
July 1, 1993.
As of March 24, 1995, the Advantage Fund's net assets were approximately
$ .
BUSINESS OF THE MFS FUND
The MFS Trust is an open-end, management investment company organized as a
Massachusetts business trust under an amended and restated Declaration of Trust
dated February 3, 1995. The MFS Fund is a diversified series of the MFS Trust.
The investment objective of the MFS Fund is to provide as high a level of
current income exempt from federal income taxes as is considered consistent with
prudent investing and protection of shareholders' capital. The MFS Fund's
predecessor commenced investment operations on December 29, 1986.
As of March 24, 1995, the MFS Fund's net assets were approximately
$ .
COMPARISON OF THE ADVANTAGE FUND AND THE MFS FUND
The investment objectives of the Advantage Fund and MFS Fund are substantially
similar.
The policy of each of the Advantage Fund and the MFS Fund is to invest at least
80% of its net assets in Municipal Obligations. The Advantage Fund has a
non-fundamental policy, which can be changed by the Advantage Trust Trustees
without a shareholder vote, that at least 65% of the total assets of the
Advantage Fund will be invested in Municipal Obligations which are bonds. Each
Fund invests primarily in Municipal Obligations which are rated "investment
grade" (rated Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's")
or AAA, AA, A or BBB by Standard and Poor's Ratings Group ("S&P")), comparable
unrated Municipal Obligations and securities which are guaranteed, backed or
secured by the U.S. Government. The MFS Fund may invest up to 33 1/3% of its
assets in Municipal Obligations rated lower than A by Moody's or S&P and in
comparable unrated Municipal Obligations. The Advantage Fund may invest up to
10% of its assets in Municipal Obligations rated Bb or B by Moody's or BB or B
by S&P and in comparable unrated Municipal Obligations. Municipal Obligations
rated lower than Baa by Moody's or BBB by S&P and comparable unrated Municipal
Obligations are commonly known as "junk bonds," which entail greater risks,
including default risks, than those found in higher rated securities. Because
the MFS Fund may invest a higher percentage of its assets in junk bonds than the
Advantage Fund, an investment in the MFS Fund entails greater risk and may be
subject to greater volatility than an investment in the Advantage Fund. However,
investing a higher percentage of assets in lower rated securities generally
offers an opportunity to earn higher levels of income. It is not the policy of
either Fund to rely exclusively on ratings issued by established credit rating
agencies but rather to supplement such ratings with its Adviser's own individual
and ongoing review of credit quality.
Both the Advantage Fund and the MFS Fund may, with certain limitations, enter
into repurchase agreements, make loans of its portfolio securities, and invest
in certain restricted and illiquid securities. Both Funds may also invest in
floating or variable rate instruments, zero coupon bonds, options on securities,
futures contracts, options on futures contracts, municipal lease obligations
and, for defensive purposes, short-term investments, and may purchase securities
on a "when issued" basis. The MFS Fund may purchase inverse floating rate
obligations, combinations of options known as "straddles" and futures contracts
for non-hedging purposes. The Advantage Fund may invest in money market
investment companies.
4
<PAGE> 10
See "Special Factors -- Investment Objectives, Policies and Restrictions" below.
FORM OF ORGANIZATION
Both the Advantage Trust and the MFS Trust are business trusts organized under
the laws of The Commonwealth of Massachusetts. The Advantage Fund commenced
operations in 1993 and the MFS Fund's predecessor commenced operations in 1986.
Each Fund is permitted to issue an unlimited number of shares of beneficial
interest and each share represents an equal proportionate beneficial interest in
such Fund.
SHARES OF THE ADVANTAGE FUND
The Advantage Fund has only one class of shares, which is offered at net asset
value without a sales charge but subject to a CDSC, as described in the
Advantage Fund Prospectus, if redeemed within four years of purchase, and
subject to a Distribution Plan providing for a combined 0.50% annual
distribution fee and service fee.
CLASSES OF SHARES OF THE MFS FUND
The MFS Fund currently offers three classes of shares, Class A, Class B and
Class C shares, and may in the future offer additional classes of shares. 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 of up to 0.10% per annum, and
a service fee of up to 0.25% per annum, of the average daily net assets
attributable to the class. Class B shares are offered at net asset value without
a sales charge but subject to a CDSC, as described below under "Other
Significant Fees," if redeemed within six years of purchase, and a Distribution
Plan providing for a distribution fee of up to 0.75% per annum, and service fee
of up to 0.25% per annum, of the average daily net assets attributable to the
class. Class B shares convert to Class A shares approximately eight years after
purchase. No sales charge is applicable upon conversion of the Class B shares to
Class A shares. Class C shares are offered at net asset value without a sales
charge or a CDSC, but are subject to a Distribution Plan providing for a
distribution fee of up to 0.75% per annum, and service fee of up to 0.25% per
annum, of the average daily net assets attributable to the class. Class C shares
do not convert to any other class of shares of the MFS Fund.
Advantage Fund shareholders will be issued Class B shares (i.e., MFS Fund
Shares) in the Reorganization which will not be subject to an initial sales
charge but may be subject to a CDSC upon redemption (as noted under "Other
Significant Fees" below). As noted above, the MFS Fund Shares will also be
subject to a 0.75% annual distribution fee and a 0.25% annual service fee, and,
assuming that the Reorganization is consummated May 1, 1995, will convert to
Class A shares approximately four and a half years after consummation of the
Reorganization.
Each share of the MFS Fund, regardless of class, will share pro rata in the
assets and income of the MFS Fund and will share pro rata in the MFS Fund
expenses, except for differences resulting from different class Distribution
Plan expenses and certain other class specific expenses. Shares of all classes
of the MFS Fund will vote together on all matters affecting the MFS Fund, except
for certain matters, such as approval of a Distribution Plan, affecting only a
particular class or classes. See "Business of the MFS Fund -- MFS Fund Shares
and Purchase of MFS Fund Shares" below.
ADVISER AND ADVISORY FEES
The MFS Fund employs MFS as its investment adviser. The Advantage Fund employs
BSC as its investment adviser.
The MFS Fund pays MFS an annual management fee, computed and paid monthly, in an
amount equal to the sum of 0.30% of the MFS Fund's average daily net assets plus
6.43% of the MFS Fund's gross income for the MFS Fund's then-current fiscal
year. For the fiscal year ended November 30, 1993, MFS, together with the MFS
Fund's former investment adviser, Lifetime Advisers, Inc. (a wholly-owned
subsidiary of MFS), received management fees under the Advisory Agreement of
$3,751,548 (of which $1,497,081 was based on average daily net assets and
$2,254,467 was based on gross income), equivalent on an annualized basis to
0.75% of the MFS Fund's average daily net assets. The MFS Fund changed its
fiscal year end from November 30 to March 31 in 1994. For the four-month period
from December 1, 1993 through March 31, 1994, MFS received management fees under
the Advisory Agreement of $1,301,038 (of which $531,612 was based on average
daily net assets and $769,426 was based on gross income), equivalent on an
annualized basis to 0.73% of the MFS Fund's average daily net assets. For the
six
5
<PAGE> 11
month period ended September 30, 1994, MFS received management fees under the
Advisory Agreement of $1,805,022 (of which $688,601 was based on average daily
net assets and $1,116,421 was based on gross income), equal on an annualized
basis to 0.79% of the MFS Fund's average daily net assets.
The Advantage Fund's fees and expenses were and are being waived or reimbursed
by BSC, Advest and their affiliates to the extent necessary to keep the
Advantage Fund's total operating expenses no greater than 0.70% per annum
through June 30, 1994, and no greater than 1.00% per annum from July 1, 1994
through April 30, 1995. While the Advantage Fund is obligated to pay BSC a
management fee equal to, on an annual basis, 0.45% of the Advantage Fund's
average daily net assets, pursuant to this expense waiver and reimbursement
arrangement, for the period from July 1, 1993 (commencement of investment
operations) through December 31, 1993, BSC waived all advisory fees due from the
Advantage Fund and, for the fiscal year ended December 31, 1994, BSC waived a
portion of advisory fees due from the Advantage Fund and received $65,121 in
advisory fees from the Advantage Fund (equal to 0.23% per annum of the Advantage
Fund's average daily net assets). The amount of advisory fees that would have
been received by BSC absent these waivers for these periods is $42,690 and
$126,131, respectively.
DISTRIBUTION PLAN FEES
The Class B Distribution Plan of the MFS Fund provides that the MFS Fund will
pay MFS Fund Distributors, Inc. ("MFD") (as the MFS Fund's distributor) a daily
distribution/service fee payable monthly and equal to, on an annual basis, 1.00%
of such Fund's average daily net assets attributable to Class B shares (0.75% of
which constitutes the distribution fee and 0.25% of which constitutes the
service fee). The Distribution Plan also provides that MFD will receive all
CDSCs, including CDSCs imposed upon redemption of MFS Fund Shares issued in the
Reorganization, as described below under "Other Significant Fees." MFD pays
commissions to dealers of 3.75% of the purchase price of MFS Fund Class B shares
purchased through dealers. MFD, on behalf of the MFS Fund, will also pay dealers
a service fee equal to 0.25% per annum on that portion of the MFS Fund's average
daily net assets attributed to Class B shares of the MFS Fund owned by investors
for whom the dealer is the holder or the dealer of record. MFD may advance to
dealers the first year service fee at a rate of up to 0.25% of the purchase
price of such shares and, as compensation therefor, MFD may retain the service
fee paid by the MFS Fund with respect to such shares for the first year after
purchase.
The Distribution Plan of the Advantage Fund provides that the Advantage Fund
will pay Advest (as the Advantage Fund's distributor) a daily
distribution/service fee payable monthly equal to, on an annual basis, 0.50% of
the Advantage Fund's average daily net assets (0.40% of which constitutes the
distribution fee and 0.10% of which constitutes the service fee). The
Distribution Plan also provides that Advest will receive all CDSCs imposed upon
redemption of Advantage Fund shares. No CDSC will be imposed in connection with
effecting the Reorganization. Advest pays commissions to its registered
representatives at the time of purchase of Advantage Fund shares, and pays
service fees to such registered representatives on an ongoing basis while such
shares are outstanding.
Distribution/service fees paid by each Fund under its respective Distribution
Plan are charged to, and therefore reduce, income.
OTHER SIGNIFICANT FEES
Both the MFS Fund and the Advantage Fund pay additional fees in connection with
their operations, including legal, accounting, shareholder servicing agent and
custodial fees, except to the extent such fees are borne by either Fund's
Adviser, as described below.
The MFS Fund's ratio of expenses to average net assets for Class B shares was
2.12% (annualized) for the six month period ended September 30, 1994, 2.24%
(annualized) for the four month fiscal period ended March 31, 1994, and 2.11%
for the fiscal year ended November 30, 1993.
The Advantage Fund's ratio of expenses to average net assets was, after expense
waivers and reimbursements described above under "Adviser and Advisory Fees,"
and after the expense reimbursement described below, 0.85% for the fiscal year
ended December 31, 1994 and 0.71% (annualized) for the period from July 1, 1993
(commencement of investment operations) through December 31, 1993. Advest
voluntarily reimbursed $90,711 and $55,135 of the Advantage Fund's expenses for
the fiscal year ended December 31, 1994 and the fiscal period
6
<PAGE> 12
ended December 31, 1993, respectively. Had BSC not elected to waive its advisory
fee and had Advest not elected to reimburse expenses, the Advantage Fund's
annualized ratio of expenses to average net assets for these periods would have
been 1.39% and 1.73%, respectively. Had the Reorganization occurred on December
31, 1993, the ratio of expenses to average net assets for Class B shares of the
MFS Fund would have been 2.16% for the year ended December 31, 1994.
<TABLE>
The MFS Fund imposes a CDSC as a percentage of redemption proceeds as follows:
<CAPTION>
CONTINGENT
DEFERRED
YEAR OF REDEMPTION SALES
AFTER PURCHASE CHARGE
- ------------------ ----------
<S> <C>
First....................................................................... 4%
Second...................................................................... 4%
Third....................................................................... 3%
Fourth...................................................................... 3%
Fifth....................................................................... 2%
Sixth....................................................................... 1%
Seventh and Following....................................................... 0%
</TABLE>
<TABLE>
The Advantage Fund imposes a CDSC as a percentage of redemption proceeds as
follows:
<CAPTION>
CONTINGENT
DEFERRED
YEAR OF REDEMPTION SALES
AFTER PURCHASE CHARGE
- ------------------ ----------
<S> <C>
First....................................................................... 4%
Second...................................................................... 3%
Third....................................................................... 2%
Fourth...................................................................... 1%
Fifth and Following......................................................... 0%
</TABLE>
With respect to both the Class B shares of the MFS Fund and the shares of the
Advantage Fund, no CDSC is imposed on shares acquired through reinvestment of
dividends and distributions or amounts derived from increases in either Fund's
net asset value per share. In determining whether a CDSC will be payable and, if
so, the percentage charge applicable, shares acquired through reinvestment and
then shares held the longest are considered the first to be redeemed by both the
MFS Fund and the Advantage Fund, thus resulting in the lowest possible CDSC. For
purposes of calculating the appropriate CDSC, Class B shares of the MFS Fund are
aggregated on a calendar month basis, meaning that 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, while shares of the Advantage
Fund age one year from the date of purchase in each subsequent year.
No new sales charges will apply to the MFS Fund Shares acquired by the Advantage
Fund shareholders in the Reorganization, but, if any Advantage Fund shares are,
on the date the Reorganization is consummated, subject to a CDSC, the MFS Fund
Shares acquired in respect of such Advantage Fund shares will be subject to a
CDSC in accordance with the MFS Fund CDSC schedule, as described above, and, for
purposes of calculating the CDSC and determining when any MFS Fund Shares issued
in the Reorganization will convert to Class A shares of the MFS Fund (but not
for calculating the holding period for tax purposes), the MFS Fund Shares will
be treated as if purchased forty-two months prior to the date the Reorganization
is consummated. Therefore, assuming that Advantage Fund shareholders approve the
Agreement (as defined under "Reorganization" below) and that the Reorganization
is consummated as scheduled on May 1, 1995, the MFS Fund Shares received by
Advantage Fund shareholders will be treated as if purchased on November 1, 1991.
Thus, the MFS Fund Shares issued in respect of Advantage Fund shares which are
subject to a CDSC on the date the Reorganization is consummated will be treated
as if held during the fourth year after purchase and will be subject to a CDSC
of 3%, which will decline to 2% on December 1, 1995, to 1% on December 1, 1996
and to 0% on December 1, 1997 and will remain at 0% thereafter, and all MFS Fund
Shares issued in the Reorganization will convert to Class A shares of the MFS
Fund on or about November 1, 1999.
7
<PAGE> 13
The MFS Fund does not anticipate that, following the Reorganization, its
portfolio turnover rate (and the expenses related thereto) will be significantly
higher than its current portfolio turnover rate (and the expenses related
thereto). However, the portfolio turnover rate (and expenses related thereto) of
the MFS Fund following the Reorganization is likely to be significantly higher
than that of the Advantage Fund. Therefore, transaction costs incurred by, and
realized gains and losses of, the MFS Fund may be higher than that of the
Advantage Fund.
<TABLE>
COMPARISON OF THE EXPENSES OF THE MFS FUND AND ADVANTAGE FUND
<CAPTION>
MFS FUND ADVANTAGE PRO FORMA CLASS B
CLASS B FUND OF MFS FUND
---------- ----------------- ------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum CDSC (as a percentage of original purchase
price or redemption proceeds, as applicable)....... 4.00% 4.00% 4.00%
</TABLE>
<TABLE>
<CAPTION>
MFS FUND ADVANTAGE PRO FORMA CLASS B
CLASS B(1) FUND(1) OF MFS FUND(2)
---------- ----------------- ------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Advisory Fees (after applicable waivers and
reimbursements).................................... 0.77% 0.23%(3) 0.77%
Rule 12b-1 Fees...................................... 1.00% 0.50% 1.00%
Other Expenses (after applicable waivers and
reimbursements).................................... 0.39% 0.12%(3) 0.39%
----- ----- -----
Total Operating Expenses (after applicable waivers
and reimbursements)................................ 2.16% 0.85%(3) 2.16%
<FN>
- ---------------
(1) For the year ended December 31, 1994.
(2) For the year ended December 31, 1994, assuming the Reorganization occurred
on December 31, 1993.
(3) The Advantage Fund's fees and expenses were and are being voluntarily waived
or reimbursed by BSC, Advest and their affiliates to the extent necessary to
keep "Total Operating Expenses" no greater than 0.70% per annum through June 30,
1994 and no greater than 1.00% per annum from July 1, 1994 through April 30,
1995. If these voluntary expense limitations were not in effect, "Advisory
Fees," "Other Expenses" and "Total Operating Expenses" would be 0.45%, 0.44% and
1.39%, respectively, for the Advantage Fund.
</TABLE>
PURCHASES AND EXCHANGES
Class B shares of the MFS Fund and shares of the Advantage Fund are available
through certain authorized dealers at the effective public offering price, which
is based on the effective net asset value per share. The MFS Fund, with respect
to Class B shares, and the Advantage Fund each receive 100% of the dollars
invested in each Fund without any deduction for sales charges. The minimum
initial investment per account for Class B shares of the MFS Fund and for shares
of the Advantage Fund is $1,000, and the minimum additional investment is $50
for Class B shares of the MFS Fund and $500 for shares of the Advantage Fund,
except in certain instances as described in each Fund's Prospectus. Class B
shareholders of the MFS Fund may exchange their shares for Class B shares of
certain other funds advised by MFS (currently, 49 funds advised by MFS are
available for exchange privileges with the MFS Fund) provided the exchange
involves shares with an aggregate net asset value of $1,000 or more or all of
the shares in the account. Shareholders of the Advantage Fund may exchange their
shares for shares of eight other Advantage funds sponsored by Advest, including
the other two series of the Advantage Trust, subject to the minimum investment
requirements of the fund or series into which the exchange is being made.
Shareholders of the Advantage Fund may also redeem their Advantage Fund shares
and invest the proceeds in the AIA (see "Overview of Proposed Reorganization"
above), in which case any applicable CDSC will not be imposed but will be
carried over to the AIA. AIA depositors may withdraw money from the AIA and
invest in shares of a series of the Advantage Trust, or may receive cash upon
withdrawal, in which case a CDSC may be imposed. The MFS Fund will not maintain
this relationship with the AIA, or have exchange privileges with the funds
sponsored by Advest, and an AIA depositor who desires to withdraw money from the
AIA, or a shareholder of any such other fund sponsored by Advest who desires to
redeem shares of such fund, and invest the proceeds of such withdrawal or
redemption in Class B shares of the MFS Fund, will be treated like any other new
purchaser of Class B shares and accordingly will be subject to the MFS Fund's
CDSC schedule set forth in the MFS Fund Prospectus. Each exchange and redemption
represents a sale of shares, which may produce a gain or loss for tax purposes.
8
<PAGE> 14
DISTRIBUTION OPTIONS
The shareholders of both the MFS Fund and the Advantage Fund have available the
following distribution options: (i) dividends and capital gain distributions
reinvested in additional shares (this option will be assigned if no other option
is specified); and (ii) dividends and capital gain distributions paid in cash.
In addition, shareholders of the MFS Fund may elect to receive dividends in cash
and have capital gain distributions reinvested in additional shares.
Reinvestments (net of any tax withholding) of dividends and capital gain
distributions will be made in additional full and fractional shares at the net
asset value in effect at the close of business on the record date.
REDEMPTION PROCEDURES
Class B shares of the MFS Fund are redeemable at any time at a price equal to
the net asset value of the shares next determined after receipt by its transfer
agent, MFS Service Center, Inc. ("MFSC"), of a written or telephonic redemption
request in good order reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld. Shares of the Advantage Fund
are redeemable at any time at a price equal to the net asset value of the shares
next determined after receipt by its transfer agent, ATS, of a written
redemption request in good order reduced by the amount of any applicable CDSC
and the amount of any income tax required to be withheld. Alternatively, Class B
shareholders of the MFS Fund and shareholders of the Advantage Fund may sell
their shares through securities dealers, who may charge a fee. No such fees will
be incurred in the proposed Reorganization.
REORGANIZATION
EFFECT OF THE REORGANIZATION
Pursuant to the terms of the Agreement and Plan of Reorganization (the
"Agreement") between the MFS Trust, on behalf of the MFS Fund, and the Advantage
Trust, on behalf of the Advantage Fund, the proposed Reorganization will consist
of (i) the transfer of all of the assets of the Advantage Fund to the MFS Fund
in exchange solely for Class B shares of the MFS Fund (the "MFS Fund Shares")
and the assumption by the MFS Fund of the stated liabilities of the Advantage
Fund as set forth on a schedule of assets and liabilities delivered by the
Advantage Trust to the MFS Trust on the Closing Date, (ii) the distribution of
the MFS Fund Shares to the shareholders of the Advantage Fund in liquidation of
the Advantage Fund as provided in the Agreement and (iii) the termination of the
Advantage Trust. These transactions are referred to as the "Reorganization."
The Reorganization will become effective as soon as practicable after the
shareholder approval noted under "Conditions Precedent to Closing" is obtained
(see "Description of Agreement" below), but in no event later than June 30, 1995
(the "Closing Date"). The assets of the Advantage Fund will be valued on the
last business day immediately preceding the Closing Date (the "Valuation Date").
The Agreement provides that, except to the extent that, pursuant to an agreement
dated February 7, 1995, MFS and The Advest Group, Inc. have agreed to bear
certain expenses in connection with the Reorganization which would otherwise be
borne by the MFS Fund and the Advantage Fund (see "Description of the Agreement"
below), the MFS Fund and the Advantage Fund will each be liable for its own
expenses incurred in connection with the Reorganization, whether or not the
Reorganization is consummated.
TAX CONSIDERATIONS
The consummation of the Reorganization is subject to the receipt of an opinion
of legal counsel, satisfactory to the MFS Fund and the Advantage Fund,
substantially to the effect that for federal income tax purposes: (i) the
acquisition by the MFS Fund of all of the assets of the Advantage Fund solely in
exchange for the MFS Fund Shares and the assumption by the MFS Fund of the
stated liabilities of the Advantage Fund, followed by the distribution by the
Advantage Fund of the MFS Fund Shares in complete liquidation to the
shareholders of the Advantage Fund in exchange for their shares of beneficial
interest of the Advantage Fund and the termination of the Advantage Trust, will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and the Advantage Fund and the
MFS Fund will each be "a party to a reorganization" within the meaning of
Section 368(b) of the Code; (ii) no gain or loss will be recognized by the
Advantage Fund upon the transfer of all of its assets to the MFS Fund solely in
exchange for the MFS Fund Shares and the assumption by the MFS Fund of the
stated liabilities of the Advantage Fund or upon the distribution to the
shareholders of the
9
<PAGE> 15
Advantage Fund of such MFS Fund Shares pursuant to the Agreement; (iii) no gain
or loss will be recognized by the MFS Fund upon the receipt of the assets of the
Advantage Fund solely in exchange for the MFS Fund Shares and the assumption by
the MFS Fund of the stated liabilities of the Advantage Fund; (iv) the basis of
the assets of the Advantage Fund acquired by the MFS Fund will be, in each
instance, the same as the basis of those assets in the hands of the Advantage
Fund immediately prior to the transfer; (v) the holding period of the assets of
the Advantage Fund in the hands of the MFS Fund will include, in each instance,
the holding period of such assets in the hands of the Advantage Fund; (vi) the
shareholders of the Advantage Fund will not recognize gain or loss upon the
exchange of all of their shares of beneficial interest of the Advantage Fund
solely for the MFS Fund Shares as part of the transaction; (vii) the basis of
the MFS Fund Shares to be received by each Advantage Fund shareholder will be,
in the aggregate, the same as the basis, in the aggregate, of the shares of
beneficial interest of the Advantage Fund surrendered by such shareholder in
exchange therefor; and (viii) the holding period of the MFS Fund Shares to be
received by each Advantage Fund shareholder will include the holding period of
the shares of beneficial interest of the Advantage Fund surrendered by such
shareholder in exchange therefor, provided the shares of the Advantage Fund were
held by such shareholder as capital assets on the date of the exchange.
VOTE REQUIRED FOR APPROVAL
The Reorganization was approved by the Trustees of the Advantage Trust on
February 23, 1995. Approval of the Reorganization by the Advantage Fund's
shareholders requires the affirmative vote of not less than two-thirds of the
shares of the Advantage Fund outstanding and entitled to vote at the Meeting.
RECOMMENDATION OF THE BOARD OF TRUSTEES OF THE ADVANTAGE TRUST
THE TRUSTEES OF THE ADVANTAGE TRUST UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS VOTE
IN FAVOR OF THE REORGANIZATION AS SET FORTH IN ITEM 1.
SPECIAL FACTORS
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives and Policies. The Advantage Fund seeks to provide a high
level of current income exempt from federal income taxes by investing in a
diversified portfolio of Municipal Obligations. The MFS Fund seeks to provide as
high a level of current income exempt from federal income taxes as is considered
consistent with prudent investing and protection of shareholders' capital.
The investment policies of both the Advantage Fund and the MFS Fund are
described above under "Summary" and certain of these policies are described to a
greater extent below.
Municipal Obligations: Each Fund will invest primarily (i.e., at least 80% of
its net assets under normal circumstances) in "Municipal Obligations," which are
debt obligations issued by or on behalf of states, territories and possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
and private purposes. Municipal Obligations include industrial revenue bonds
issued by state and local agencies to finance various public projects, as well
as revenue bonds issued for housing, health care facilities or electric
utilities. Each Fund may also invest in municipal lease obligations, which are
undivided interests in a portion of a Municipal Obligation in the form of a
lease or installment purchase which are issued by state and local governments to
acquire equipment and facilities. The Advantage Fund may invest in substantial
amounts of long-term (maturities of 10 years or greater) Municipal Obligations,
which are more susceptible to fluctuations in their market price. See
"Additional Information as to Investment Objective and Policies" in the MFS Fund
Prospectus for more information including the risks associated therewith.
Lower Rated Securities: Each Fund may invest to a limited extent in lower rated
Municipal Obligations or securities which are unrated but considered by the
Fund's Adviser to be of comparable quality. While these securities offer the
high current income sought by the Funds, they entail greater risk of principal
and income and greater price volatility than investments in higher rated
securities. Such high yielding, lower rated securities also tend to reflect
economic changes, short-term corporate and industry developments and the
market's perception of their credit quality to a greater extent than higher
rated securities. The market for these obligations may also be less liquid than
for
10
<PAGE> 16
investment grade securities because there are fewer investors in lower quality
securities. The Advantage Fund may invest up to 10% of its assets in securities
rated Ba or B by Moody's or BB or B by S&P and comparable unrated securities,
while the MFS Fund may invest up to 33 1/3% of its assets in securities rated
Baa or lower by Moody's or BBB or lower by S&P and comparable unrated
securities. Securities rated below Baa by Moody's or BBB by S&P and comparable
unrated securities are commonly known as "junk bonds". Because the MFS Fund may
invest a higher percentage of its assets in lower rated securities than the
Advantage Fund, an investment in the MFS Fund entails greater risk and may be
subject to greater volatility than an investment in the Advantage Fund. However,
investing a higher percentage of assets in lower rated securities generally
offers an opportunity to earn higher levels of income. See "Additional
Information as to Investment Objective and Policies" in the MFS Fund Prospectus
for more information including the risks associated therewith. The tables below
show the percentages of the MFS Fund's and the Advantage Fund's assets at
December 31, 1994 invested in Municipal Obligations assigned to the various
rating categories by S&P and Moody's (provided only for Municipal Obligations
not rated by S&P) and in unrated securities determined by the respective Adviser
to be of comparable quality:
<TABLE>
MFS FUND
- ------------------------------------------------------------------------------------------------
<CAPTION>
UNRATED SECURITIES
RATING S&P MOODY'S OF COMPARABLE QUALITY TOTAL
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
AAA/Aaa
- ------------------------------------------------------------------------------------------------
AA/Aa
- ------------------------------------------------------------------------------------------------
A/A
- ------------------------------------------------------------------------------------------------
BBB/Baa
- ------------------------------------------------------------------------------------------------
BB/Ba
- ------------------------------------------------------------------------------------------------
B/B
- ------------------------------------------------------------------------------------------------
CCC/Caa
- ------------------------------------------------------------------------------------------------
CC/Ca
- ------------------------------------------------------------------------------------------------
C/C
- ------------------------------------------------------------------------------------------------
Default
- ------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
ADVANTAGE FUND
- ------------------------------------------------------------------------------------------------
<CAPTION>
UNRATED SECURITIES
RATING S&P MOODY'S OF COMPARABLE QUALITY TOTAL
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
AAA/Aaa
- ------------------------------------------------------------------------------------------------
AA/Aa
- ------------------------------------------------------------------------------------------------
A/A
- ------------------------------------------------------------------------------------------------
BBB/Baa
- ------------------------------------------------------------------------------------------------
BB/Ba
- ------------------------------------------------------------------------------------------------
B/B
- ------------------------------------------------------------------------------------------------
CCC/Caa
- ------------------------------------------------------------------------------------------------
CC/Ca
- ------------------------------------------------------------------------------------------------
C/C
- ------------------------------------------------------------------------------------------------
Default
- ------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------
</TABLE>
These charts do not necessarily indicate what the composition of either Fund's
portfolio will be in subsequent years. Rather, each Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
11
<PAGE> 17
Illiquid Securities: Each Fund may invest up to 15% of its net assets in
illiquid securities. Such securities may include Municipal Obligations issued in
private placements, repurchase agreements maturing in more than seven days and
other securities subject to legal or contractual restrictions on resale. Each
Fund may also purchase securities that are not registered under the Securities
Act of 1933, including those that can be offered and sold to "qualified buyers"
under Rule 144A under the Act. The MFS Trust's Board of Trustees determines,
based upon a continuing review of the trading markets for a specific Rule 144A
security, whether the security is illiquid and thus subject to the Fund's
limitation on investing not more than 15% of its net assets in illiquid
securities, or liquid and not subject to this limitation. While the Advantage
Fund may invest up to 15% of its net assets in illiquid securities, it may only
invest up to 10% of its total assets in illiquid securities which are restricted
securities not subject to Rule 144A. The Funds may not be able to sell these
securities when the applicable Adviser wishes to do so, or might have to sell
them at less than fair value. Additionally, market quotations are less readily
available. Therefore, the judgment of the Fund's Adviser may at times play a
greater role in valuing these securities than in the case of liquid securities.
See "Additional Information as to Investment Objective and Policies" in the MFS
Fund Prospectus for more information including the risks associated therewith.
Short-Term Investments for Defensive Purposes: During periods of unusual market
conditions when its Adviser believes that investing for defensive purposes is
appropriate, each Fund may make temporary investments in cash or cash
equivalents. Cash equivalents include obligations of banks having assets of $1
billion or more, commercial paper, short-term notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities and related repurchase agreements. The MFS Fund may not invest
more than 50% of its total assets in cash and cash equivalents. See Appendix B
to the MFS Fund Prospectus for a description of U.S. Government obligations and
certain short-term investments.
Lending of Portfolio Securities: Each Fund may make loans of its portfolio
securities. Such loans will usually be made only to member banks of the Federal
Reserve System and member firms and subsidiaries of the New York Stock Exchange
or borrowers considered by its Adviser to be creditworthy. Loans on portfolio
securities must be secured continuously by collateral at an amount at least
equal to the market value of the securities loaned. See "Investment Techniques"
in the MFS Fund SAI for more information including risks associated therewith.
Repurchase Agreements: Each Fund may invest in repurchase agreements either for
temporary defensive purposes due to adverse market conditions or to generate
income from cash balances. Under a repurchase agreement, a Fund acquires
securities subject to the seller's agreement to repurchase the securities at a
specified time and price. Repurchase agreements maturing more than seven days in
the future are considered illiquid and are, therefore, subject to the Funds'
restrictions on investing in illiquid securities. The MFS Fund may not invest
more than 10% of its total assets in repurchase agreements maturing more than
seven days in the future. See "Investment Techniques" in the MFS Fund SAI for
more information including risks associated therewith.
When-Issued Securities: Each Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis, which means that the obligations will be
delivered at a future date usually beyond customary settlement time. When-issued
securities involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date. See "Investment Techniques" in the MFS
Fund Prospectus and SAI for more information including risks associated
therewith.
Zero Coupon Bonds: Each Fund may invest in zero coupon bonds, which are debt
obligations that do not pay periodic interest and are issued or purchased at a
significant discount from face value. The discount approximates the total amount
of interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market rate
of the security at the time of issuance. The prices of these securities are
affected to a greater extent by interest rate fluctuations and tend to be more
volatile than securities that pay interest periodically and in cash. Each Fund
accrues income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations. See "Investment Techniques" in the MFS Fund
Prospectus for more information including the risks associated therewith.
Options on Securities: Each Fund may write (sell) covered call and put options
on fixed income securities in order to increase its return on such securities
and/or protect the value of its portfolio. If the Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the option which will
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<PAGE> 18
offset, in part, the reduced value of a portfolio security in connection with
which the option may have been written or the increased cost of portfolio
securities to be acquired. If the price of the underlying security moves
adversely to the Fund's position, however, the option may be exercised and the
Fund will be required to purchase or sell the underlying security at a
disadvantageous price, which may only be partially offset by the amount of the
premium.
The MFS Fund may also write combinations of put and call options on the same
security, known as "straddles." These transactions can generate additional
premium income but also present increased risk. In certain instances the MFS
Fund may also enter into options on Treasury securities which may be referred to
as "reset" options or "adjustable strike" options. These options provide for
periodic adjustment of the strike price and may also provide for the periodic
adjustment of the premium during the term of the option.
Each Fund may purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Fund wants to purchase at a later date. In the event that
the expected market fluctuations occur, each Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The MFS Fund may also purchase options to increase its
return. The risk assumed by the Funds in connection with such transactions is
limited to the amount of the premium and related transaction costs associated
with the option, although the Funds may be required to forfeit such amounts in
the event that the prices of securities underlying the options do not move in
the direction or to the extent anticipated. Each Fund is restricted from
purchasing put and call options on securities, indices and Futures Contracts
(see "Options on Futures Contracts" below) if, as a result, more than 5% of its
total assets would be invested in such options. Each Fund is restricted from
purchasing put and call options if, as a result, more than 5% of its total
assets would be invested in such options. See "Investment Techniques" in the MFS
Fund SAI for more information including risks associated therewith.
Futures Contracts: Each Fund may enter into interest rate futures contracts on
fixed income securities and indexes of such securities for hedging purposes
(collectively "Futures Contracts"). These transactions will be used to protect
the Fund's current or intended investments from the effects of interest rate
fluctuations. In the event that an anticipated decrease in the value of
portfolio securities occurs as a result of a general increase in interest rates,
the adverse effects of such changes may be offset, in whole or in part, by gains
on the sale of Futures Contracts. Conversely, the increased cost of portfolio
securities to be acquired, caused by a general decline in interest rates, may be
offset, in whole or in part, by gains on Futures Contracts purchased by each
Fund.
The MFS Fund may also enter into futures contracts for non-hedging purposes, to
the extent permitted by applicable law, in order to increase portfolio returns.
Non-hedging transactions in such investments involve greater risks and may
result in losses which may not be offset by increases in the value of portfolio
securities.
The Funds will incur brokerage fees when they purchase and sell Futures
Contracts, and will be required to maintain margin deposits. Although each
Adviser believes that use of such contracts will benefit the Funds, if its
investment judgment about the general direction of interest rates is incorrect,
the Funds' overall performance may be worse than if they had not entered into
the contract and result in a loss. Accordingly, it is the policy of the
Advantage Fund not to enter into Futures Contracts or Options on Futures
Contracts (see below) if, immediately thereafter, more than 5% of the Advantage
Fund's net assets will be committed to initial margin deposits and premiums paid
on open Options or if more than 30% of its total assets would be set aside as an
offset to the Futures Contract and Options on Futures Contracts. The MFS Fund
will not enter into Futures Contracts if, immediately thereafter, the value of
securities and other obligations underlying all such Futures Contracts would
exceed 50% of the value of the MFS Fund's total assets. In addition, the MFS
Fund will not enter into Futures Contracts or Options on Futures Contracts (see
below) for non-hedging purposes if the initial margins and premiums on such
non-hedging positions are greater than 5% of its total assets. See "Investment
Techniques" in the MFS Fund Prospectus and SAI for more information including
risks associated therewith.
Options on Futures Contracts: Each Fund may purchase and write options on
Futures Contracts ("Options on Futures Contracts"). These instruments are used
to protect against anticipated changes in interest rates which otherwise might
adversely affect either the value of the Fund's portfolio securities or the
price of securities to be acquired. The MFS Fund may also invest in Options on
Futures Contracts for non-hedging purposes, to the extent permitted by
applicable law. Purchases of Options on Futures Contracts may present less risk
in hedging the Fund's portfolio than the purchase or sale of the underlying
Futures Contracts since the potential loss is limited to the
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<PAGE> 19
amount of the premium plus related transaction costs, although it may be
necessary to exercise the Option to realize any profit, which results in the
establishment of a futures position. The writing of Options on Futures
Contracts, however, does not present less risk than the trading of Futures
Contracts and will constitute only a partial hedge, up to the amount of the
premium received. If an Option is exercised, the Fund may suffer a loss on the
transaction. Accordingly, it is the policy of the Advantage Fund not to enter
into Futures Contracts and Options on Futures Contracts if, immediately
thereafter, more than 5% of the Advantage Fund's net assets will be committed to
initial margin deposits and premiums paid on open Options or if more than 30% of
its total assets would be set aside as an offset to the Futures Contracts and
Options on Futures Contracts. In addition, the MFS Fund will not enter into
Futures Contracts and Options on Futures Contracts for non-hedging purposes if
the initial margins and premiums on such non-hedging positions are greater than
5% of its total assets. Moreover, the MFS Fund will not purchase Options on
Futures Contracts if, as a result, more than 5% of its total assets would be
invested in such Options. See "Investment Techniques" in the MFS Fund Prospectus
and SAI for more information including risks associated therewith.
Variable and Floating Rate Obligations: Each Fund may invest in floating or
variable rate instruments, which may provide for interest rate adjustments at
specified intervals. Variable rate obligations have an interest rate which is
adjusted at pre-designated periods and interest on floating rate obligations is
adjusted whenever there is a change in the market rate of interest on which the
payable interest rate is based. See "Investment Techniques" in the MFS Fund SAI
for more information concerning these obligations.
Inverse Floating Rate Obligations: The MFS Fund may invest in "inverse floating
rate obligations," "residual interest" bonds, or other obligations or
certificates structured to have similar features. Such obligations generally
have floating or variable interest rates that move in the opposite direction of
short-term interest rates and generally increase or decrease in value in
response to changes in short-term interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate long-term tax-exempt securities
increase or decrease in response to such changes. As a result, such obligations
have the effect of providing investment leverage and may be more volatile than
long-term fixed rate tax-exempt obligations. See "Investment Techniques" in the
MFS Fund SAI for more information concerning these obligations.
Money Market Investment Companies: The Advantage Fund may from time-to-time
invest up to 5% of its assets in money market investment companies sponsored by
a third party for short-term liquidity purposes. See "Investment Techniques" in
the Advantage Fund Prospectus and "Investment Restrictions" in the Advantage
Fund SAI for more information concerning these securities.
------------------------
The investment objectives and policies of the Advantage Fund and the MFS Fund
described above may be changed without shareholder approval.
Fundamental Investment Restrictions. The investment restrictions summarized
below are fundamental and may not be changed without the approval of the holders
of a majority of outstanding shares (as defined in the 1940 Act) of the
Advantage Fund or the MFS Fund, as applicable.
Neither Fund may borrow money except as a temporary measure for extraordinary or
emergency purposes. Each Fund must maintain asset coverage of at least 300% for
all such borrowings. The MFS Fund may not pledge, mortgage or hypothecate more
than 15% of its assets to secure permitted borrowings (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).
Neither Fund may underwrite securities issued by other persons except insofar as
the Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security.
Neither Fund may concentrate its investments in any particular industry,
provided, however, that there is no limitation in respect to investments in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. If it is deemed appropriate for the achievement of its
investment objective, up to 25% of each Fund's assets may be invested, at market
value at the time of each investment, in securities of issuers in any one
industry.
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<PAGE> 20
Neither Fund may make any investment in real estate, commodities or commodity
contracts, except each Fund may (a) purchase or sell readily marketable
securities which are secured by interests in real estate or issued by companies
which deal in real estate, including real estate investment trusts; and (b)
engage in certain options, Futures Contracts, and Options on Futures Contracts
in the ordinary course of business. It is also the fundamental policy of the MFS
Fund not to purchase or retain mineral leases. The MFS Fund reserves the freedom
of action to hold and to sell real estate, mineral leases, commodities or
commodity contracts acquired as a result of the ownership of securities.
Neither Fund may make loans to other persons except that each Fund may (a)
purchase obligations in which the Fund is authorized to invest and (b) invest in
repurchase agreements. The Advantage Fund may lend its portfolio securities in
amounts up to one-third of the market or other fair value of its total assets.
The MFS Fund may lend its portfolio securities up to 30% of the market value of
its total assets. Not more than 10% of the MFS Fund's total assets (taken at
market value) may be subject to repurchase agreements maturing in more than
seven days.
Neither Fund may purchase the securities of any one issuer (except U.S.
Government securities and, with respect to the MFS Fund, except securities
issued or guaranteed by any state or subdivision thereof) if, as a result, more
than 5% of the Fund's total assets would be invested in that issuer. Up to 25%
of the Advantage Fund's total assets may be invested without regard to this
limitation.
Neither Fund may purchase the securities of any issuer (except U.S. Government
Securities) if, as a result, more than 10% of the outstanding voting securities
(with respect to the Advantage Fund) or more than 10% of any class of securities
(with respect to the MFS Fund) of the issuer would be held by the Fund. Up to
25% of the Advantage Fund's total assets may be invested without regard to this
limitation.
Neither Fund may issue any senior security, as that term is defined in the 1940
Act, except with respect to permitted borrowings. Collateral arrangements with
respect to options, Futures Contracts and Options on Futures Contracts and
collateral arrangements with respect to initial and variation margins are not
deemed to be the issuance of a senior security.
The MFS Fund may not:
(i) Invest in companies for the purpose of exercising control or
management;
(ii) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the MFS Trust, or is an officer or director of the
Adviser of the MFS Fund, if after the purchase of the securities of such
issuer by the Fund one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, all taken at market value,
of such issuer, and such persons owning more than 1/2 of 1% of such shares
or securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value;
(iii) Purchase any securities or evidences of interest therein on
margin, except that the Fund may obtain such short-term credit as may be
necessary for the clearance or purchases and sales of securities and the
Fund may make margin deposits in connection with Futures Contracts, Options
on Futures Contracts, and options;
(iv) 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) Purchase securities issued by any other registered investment
company or investment trust except by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase
other than the customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of merger or
consolidation; provided, however, that the Fund will not purchase such
securities if such purchase at the time thereof would cause more than 10%
of its total assets (taken at market
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<PAGE> 21
value) to be invested in the securities of such issuers; and provided
further, that the Fund will not purchase securities issued by an open-end
investment company; or
(vi) Write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the Fund from writing,
purchasing and selling puts, calls or combinations thereof with respect to
securities and indexes of securities or Futures Contracts; and further
provided that this shall not prevent the Fund from purchasing, owning,
holding or selling contracts for the future delivery of fixed income
securities.
Non-fundamental Investment Policies. As described below, each Fund has certain
operating policies which are not fundamental and may be changed without
shareholder approval.
The Advantage Fund may not:
(i) Borrow money in excess of 5% of its total assets (taken at market
value);
(ii) Pledge, mortgage or hypothecate in excess of 5% of its total
assets. The deposit or payment by the Fund of initial or maintenance margin
in connection with Futures Contracts and related Options is not considered
a pledge or hypothecation of assets;
(iii) Purchase more than 10% of the voting securities of any one
issuer, except U.S. Government securities;
(iv) Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days, that
cannot be disposed of within the normal course of business at approximately
the amount at which the Fund has valued the securities;
(v) Purchase securities of any issuer with a record of less than three
years of continuous operation, including by predecessors, except U.S.
Government securities and obligations issued or guaranteed by any foreign
government or its agencies or instrumentalities, if such purchase would
cause the investments of the Fund in all such issuers to exceed 5% of the
total assets of the Fund taken at market value;
(vi) Purchase securities on margin, except the Fund may obtain such
short-term credit as may be necessary for the clearing of purchases and
sales of securities. The deposit or payment by the Fund of initial or
maintenance margin in connection with Futures Contracts or related Options
is not considered the purchase of a security on margin;
(vii) Write put and call options unless the options are covered and
the Fund invests though premium payments no more than 5% of its total
assets in options transactions other than Options on Futures Contracts;
(viii) Purchase and sell Futures Contracts and Options on Futures
Contracts unless the sum of margin deposits on all Futures Contracts held
by the Fund (other than bona fide hedging positions) and premiums paid on
related Options held by the Fund does not exceed 5% of the Fund's assets.
(In the case of an Option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing this 5% test.);
(ix) Invest in securities of any issuer if any officer or trustee of
the Advantage Trust or any officers or director of the Fund's Adviser owns
more than 1/2 of 1% of the outstanding securities of the issuer and such
officers, directors and trustees own in the aggregate more than 5% of the
securities of such issuer;
(x) Invest in interests in oil, gas or other mineral exploration or
development programs (although it may invest in issuers which own or invest
in such interests);
(xi) Purchase securities of any investment company except by purchase
in the open market where no commission or profit to a sponsor or dealer
results from such purchase or except when such purchase, though not made in
the open market, is part of a plan of merger, consolidation, reorganization
or acquisition of assets; in any event, the Fund may not purchase more than
3% of the outstanding voting securities of another investment company, may
not invest more than 5% of its total assets in another single investment
company and may not invest more than 10% of its total assets in other
investment companies in the aggregate;
(xii) Purchase warrants, if as a result, warrants taken at the lower
of cost or market value would represent more than 5% of the value of the
Fund's net assets or if warrants that are not listed on the New York
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<PAGE> 22
or American Stock Exchanges or on an exchange with comparable listing
requirements taken at the lower of cost or market value would represent
more than 2% of the value of the Fund's net assets. (For this purpose,
warrants attached to securities will be deemed to have no value.);
(xiii) Make short sales, unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in kind
and amount to the securities sold and, if the right is conditional, the
sale is made upon the same conditions, except in connection with arbitrage
transactions;
(xiv) Purchase securities which are not publicly traded and which the
Fund is restricted from selling to the public without registration under
the Securities Act of 1933 if by reason thereof the value of its aggregate
investment in such securities will exceed 10% of its total assets (not
including for these purposes securities sold pursuant to Rule 144A under
the Securities Act of 1933); or
(xv) Invest in interests of real estate limited partnerships.
The MFS Fund may not:
(i) Knowingly invest in securities which are subject to legal or
contractual restrictions on resale (other than repurchase agreements),
unless the Board of Trustees of the MFS Trust has determined that such
securities are liquid based upon trading markets for the specific security,
if, as a result thereof, more than 15% of the Fund's total assets (taken at
market value) would be so invested.
RISK FACTORS
Due to the similarities in the investment objectives and techniques of the
Advantage Fund and the MFS Fund, the risks involved in investing in the Funds,
as referred to in the subsection entitled "Investment Objectives, Policies and
Restrictions" of this "Special Factors" section, can be considered similar. It
should be noted, however, that the Advantage Fund may invest in money market
investment companies, while the MFS Fund may invest in combinations of options
known as "straddles," Futures Contracts for non-hedging purposes and inverse
floating rate obligations. THE MFS FUND MAY ALSO INVEST A LARGER PERCENTAGE OF
ITS ASSETS (33 1/3% OF ITS ASSETS) IN LOWER QUALITY SECURITIES (INCLUDING JUNK
BONDS) THAN THE ADVANTAGE FUND (10% OF ITS ASSETS), AND THUS AN INVESTMENT IN
THE MFS FUND ENTAILS GREATER RISK AND MAY BE SUBJECT TO GREATER VOLATILITY THAN
AN INVESTMENT IN THE ADVANTAGE FUND.
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION
GENERAL
The shareholders of the Advantage Fund are being asked to approve the Agreement
between the MFS Trust, on behalf of the MFS Fund, and the Advantage Trust, on
behalf of the Advantage Fund. A copy of the Agreement is attached as Exhibit A.
Detailed information with respect to the MFS Fund is set forth in the MFS Fund
Prospectus, which is enclosed with this Proxy Statement and Prospectus. The
Reorganization will consist of (i) the transfer of all of the assets of the
Advantage Fund to the MFS Fund in exchange solely for the MFS Fund Shares and
the assumption by the MFS Fund of the stated liabilities of the Advantage Fund
as set forth on a schedule of assets and liabilities delivered by the Advantage
Trust to the MFS Trust on the Closing Date, (ii) the distribution of the MFS
Fund Shares to the shareholders of the Advantage Fund in liquidation of the
Advantage Fund, as provided in the Agreement, and (iii) the termination of the
Advantage Trust. The number of MFS Fund Shares to be issued upon the
consummation of the Reorganization will be calculated on the basis of the net
asset value of the Advantage Fund, less liabilities assumed, and the net asset
value of the Class B shares of the MFS Fund, as more fully described under
"Description of Agreement."
The Agreement and the transactions provided for therein were approved by the
Board of Trustees of the Advantage Trust and of the MFS Trust on February 23,
1995 and February 2, 1995, respectively. In the event that the Reorganization is
not consummated, the Advantage Fund will continue to engage in business as a
series of an open-end, registered investment company.
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<PAGE> 23
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Trustees of the Advantage Trust believes that the proposed
Reorganization will be to the advantage of the shareholders of the Advantage
Fund.
In determining to approve the Reorganization, the Trustees considered a variety
of factors, including the following:
First, Advest has informed the Trustees that it is in the process of withdrawing
generally from the business of sponsoring and advising mutual funds. Advest has
announced that sponsorship of the other mutual funds in the Advantage Family of
Funds will be assumed by another organization, subject to approval by the
shareholders of those funds and satisfaction of certain other conditions. Upon
consummation of that transaction, the Advantage Trust would be the only
remaining mutual fund sponsored by Advest.
Second, the Advantage Fund and the other portfolios of the Advantage Trust have
relatively low levels of net assets. At these low asset levels, the Portfolios
would be unable to earn a competitive investment return in the absence of
voluntary fee waivers and expense assumptions by BSC and Advest, which are in
effect through April 30, 1995. BSC and Advest have no obligation to continue
subsidizing the operations of the Advantage Trust, and have indicated that they
would not expect to continue such subsidization indefinitely.
Third, the Trustees considered the advantages and disadvantages of the
Reorganization to the shareholders of the Advantage Fund. These considerations
included the following, among others:
(1) Following the Reorganization, shareholders would, as shareholders of the
MFS Fund, be shareholders of a fund with a larger asset base. This larger
asset base may permit enhanced portfolio management flexibility and greater
portfolio diversification. The Trustees also considered, however, that
there can be no assurance that a greater asset base will in fact result in
enhanced investment performance. The Trustee also considered that the MFS
Fund has an advisory fee rate and total expense ratio significantly higher
than the Advantage Fund's.
(2) As shareholders of the MFS Fund, shareholders will enjoy exchange
privileges into a much larger range of funds (49 other MFS Funds, as
compared to 8 other Advantage Funds).
(3) Although Class B shares of the MFS Fund are subject to significantly higher
Rule 12b-1 fees than are shares of the Advantage Fund, this extra cost may,
for long-term shareholders, be offset by the benefits of conversion from
Class B to Class A shares of the MFS Fund. For shares of the Advantage Fund
outstanding at the time of the Reorganization, such conversion is scheduled
to occur on or about November 1, 1999. Class A shares of the MFS Fund are
subject to Rule 12b-1 fees at the annual rate of 0.35% of net assets, as
compared to the 0.50% rate for the Advantage Fund and the 1.00% rate for
Class B shares of the MFS Fund.
DESCRIPTION OF AGREEMENT
The following explanation of the Agreement is a summary, does not purport to be
complete, and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the Agreement. A copy of the Agreement is
attached hereto as Exhibit A to this Proxy Statement and Prospectus and should
be read in its entirety. Paragraph references are to the numbered paragraphs of
the Agreement.
METHOD OF CARRYING OUT REORGANIZATION. If shareholders of the Advantage Fund
holding at least a majority (as described in the section entitled "Voting Rights
and Required Vote" below) of the outstanding shares of the Advantage Fund
approve the Agreement, the Reorganization will be consummated promptly after all
the various conditions to the obligations of each of the parties are satisfied
(see Agreement paragraphs 4 through 8). The Reorganization will be effected as
soon as practicable after this shareholder approval is obtained, but in no event
later than June 30, 1995 (the "Closing Date").
On the Closing Date, the Advantage Fund will transfer all of its assets to the
MFS Fund in exchange for (i) MFS Fund Shares having an aggregate net asset value
equal to the value of the assets, less the stated liabilities of the Advantage
Fund as so determined and set forth on a schedule of assets and liabilities
delivered by the Advantage Trust to the MFS Trust on the Closing Date,
determined as of the close of business on the last business day preceding the
Closing Date (the "Valuation Date") and (ii) the assumption by the MFS Fund of
all of the Advantage Fund's stated liabilities as so determined and set forth on
such schedule (see Agreement paragraphs 1 and 2). The
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<PAGE> 24
Advantage Fund will distribute as of the Closing Date such MFS Fund Shares pro
rata to its shareholders of record, determined as of the Valuation Date, in
exchange for their shares of the Advantage Fund.
The net asset value of the MFS Fund Shares and the value of the Advantage Fund's
assets and the amount of its liabilities will be determined in accordance with
the valuation procedures set forth in the Declarations of Trust and By-laws of
the MFS Trust and the Advantage Trust and each Fund's current Prospectus and
Statement of Additional Information (see "Net Asset Value" in the MFS Fund
Prospectus and "Purchase of Shares" in the Advantage Fund Prospectus). The
valuation procedures used by the Advantage Fund are not materially different
from those of the MFS Fund. No initial sales charge will be imposed on the MFS
Fund Shares delivered in exchange for the assets of the Advantage Fund.
SURVIVAL OF CONTINGENT DEFERRED SALES CHARGE AND CONVERSION TO CLASS A
SHARES. The MFS Fund Shares issued in connection with the Reorganization will
not be subject to any initial sales charge; however, if any Advantage Fund
shares are at the Closing Date subject to a CDSC, the MFS Fund Shares issued in
respect of such Advantage Fund shares may be subject, upon redemption, to a CDSC
with respect to such MFS Fund Shares imposed by the MFS Fund in accordance with
the MFS Fund CDSC schedule, and, for purposes of calculating the CDSC and
determining when all MFS Fund Shares will convert to Class A shares of the MFS
Fund (but not for calculating the holding period for tax purposes), the MFS Fund
Shares will be treated as if purchased 42 months prior to the date the
Reorganization is consummated. Therefore, assuming that Advantage Fund
shareholders approve the Agreement and that the Reorganization is consummated on
May 1, 1995, the MFS Fund Shares received by Advantage Fund shareholders will be
treated as if purchased on November 1, 1991, and therefore, with respect to
those MFS Fund Shares issued in respect of Advantage Fund shares which are
subject to a CDSC on the Closing Date, will be treated as if held during the
fourth year after purchase and will be subject to a CDSC of 3%, which will
decline to 2% on December 1, 1995, to 1% on December 1, 1996 and to 0% on
December 1, 1997 and will remain at 0% thereafter, and, with respect to all such
MFS Fund Shares, will convert to Class A shares of the MFS Fund on or about
November 1, 1999.
SURRENDER OF SHARE CERTIFICATES. Shareholders of the Advantage Fund whose
shares of beneficial interest are represented by one or more share certificates
should, prior to the Closing Date, either surrender such certificates to the
Advantage Fund or deliver to the Advantage Fund an affidavit with respect to
lost certificates, in such form and accompanied by such surety bonds as the
Advantage Fund may require (collectively, an "Affidavit"). On the Closing Date,
all certificates which have not been so surrendered will be deemed to be
cancelled, will no longer evidence ownership of shares of the Advantage Fund and
will not evidence ownership of the MFS Fund Shares. Shareholders of the
Advantage Fund who have not surrendered their certificates or delivered an
Affidavit may not redeem or transfer the MFS Fund Shares received in the
Reorganization until such certificates are surrendered or an Affidavit is
received by MFSC, the MFS Fund's shareholder servicing agent. Such shareholders
will, however, receive distributions payable by the MFS Fund. The MFS Fund will
not issue share certificates except in connection with pledges and assignments
and in certain other limited circumstances.
CONDITIONS PRECEDENT TO CLOSING. The obligation of the Advantage Fund to
transfer its assets to the MFS Fund pursuant to the Agreement is subject, at its
election, to the satisfaction of certain conditions precedent, including
performance by the MFS Fund of all acts and undertakings required to be
performed under the Agreement, the receipt of certain documents from the MFS
Fund, the receipt of an opinion of Stephen E. Cavan, Senior Vice President and
General Counsel of MFS, and the receipt of all consents, orders and permits
necessary to consummate the Reorganization (see Agreement paragraphs 4 through
8).
The MFS Fund's obligation to consummate the Reorganization is subject, at its
election, to the satisfaction of certain conditions precedent, including the
performance by the Advantage Fund of all acts and undertakings to be performed
under the Agreement, the receipt of certain documents and financial statements
from the Advantage Fund, the receipt of an opinion of counsel to the Advantage
Fund and the receipt of all consents, orders and permits necessary to consummate
the Reorganization (see Agreement paragraphs 4 through 8).
The obligations of both Funds are subject to the receipt of approval and
authorization of the Agreement by the vote of not less than a majority of the
shares of the Advantage Fund outstanding and entitled to vote (as defined in the
section entitled "Voting Rights and Required Vote" below) (see Agreement
paragraph 8.1) and the receipt of a favorable opinion of legal counsel as to the
federal income tax consequences of the transaction (see Agreement
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paragraph 8.6). In addition, the obligations of both Funds are subject to the
receipt of approval and authorization of separate agreements and plans of
reorganization (the "Related Agreements") by the vote of not less than a
majority of the outstanding shares of The New York Portfolio and The
Pennsylvania Portfolio (each of which is a separate series of the Advantage
Trust), respectively, which, subject to such approvals and the satisfaction of
certain other conditions, will transfer all of their respective assets to the
MFS New York Municipal Bond Fund and the MFS Pennsylvania Municipal Bond Fund
(each of which is a separate series of the MFS Trust), respectively, in separate
transactions, which are substantially similar to the Reorganization, scheduled
to occur contemporaneously with the Reorganization (the "Related
Reorganizations").
EXPENSES OF THE REORGANIZATION. Except to the extent that, pursuant to an
agreement dated February 7, 1995, (i) The Advest Group, Inc. has agreed to pay
all of the following expenses associated with the Reorganization: (a)
typesetting the MFS Fund registration statement on Form N-14 filed with the
Securities and Exchange Commission, of which this Proxy Statement and Prospectus
is a part; (b) printing this Proxy Statement and Prospectus and the Advantage
Fund Prospectus and SAI; (c) mailing this Proxy Statement and Prospectus, the
MFS Fund Prospectus and, if requested, the MFS Fund SAI and the Advantage Fund
Prospectus and SAI to shareholders of the Advantage Fund in connection with the
Meeting; and (d) any solicitation and meeting expenses associated with the
Meeting; and (ii) The Advest Group, Inc. and MFS have each agreed to pay 50% of
the reasonable legal expenses of the MFS Fund and the Advantage Fund incurred in
connection with the Reorganization, provided that MFS' maximum obligation in
relation to the Reorganization and the Related Reorganizations is limited to
$25,000 in the aggregate, the MFS Fund and the Advantage Fund will each be
liable for its own expenses incurred in connection with entering into and
carrying out the provisions of the Agreement whether or not the Reorganization
is consummated.
20
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the MFS Fund (with respect
to Class B shares) and the Advantage Fund as of December 31, 1994, and the pro
forma combined capitalization of both Funds as if the Reorganization had
occurred on that date. The table reflects a pro forma exchange ratio of
approximately 1.055754 MFS Fund Shares being issued for each share of the
Advantage Fund. If the Reorganization is consummated, the actual exchange ratio
on the Closing Date may vary from the ratio indicated below due to changes in
the market value of the portfolio securities of both the MFS Fund and the
Advantage Fund between December 31, 1994 and the Valuation Date, changes in the
relative asset size of each Fund, and changes in the amount of undistributed net
investment income of the MFS Fund and the Advantage Fund during that period
resulting from income and distributions and changes in the accrued liabilities
of the MFS Fund and the Advantage Fund during the same period.
<TABLE>
DECEMBER 31, 1994 (UNAUDITED)
<CAPTION>
THE
THE MFS FUND ADVANTAGE PRO FORMA
CLASS B FUND COMBINED
------------ ---------- ------------
<S> <C> <C> <C>
Net Assets...................................... $419,792,948 $27,418,451 $447,211,399
Net Asset Value per Share....................... $ 8.20 $ 8.66 $ 8.20
Shares Outstanding.............................. 51,176,439 3,167,133 54,520,152(1)
Shares Authorized............................... Unlimited Unlimited Unlimited
<FN>
- ---------------
(1) If the Reorganization had taken place on December 31, 1994, the Advantage
Fund would have received 3,343,713 MFS Fund Shares, which would be available
for distribution to its shareholders. No assurances can be given as to the
number of MFS Fund Shares the Advantage Fund will receive on the Closing
Date. The foregoing is merely an example of what the Advantage Fund would
have received and distributed had the Reorganization been consummated on
December 31, 1994, and should not be relied upon to reflect the amount that
will actually be received on or after the Closing Date.
</TABLE>
TAX CONSIDERATIONS
The consummation of the Reorganization is subject to the receipt of a favorable
opinion of Ropes & Gray, counsel to the Advantage Fund, substantially to the
effect that, for federal income tax purposes:
(i) the acquisition by the MFS Fund of all of the assets of the
Advantage Fund solely in exchange for MFS Fund Shares and the assumption by
the MFS Fund of the Advantage Fund's stated liabilities, followed by the
distribution by the Advantage Fund of MFS Fund Shares in complete
liquidation to shareholders of the Advantage Fund in exchange for their
shares of the Advantage Fund and the termination of the Advantage Trust,
will constitute a reorganization within the meaning of Section 368(a) of
the Code, and the Advantage Fund and the MFS Fund will each be "a party to
a reorganization" within the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by the Advantage Fund upon the
transfer of all of its assets to the MFS Fund solely in exchange for MFS
Fund Shares and the assumption by the MFS Fund of the Advantage Fund's
stated liabilities by, or upon the distribution to the shareholders of the
Advantage Fund of such MFS Fund Shares pursuant to the Agreement;
(iii) no gain or loss will be recognized by the MFS Fund upon the
receipt of the assets of the Advantage Fund solely in exchange for MFS Fund
Shares and the assumption by the MFS Fund of the Advantage Fund's stated
liabilities;
(iv) the basis of the assets of the Advantage Fund acquired by the MFS
Fund will be, in each instance, the same as the basis of those assets in
the hands of the Advantage Fund immediately prior to the transfer;
(v) the holding period of the assets of the Advantage Fund in the
hands of the MFS Fund will include, in each instance, the holding period of
such assets in the hands of the Advantage Fund;
(vi) the shareholders of the Advantage Fund will not recognize gain or
loss upon the exchange of all of their Advantage Fund shares solely for MFS
Fund Shares as part of the transaction;
21
<PAGE> 27
(vii) the basis of the MFS Fund Shares to be received by each
Advantage Fund shareholder will be, in the aggregate, the same as the
basis, in the aggregate, of the shares of the Advantage Fund surrendered by
such shareholder in exchange therefor; and
(viii) the holding period of the MFS Fund Shares to be received by
each Advantage Fund shareholder will include the holding period of the
shares of the Advantage Fund surrendered by such shareholder in exchange
therefor, provided the shares of the Advantage Fund were held by such
shareholder as capital assets on the date of the exchange.
COMPARATIVE PERFORMANCE INFORMATION
TOTAL RETURN
The table below indicates the total return (with capital gains and all dividends
and distributions reinvested) on a hypothetical investment of $1,000 in shares
of the Advantage Fund and Class B shares of the MFS Fund covering the indicated
periods.
<TABLE>
VALUE OF A $1,000 INVESTMENT IN THE ADVANTAGE FUND
<CAPTION>
NET ASSET NET ASSET
VALUE OF VALUE OF TOTAL RETURN TOTAL RETURN
INVESTMENT ON INVESTMENT ON GIVING EFFECT NOT GIVING
DECEMBER 31, 1994 DECEMBER 31,1994 TO CDSC* EFFECT TO CDSC
INVESTMENT INVESTMENT AMOUNT OF GIVING EFFECT TO NOT GIVING EFFECT ----------------------- -----------------------
PERIOD DATE INVESTMENT CDSC* TO CDSC CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
- ------------ ---------- ---------- ----------------- ----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
July 1,
1993+ to
December 31,
1994...... 7/1/93 $1,000 $ 914 $ 940 -8.62% -5.83% -6.02% -4.05%
1 Year ended
December 31,
1994...... 1/1/94 $1,000 $ 863 $ 897 -13.74% -13.74% -10.35% -10.35%
<FN>
- ---------------
* Based on CDSC schedule described under "Other Significant Fees" above with respect to the Advantage Fund.
+ Commencement of investment operations.
</TABLE>
The total return of the Advantage Fund as reflected in this table would have
been lower had BSC not agreed to waive its advisory fee and Advest had not
agreed to bear certain Advantage Fund expenses, as described under "Adviser and
Advisory Fees" and "Other Significant Fees" above.
<TABLE>
VALUE OF A $1,000 INVESTMENT IN CLASS B SHARES OF THE MFS FUND
<CAPTION>
NET ASSET
NET ASSET VALUE OF
VALUE OF INVESTMENT ON
INVESTMENT ON DECEMBER 31, TOTAL RETURN TOTAL RETURN
DECEMBER 31, 1994 GIVING EFFECT NOT GIVING EFFECT
1994 NOT GIVING TO CDSC* TO CDSC
INVESTMENT AMOUNT OF GIVING EFFECT TO EFFECT TO ---------------------- ----------------------
INVESTMENT PERIOD DATE INVESTMENT CDSC* CDSC CUMULATIVE ANNUALIZED CUMULATIVE ANNUALIZED
----------------- ---------- ---------- ---------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 29, 1986+ to
December 31, 1994...... 12/29/86 $1,000 $1,543 $ 1,543 54.29% 5.57% 54.29% 5.57%
July 1, 1993++ to
December 31,
1994................... 7/1/93 $1,000 $ 948 $ 985 -5.19% -3.49% -1.54% -1.03%
5 years ended December
31, 1994............... 1/1/90 $1,000 $1,288 $ 1,307 28.77% 5.19% 30.72% 5.50%
1 Year ended December 31,
1994................... 1/1/94 $1,000 $ 911 $ 946 -8.91% -8.91% -5.30% -5.30%
<FN>
- ---------------
* Based on CDSC schedule described under "Other Significant Fees" above with
respect to the MFS Fund.
+ Commencement of investment operations of the MFS Fund.
++ Commencement of investment operations of the Advantage Fund.
</TABLE>
Each Fund calculates its total rate of return for a certain period by
determining the average annual compounded rates of return over the period that
would cause an investment of $1,000 (made at net asset value with all
distributions
22
<PAGE> 28
reinvested) to reach the value of that investment at the end of the period. If
the total rate of return gives effect to the CDSC, then the investment of $1,000
will be reduced by the applicable CDSC.
YIELD
The yield for Advantage Fund shares for the 30-day period ended December 31,
1994 was 6.23%. Had the waiver and reimbursement arrangements described above
under "Advisor and Advisory Fees" and "Other Significant Fees" not been in
effect, the yield for Advantage Fund shares for this period would have been
5.84%. The yield for Class B shares of the MFS Fund for the 30-day period ended
December 31, 1994 was 5.22%.
Yield is calculated by dividing the net investment income per share earned
during the period by the public offering price per share on the last day of the
period. The resulting figure is then annualized.
TAX EQUIVALENT YIELD
The tax-equivalent yield for Advantage Fund shares for the 30-day period ended
December 31, 1994 was 8.65% (assuming a tax-bracket of 28%) and 9.03% (assuming
a tax-bracket of 31%). Had the waiver and reimbursement arrangements described
above under "Advisor and Advisory Fees" and "Other Significant Fees" not been in
effect, the tax-equivalent yield for Advantage Fund shares for this period would
have been 8.11% (assuming a tax-bracket of 28%) and 8.46% (assuming a
tax-bracket of 31%). The tax-equivalent yield for Class B shares of the MFS Fund
for the 30-day period ended December 31, 1994 was 7.25% (assuming a tax-bracket
of 28%) and 7.57% (assuming a tax-bracket of 31%).
Tax-equivalent yield is calculated by determining the rate of return that would
have to be achieved on a fully taxable investment to produce the after-tax
equivalent of that yield. The calculation of tax-equivalent yields assumes
certain federal tax brackets for shareholders and does not take into account
state taxes.
For further information as to the manner in which total return, yield and tax
equivalent yield are calculated, see "Information Concerning Shares of the Fund
- -- Performance Information" in the MFS Fund Prospectus, and "Determination of
Net Assets; Performance Information" in the MFS Fund SAI.
BUSINESS OF THE MFS FUND
FINANCIAL INFORMATION
For the Condensed Financial Information of the MFS Fund, see "Condensed
Financial Information" in the MFS Fund Prospectus.
GENERAL
For a discussion of the organization and operation of the MFS Fund, see "The
Fund" and "Information Concerning Shares of the Fund -- Description of Shares,
Voting Rights and Liabilities" in the MFS Fund Prospectus, and "MFS Fund Shares
and Purchase of MFS Fund Shares" below.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of the MFS Fund's investment objective and policies, see
"Investment Objective and Policies" in the MFS Fund Prospectus.
TRUSTEES
For a discussion of the responsibilities of the MFS Trust's Board of Trustees,
see "The Fund" and "Management of the Fund" in the MFS Fund Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For information concerning the MFS Fund's investment adviser and distributor,
see "Management of the Fund," "Information Concerning Shares of the Fund --
Purchases" and "Information Concerning Shares of the Fund -- Distribution Plans"
in the MFS Fund Prospectus.
23
<PAGE> 29
EXPENSES
For a discussion of the MFS Fund's expenses, see "Expense Summary," "Condensed
Financial Information," "Management of the Fund" and "Information Concerning
Shares of the Fund -- Distribution Plans" in the MFS Fund Prospectus.
CUSTODIAN AND TRANSFER AGENT
For a description of the MFS Fund's custodian and transfer agent, see
"Shareholder Services" and the back cover of the MFS Fund Prospectus.
MFS FUND SHARES AND PURCHASE OF MFS FUND SHARES
For a description of MFS Fund Shares, see "Condensed Financial Information" and
"Information Concerning Shares of the Fund -- Description of Shares, Voting
Rights and Liabilities" in the MFS Fund Prospectus.
For a description of how shares of the MFS Fund may be purchased or exchanged,
see "Information Concerning Shares of the Fund -- Purchases," "Information
Concerning Shares of the Fund -- Exchanges" and "Shareholder Services" in the
MFS Fund Prospectus.
REDEMPTION OF THE MFS FUND SHARES
For a discussion of how the MFS Fund Shares may be redeemed, see "Information
Concerning Shares of the Fund -- Redemptions and Repurchases" in the MFS Fund
Prospectus. Shareholders of the Advantage Fund whose shares are represented by
certificates will be required to surrender their certificates for cancellation
or deliver an Affidavit to the Advantage Fund or MFSC, the MFS Fund's transfer
agent, in order to redeem or transfer the MFS Fund Shares received in the
Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For information concerning the MFS Fund's policy with respect to dividends,
distributions and taxes, see "Information Concerning Shares of the Fund --
Distributions," "Information Concerning Shares of the Fund -- Tax Status" and
"Shareholder Services" in the MFS Fund Prospectus.
BUSINESS OF THE ADVANTAGE FUND
FINANCIAL INFORMATION
For the condensed financial information of the Advantage Fund, see "Financial
Highlights" in the Advantage Fund Prospectus and "Financial Highlights" in the
Advantage Fund Annual Report.
GENERAL
For a discussion of the organization and operation of the Advantage Fund, see
"The Fund and its Shares" in the Advantage Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of the Advantage Fund's investment objective and policies, see
"Investment Objectives and Policies," "Risk Factors," "Types of Municipal
Obligations," and "Other Investment Policies and Techniques" in the Advantage
Fund Prospectus.
TRUSTEES
For a discussion of the responsibilities of the Advantage Trust's Board of
Trustees, see "The Fund and its Shares" in the Advantage Fund Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For information concerning the Advantage Fund's investment adviser and
distributor, see "Investment Adviser" and "Distributor and Rule 12b-1 Plans" in
the Advantage Fund Prospectus.
24
<PAGE> 30
EXPENSES
For a discussion of the Advantage Fund's expenses, see "Summary of Expenses,"
"Financial Highlights," "Investment Adviser" and "Distributor and Rule 12b-1
Plans" in the Advantage Fund Prospectus, and the Advantage Fund Annual Report.
CUSTODIAN AND TRANSFER AGENT
For a description of the Advantage Fund's custodian and transfer agent, see
"Custodian; Transfer Agent and Dividend Disbursing Agent" and the back cover of
the Advantage Fund Prospectus.
ADVANTAGE FUND SHARES AND PURCHASE OF THE ADVANTAGE FUND SHARES
For a description of the Advantage Fund's shares, see "Financial Highlights" and
"The Fund and its Shares" in the Advantage Fund Prospectus.
For a description of how the Advantage Fund shares may be purchased or
exchanged, see "Purchase of Shares" and "Shareholder Services" in the Advantage
Fund Prospectus.
REDEMPTION OF THE ADVANTAGE FUND SHARES
For a discussion of how the Advantage Fund shares may be redeemed, see
"Redemption of Shares" in the Advantage Fund Prospectus.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For information concerning the Advantage Fund's policy with respect to
dividends, distributions and taxes, see "Dividends and Distributions; Taxes" in
the Advantage Fund Prospectus.
NO APPRAISAL RIGHTS
Shareholders are not entitled to any rights of share appraisal under the
Advantage Trust's Declaration of Trust or under the laws of The Commonwealth of
Massachusetts in connection with the Reorganization. Shareholders have, however,
the right to redeem from the Advantage Fund their Advantage Fund shares at net
asset value subject to any applicable CDSC until the Closing Date of the
Reorganization, and thereafter shareholders may redeem from the MFS Fund the
Class B shares issued to them in the Reorganization subject to any applicable
CDSC, as described herein.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the MFS Fund Shares
will be passed upon for the MFS Fund by Stephen E. Cavan, Senior Vice President
and General Counsel of Massachusetts Financial Services Company, the Adviser to
the MFS Fund, and for the Advantage Fund by Ropes & Gray, its legal counsel.
EXPERTS
The financial statements of the MFS Fund incorporated in this Proxy Statement
and Prospectus by reference to the Annual Report to Shareholders for the year
ended March 31, 1994, and by reference to the MFS Fund's Semi-Annual Report to
Shareholders for the six month period ended September 30, 1994, have been so
incorporated in reliance on the report of Deloitte & Touche LLP, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of the Advantage Fund incorporated in this Proxy
Statement and Prospectus by reference to the Annual Report to Shareholders for
the year ended December 31, 1994, and by reference to the Fund's SAI dated April
18, 1994, as supplemented, into which the Annual Report to Shareholders for the
year ended December 31, 1993 was incorporated by reference, have been so
incorporated in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Advantage Fund and the MFS Fund are subject to the informational
requirements of the Securities Exchange Act of 1934 and the 1940 Act, and in
accordance therewith file reports, proxy statements and other information with
the SEC. Such reports, proxy statements and other information filed by the
Advantage Fund and the MFS Fund can be
25
<PAGE> 31
inspected and copied at the public reference facilities of the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C., and at the following regional offices:
Chicago (Room 1204, Everett McKinley Dirksen Building, 219 South Dearborn
Street, Chicago, Illinois); and New York (Room 1102, Federal Building, 26
Federal Plaza, New York, New York). Copies of such material can also be obtained
by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF THE MFS AND ADVANTAGE FUNDS
[To the knowledge of the MFS Fund, as of March 24, 1995, no person owned of
record or beneficially 5% or more of the outstanding shares of the MFS Fund. To
the knowledge of the Advantage Fund, as of March 24, 1995, no person owned of
record or beneficially 5% or more of the outstanding shares of the Advantage
Fund.]
[As of March 24, 1995, the Trustees and officers of the MFS Trust, as a group,
owned in the aggregate less than 1% of the outstanding shares of the MFS Fund].
VOTING RIGHTS AND REQUIRED VOTE
The Reorganization, having been approved by the Trustees of the Advantage Trust
on February 23, 1995, requires the approval of the Advantage Fund's shareholders
by the affirmative vote of not less than two-thirds of the shares of the
Advantage Fund outstanding and entitled to vote at the Meeting.
Consummation of the Reorganization will require both the approval of the
Advantage Fund's shareholders as described above and the approval of
substantially similar transactions with two other series of the MFS Trust by the
shareholders of the two other series of the Advantage Trust as described above.
See "Description of Agreement -- Conditions Precedent to Closing."
<TABLE>
SECURITY OWNERSHIP OF THE ADVANTAGE FUND
The following table presents certain information regarding the shares of the
Advantage Fund owned beneficially by the officers and Trustees of the Advantage
Trust.
<CAPTION>
SHARES OF
FUND OWNED
BENEFICIALLY
AS OF
MARCH 24, PERCENT OF
NAME OF TRUSTEE 1995(1) CLASS(2)
- --------------- ---------- ----------
<S> <C> <C>
ROBERT L. THOMAS.................................................... 0 0%
GEOFFREY NUNES...................................................... 0 0%
RICHARD C. FARR..................................................... 0 0%
LINDA G. SPRAGUE.................................................... 0 0%
ALLEN WEINTRAUB..................................................... 0 0%
All Trustees and officers as a group................................ 0 0%
<FN>
- ---------------
(1) Numbers are approximate and include, where applicable, shares owned by a
Trustee or officer's spouse or minor children or shares which were otherwise
reported by the Trustee or officer as "beneficially owned" in the light of
pertinent SEC rules.
(2) Percentage of shares outstanding on March 24, 1995. All shares are held with
sole voting and investment power, except to the extent that such powers may
be shared by a family member or a trustee of a family trust (see Note 1).
</TABLE>
MANNER OF VOTING PROXIES
All proxies received by the management will be voted on all matters presented at
the Meeting, and, if not limited to the contrary, will be voted for Item 1.
26
<PAGE> 32
The management of the Advantage Trust knows of no other matters to be brought
before the Meeting. If, however, because of any unexpected occurrence, any
matters properly come before the Meeting, it is the management's intention that
proxies not limited to the contrary will be voted in accordance with the
judgment of the persons named in the enclosed form of proxy.
All proxies voted, including abstentions, will be counted toward establishing a
quorum. Passage of any proposal being considered at the Meeting will occur only
if a sufficient number of votes are cast FOR the proposal. With respect to the
proposal described in Item 1, abstentions and broker non-votes have the effect
of a negative vote on the proposal.
If sufficient votes to approve Item 1 are not received, the persons named as
proxies may propose one or more adjournments of the Meeting with respect to such
Item to permit further solicitation of proxies. Any such adjournment with
respect to Item 1 will require the affirmative vote of a majority of those
shares which are voted on the motion to adjourn present in person or by proxy at
the session of the Meeting to be adjourned. When voting on a proposed
adjournment, the persons named as proxies will vote FOR the proposed adjournment
all shares that they are entitled to vote with respect to such Item, unless
directed to vote AGAINST the Item, in which case such shares will be voted
against the proposed adjournment with respect to Item 1.
SUBMISSION OF CERTAIN PROPOSALS
If the Reorganization is not consummated, proposals of shareholders which are
intended to be presented at a future meeting of shareholders must be received by
the Advantage Fund a reasonable amount of time prior to the Advantage Fund's
solicitation of proxies relating to such future meeting.
ADDITIONAL INFORMATION
Upon the consummation of the Reorganization and the Related Reorganizations, MFS
shall pay The Advest Group, Inc. $1.2 million; provided, however, that if the
Agreement and the Related Agreements have not been approved by the shareholders
of the Advantage Fund, The New York Portfolio and The Pennsylvania Portfolio, as
the case may be, MFS will not make such payment and The Advest Group, Inc. shall
promptly reimburse or pay the costs and expenses incurred by the MFS Fund, the
MFS New York Municipal Bond Fund and the MFS Pennsylvania Municipal Bond Fund
and by MFS in relation to matters contemplated by the Agreement and the Related
Agreements. See "Description of Agreement -- Conditions Precedent to Closing"
above.
The Advantage Trust, solely on behalf of the Advantage Fund, and The Advest
Group, Inc. have agreed, jointly and severally, to indemnify and hold harmless
the MFS Trust, its trustees and officers, each person who controls the MFS Fund
within the meaning of applicable federal securities laws, and MFS, its
wholly-owned subsidiaries and the directors, officers and employees of MFS and
such subsidiaries, against any loss, claim damage and expense, paid or incurred,
arising out of (i) any untrue statement or alleged untrue statement of material
fact contained in the Notice of Special Meeting or this Proxy Statement and
Prospectus or in the registration statement of the MFS Trust containing this
Proxy Statement and Prospectus filed with the Securities and Exchange Commission
(the "SEC") with respect thereto, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with respect to untrue statements or
omissions in or from those sections thereof identified as being the
responsibility of the Advantage Fund; (ii) any breach of any representation,
warranty or covenant of the Advantage Trust or the Advantage Fund set forth in
the Agreement or set forth in any certificate provided by the Advantage Trust in
connection with the consummation of the Reorganization (including, without
limitation, any certificate provided by the Advantage Trust in support of the
legal opinion required pursuant to Section 8.6 of the Agreement); (iii) the
failure of the Advantage Fund or its designee to timely file all federal, state
and other tax returns, forms and reports when due by the Advantage Fund with
respect to all periods up to and including the Closing Date or to pay any taxes
due by the Advantage Fund to any taxing authority with respect to all such
periods, including without limitation, any failure to pay such taxes due in a
timely manner; and (iv) non-compliance of the Advantage Fund with any applicable
federal or state securities laws or with applicable provisions of the Internal
Revenue Code of 1986, as amended, or with the investment policies and
27
<PAGE> 33
restrictions contained in the Advantage Fund's prospectus and statement of
additional information, as in effect from time to time.
The MFS Trust, solely on behalf of the MFS Fund, has agreed to indemnify and
hold harmless the Advantage Trust, its trustees and officers, each person who
controls the Advantage Fund within the meaning of applicable federal securities
laws, and The Advest Group, Inc., its wholly-owned subsidiaries and the
directors, officers and employees of The Advest Group, Inc. and such
subsidiaries, against any loss, claim, damage and expense, paid or incurred,
arising out of any untrue statement or alleged untrue statement of material fact
contained in the Notice of Special Meeting or this Proxy Statement and
Prospectus or in the registration statement of the MFS Trust containing this
Proxy Statement and Prospectus filed with the SEC with respect thereto, or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading, but only
with respect to untrue statements of omissions in or from those sections thereof
identified as not being the responsibility of the Advantage Fund or as not being
the responsibility of either the Advantage Fund or the MFS Fund.
To obtain the necessary representation at the Meeting, solicitations may be made
by mail, telephone or interview by [ ] or its agents as well as by
officers of the Advantage Trust and employees of The Advest Group, Inc. and its
subsidiaries. It is anticipated that the total cost of any such solicitations,
if made by [ ] or its agents, would be approximately $[ ] plus
out-of-pocket expenses, and if made by any other party, would be nominal.
The expense of solicitations as well as of the preparation, printing and mailing
of the enclosed form of proxy, and this Notice and Proxy Statement, will be
borne by The Advest Group, Inc.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
<TABLE>
<S> <C>
THE NATIONAL
March 29, 1995 PORTFOLIO
a series of
THE ADVANTAGE
MUNICIPAL
BOND FUND
</TABLE>
28
<PAGE> 34
THE NATIONAL PORTFOLIO
a series of
THE ADVANTAGE MUNICIPAL BOND FUND
100 Federal Street
Boston, MA 02110
<PAGE> 35
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 23rd
day of February, 1995, by and between the Advantage Municipal Bond Fund, a
Massachusetts business trust (the "Advantage Trust"), with its principal place
of business at 100 Federal Street, Boston, Massachusetts 02110, on behalf of The
National Portfolio, a series thereof (the "Advantage Fund"), and MFS Municipal
Series Trust, a Massachusetts business trust (the "MFS Trust"), with its
principal place of business at 500 Boylston Street, Boston, Massachusetts 02116,
on behalf of MFS Municipal Income Fund, a series thereof (the "MFS Fund").
This Agreement is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a) of the United States Internal
Revenue Code of 1986, as amended (the "Code"). The reorganization will consist
(i) of the transfer of all of the assets of the Advantage Fund to the MFS Fund
in exchange solely for the assumption by the MFS Fund of the stated liabilities
of the Advantage Fund and the issuance to the Advantage Fund of shares of
beneficial interest of the MFS Fund designated as Class B shares (the "MFS Fund
Shares"), (ii) the distribution, promptly after the Closing Date hereinafter
referred to, of the MFS Fund Shares to the shareholders of the Advantage Fund in
liquidation of the Advantage Fund as provided herein, and (iii) the termination
of the Advantage Trust, all upon the terms and conditions hereinafter set forth
in this Agreement.
All representations, warranties, covenants and obligations of the MFS Fund and
the Advantage Fund contained herein shall be deemed to be representations,
warranties, covenants and obligations of the MFS Trust and the Advantage Trust,
respectively, acting on behalf of the MFS Fund and the Advantage Fund,
respectively, and all rights and benefits created hereunder in favor of the MFS
Fund and the Advantage Fund shall inure to the MFS Trust and the Advantage
Trust, respectively, and shall be enforceable by the MFS Trust and the Advantage
Trust, respectively, acting on behalf of the MFS Fund and the Advantage Fund,
respectively.
In consideration of the premises of the covenants and agreements hereinafter set
forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ADVANTAGE FUND IN EXCHANGE FOR THE MFS FUND SHARES
AND LIQUIDATION OF THE ADVANTAGE FUND
1.1 The Advantage Fund will transfer its assets (consisting, without
limitation, of portfolio securities and instruments, dividend and interest
receivables, cash and other assets) as set forth in the statement of assets and
liabilities as of the Valuation Date (as defined in paragraph 1.4 hereof)
delivered by the Advantage Trust to the MFS Trust pursuant to paragraph 7.2
hereof (the "Statement of Assets and Liabilities") to the MFS Fund, free and
clear of all liens and encumbrances, except as otherwise provided herein, in
exchange for (a) the assumption by the MFS Fund of all of the stated liabilities
of the Advantage Fund as set forth in the Statement of Assets and Liabilities
and (b) the issuance and delivery by the MFS Fund to the Advantage Fund, for
distribution in accordance with paragraph 1.4 hereof pro rata to the Advantage
Fund shareholders as of the close of business on the Valuation Date, of a number
of the MFS Fund Shares having an aggregate net asset value equal to the value of
the assets, less such liabilities (herein referred to as the "net value of the
assets"), of the Advantage Fund so transferred, assigned and delivered, all
determined as provided in paragraph 2 and as of a date and time as specified
therein. Such transactions shall take place at the closing provided for in
paragraph 3.1 hereof (the "Closing"). All computations for the Advantage Fund
shall be provided by State Street Bank and Trust Company (the "Custodian"), as
custodian and pricing agent for the Advantage Fund, and all computations for the
MFS Fund shall be provided by the Custodian, as custodian and pricing agent for
the MFS Fund. The determinations of the Custodian shall be conclusive and
binding on all parties in interest.
1.2 The Advantage Fund has provided the MFS Fund with a list of the current
securities holdings of the Advantage Fund as of the date of execution of this
Agreement. The Advantage Fund reserves the right to sell any of these securities
(except to the extent sales may be limited by representations made in connection
with issuance of the tax opinion described in paragraph 8.6 hereof) but will
not, without the prior approval of the MFS Fund, acquire any additional
securities other than securities of the type in which the MFS Fund is permitted
to invest.
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1.3 Except to the extent that another party has agreed to bear certain expenses
in connection with the transactions contemplated by this Agreement, the MFS
Trust and the Advantage Trust shall each bear its own expenses in connection
with the transactions contemplated by this Agreement.
1.4 On or as soon after the closing date established in paragraph 3.1 hereof
(the "Closing Date") as is conveniently practicable (the "Liquidation Date"),
the Advantage Fund will liquidate and distribute pro rata to shareholders of
record ("Advantage Fund shareholders"), determined as of the close of business
on the last business day preceding the Closing Date (the "Valuation Date"), the
MFS Fund Shares received by the Advantage Fund pursuant to paragraph 1.1 in
actual or constructive exchange for the shares of the Advantage Fund held by the
Advantage Fund shareholders. Such liquidation and distribution will be
accomplished by the transfer of the MFS Fund Shares then credited to the account
of the Advantage Fund on the books of the MFS Fund, to open accounts on the
share records of the MFS Fund in the names of the Advantage Fund shareholders
and representing the respective pro rata number of the MFS Fund Shares due such
shareholders. The MFS Fund will not issue share certificates representing the
MFS Fund Shares in connection with such exchange, except in connection with
pledges and assignments and in certain other limited circumstances.
1.5 Advantage Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Advantage Fund shall surrender
such certificates or deliver an affidavit with respect to lost certificates, in
such form and accompanied by such surety bonds as the Advantage Fund may require
(collectively, an "Affidavit"), to the Advantage Fund prior to the Closing Date.
Any Advantage Fund certificate which remains outstanding on the Closing Date
shall be deemed to be cancelled, shall no longer evidence ownership of shares of
beneficial interest of the Advantage Fund and shall not evidence ownership of
the MFS Fund Shares. Unless and until any such certificate shall be so
surrendered or an Affidavit relating thereto shall be delivered, dividends and
other distributions payable by the MFS Fund subsequent to the Closing Date with
respect to the MFS Fund Shares allocable to the holders of such certificate(s)
shall be paid to the holder of such certificate(s), but such shareholder may not
redeem or transfer the MFS Fund Shares received in the Reorganization.
1.6 Any transfer taxes payable upon issuance of the MFS Fund Shares in a name
other than the registered holder of the MFS Fund Shares on the books of the
Advantage Fund as of that time shall, as a condition of such issuance and
transfer, be paid by the person to whom such MFS Fund Shares are to be issued
and transferred.
1.7 The Advantage Trust shall be terminated promptly following the later of (i)
the Liquidation Date, and (ii) the date that the other two series of the
Advantage Trust liquidate and distribute the MFS Shares received by such series
pursuant to the terms of separate Agreements and Plans of Reorganization entered
into by the Advantage Trust, on behalf of such series, and MFS Municipal Series
Trust, on behalf of two of its other series, dated the date hereof.
2. VALUATION
2.1 The net asset value of the MFS Fund Shares and the net value of the assets
of the Advantage Fund to be transferred shall in each case be determined as of
the close of business on the Valuation Date. The net asset value of the MFS Fund
Shares shall be computed by the Custodian in the manner set forth in the MFS
Trust's Declaration of Trust or By-laws and the MFS Fund's then current
prospectus and statement of additional information and shall be computed to not
less than two decimal places. The net value of the assets of the Advantage Fund
to be transferred shall be computed by the Custodian by calculating the value of
the assets transferred by the Advantage Fund and by subtracting therefrom the
amount of the liabilities assigned and transferred to the MFS Fund, said assets
and liabilities to be valued in the manner set forth in the Advantage Trust's
Declaration of Trust or By-laws and the Advantage Fund's then current prospectus
and statement of additional information.
2.2 The number of MFS Fund Shares to be issued (including fractional shares, if
any) in exchange for the Advantage Fund's assets shall be determined by dividing
the net value of the Advantage Fund assets by the net asset value per MFS Fund
Share, both as determined in accordance with paragraph 2.1.
2.3 All computations of value shall be made by the Custodian in accordance with
its regular practice as pricing agent for the MFS Fund and the Advantage Fund,
as applicable.
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3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be as soon as practicable after the reorganization
described above is approved by shareholders of the Advantage Fund, but in no
event later than June 30, 1995. The Closing shall be held at 10:00 a.m., Boston
time, at the offices of the MFS Fund, 500 Boylston Street, Boston, Massachusetts
02116, or at such other time and/or place as the parties may agree.
3.2 Portfolio securities shall be delivered by the Advantage Fund to the
Custodian for the account of the MFS Fund on the Closing Date, duly endorsed in
proper form for transfer, in such condition as to constitute good delivery
thereof in accordance with the custom of brokers, and shall be accompanied by
all necessary federal and state stock transfer stamps or a check for the
appropriate purchase price thereof. The cash delivered shall be in the form of
currency, certified or official bank check in Boston funds or federal fund wire,
payable to the order of "State Street Bank and Trust Company, Custodian for MFS
Municipal Income Fund" or in the name of any successor organization.
3.3 In the event that on the proposed Valuation Date (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted, or
(b) trading or the reporting of trading on said Exchange or elsewhere shall be
disrupted so that accurate appraisal of the net value of the assets of the MFS
Fund or the Advantage Fund is impracticable, the Closing Date shall be postponed
until the first business day after the day when trading shall have been fully
resumed and reporting shall have been restored; provided that if trading shall
not be fully resumed and reporting restored on or before June 30, 1995, this
Agreement may be terminated by the MFS Fund or the Advantage Fund upon the
giving of written notice to the other party.
3.4 The Advantage Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding and
nonresident alien withholding status of the Advantage Fund shareholders and the
number of outstanding shares of beneficial interest of the Advantage Fund owned
by each such shareholder, all as of the close of business on the Valuation Date
(the "Shareholder List"). The MFS Fund shall issue and deliver to the Advantage
Fund a confirmation evidencing the MFS Fund Shares to be credited on the
Liquidation Date, or provide evidence satisfactory to the Advantage Fund that
such MFS Fund Shares have been credited to the Advantage Fund's account on the
books of the MFS Fund. At the Closing each party shall deliver to the other such
bills of sale, checks, assignments, stock certificates, receipts or other
documents as such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Advantage Trust and the Advantage Fund represent and warrant to the MFS
Trust and the MFS Fund as follows:
(a) The Advantage Trust is a business trust duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has the power to own all of its properties and assets
and, subject to approval by the shareholders of the Advantage Fund, to
carry out the Agreement. Neither the Advantage Trust nor the Advantage Fund
is required to qualify to do business in any other jurisdiction. The
Agreement has been duly authorized by the Advantage Trust, subject to the
approval of the shareholders of the Advantage Fund. The Advantage Trust has
all necessary federal, state and local authorizations to own all of the
properties and assets of the Advantage Trust and to carry on its business
as now being conducted;
(b) The Advantage Trust is a duly registered investment company
classified as a management company of the open-end, diversified type and
its registration with the Securities and Exchange Commission (the
"Commission") as an investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), is in full force and effect;
(c) The Advantage Trust is not, and the execution, delivery and
performance of this Agreement by the Advantage Trust will not result, in
violation of any provision of the Declaration of Trust or By-Laws of the
Advantage Trust or of any agreement, indenture, instrument, contract, lease
or other undertaking to which the Advantage Trust is a party or by which
the Advantage Trust or the Advantage Fund is bound;
(d) The Advantage Trust has no material contracts or other commitments
(other than this Agreement) which will not be terminated without liability
to the Advantage Fund at or prior to the Closing Date;
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(e) Except as otherwise disclosed in writing to and accepted by the
MFS Fund, no litigation or administrative proceeding or investigation of or
before any court or governmental body is currently pending or threatened as
to the Advantage Trust or any of its properties or assets. The Advantage
Trust knows of no facts which might form the basis for the institution of
such proceedings, and the Advantage Trust is not a party to or subject to
the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(f) The statement of assets and liabilities, including the schedule of
portfolio investments, of the Advantage Fund as of December 31, 1994 and
the related statement of operations for the year ended December 31, 1994,
and the statement of changes in net assets for the year ended December 31,
1994 and the period ended December 31, 1993 (copies of which have been
furnished to the MFS Fund) have been audited by Price Waterhouse LLP,
independent accountants, and present fairly in all material respects the
financial position of the Advantage Fund as of December 31, 1994 and the
results of its operations and changes in net assets for the respective
stated periods in accordance with generally accepted accounting principles
consistently applied, and there are no known actual or contingent
liabilities of the Advantage Fund as of the respective dates thereof not
disclosed therein;
(g) Since December 31, 1994, there has not been any material adverse
change in the Advantage Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Advantage Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the MFS Fund. For the purposes of this
subparagraph (g), a decline in net asset value per share of beneficial
interest of the Advantage Fund as a result of losses upon the disposition
of investments or from changes in the value of investments held by the
Advantage Fund, or a distribution or a payment of dividends shall not
constitute a material adverse change;
(h) At the date hereof and at the Closing Date, all federal, state and
other tax returns and reports, including information returns and payee
statements, of the Advantage Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, and all
federal, state and other taxes, interest and penalties shall have been paid
so far as due, and to the best of the Advantage Fund's knowledge no such
return is currently under audit and no assessment has been asserted with
respect to such returns or reports;
(i) The Advantage Fund has elected to be treated as a regulated
investment company for federal tax purposes, has qualified as such for each
taxable year of its operation and will qualify as such as of the Closing
Date;
(j) The authorized capital of the Advantage Trust consists of an
unlimited number of shares of beneficial interest, no par value, divided
into three series, all of one class, at the date hereof. All issued and
outstanding shares of beneficial interest attributable to the Advantage
Fund are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Advantage Trust. All of
the issued and outstanding shares of beneficial interest attributable to
the Advantage Fund will, at the time of Closing, be held by the persons and
in the amounts set forth in the Shareholder List. The Advantage Trust does
not have outstanding any options, warrants or other rights to subscribe for
or purchase any shares of beneficial interest attributable to the Advantage
Fund, nor is there outstanding any security convertible into any shares of
beneficial interest attributable to the Advantage Fund;
(k) Except as previously disclosed to the MFS Fund, at the Closing
Date the Advantage Trust will have good and marketable title to the assets
attributable to the Advantage Fund to be transferred to the MFS Fund
pursuant to paragraph 1.1, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder, and upon delivery and
payment for such assets, the MFS Fund will acquire good and marketable
title thereto subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the Securities Act of
1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the Advantage
Trust (with the exception of the approval of this Agreement by Advantage
Fund shareholders holding at least two-thirds of the issued and outstanding
Advantage Fund
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shares), and this Agreement constitutes a valid and binding obligation of
the Advantage Trust enforceable in accordance with its terms, subject to
the approval of the Advantage Fund shareholders;
(m) The information to be furnished by the Advantage Fund for use in
applications for orders, registration statements, proxy materials and other
documents which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete and shall comply fully
with federal securities and other laws and regulations thereunder
applicable thereto;
(n) The proxy statement of the Advantage Fund (the "Proxy Statement")
to be included in the Registration Statement referred to in paragraph 5.7
(other than written information furnished by the MFS Fund for inclusion
therein, as covered by the MFS Fund's warranty in paragraph 4.2(n)), on the
effective date of the Registration Statement, on the date of the meeting of
the Advantage Fund shareholders and on the Closing Date, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Advantage
Trust and the Advantage Fund of the transactions contemplated by this
Agreement, except such as have been obtained under the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the 1940
Act, and such as may be required under state securities laws;
(p) All of the issued and outstanding shares of beneficial interest of
the Advantage Trust attributable to the Advantage Fund have been offered
for sale and sold in conformity with all applicable federal and state
securities laws, except as may have been previously disclosed in writing to
the MFS Fund; and
(q) The current prospectus and statement of additional information of
the Advantage Fund, each dated April 18, 1994 as supplemented and updated
from time to time (the "Advantage Fund Prospectus"), will conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations of the Commission thereunder on the
date of the Proxy Statement, on the date of the meeting of Advantage Fund
shareholders and on the Closing Date and will not on such dates include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
4.2 The MFS Trust and the MFS Fund represent and warrant to the Advantage Trust
and the Advantage Fund as follows:
(a) The MFS Trust is a business trust duly organized, validly existing
and in good standing under the laws of The Commonwealth of Massachusetts
and has the power to own all of its properties and assets and to carry out
the Agreement. Neither the MFS Trust nor the MFS Fund is required to
qualify to do business in any other jurisdiction. The Agreement has been
duly authorized by the MFS Trust. The MFS Trust has all necessary federal,
state and local authorization to own all of its properties and assets and
to carry on its business as now being conducted;
(b) The MFS Trust is a duly registered investment company classified
as a management company of the open-end type and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect;
(c) The current prospectus and statement of additional information of
the MFS Fund, each dated March 1, 1995, as supplemented and updated from
time to time (the "MFS Fund Prospectus"), and the Registration Statement
referred to in paragraph 5.7 (other than written information furnished by
the Advantage Fund for inclusion therein as covered by the Advantage Fund's
warranty in paragraph 4.1(m)) will conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder on the date of the Proxy
Statement, on the date of the meeting of the Advantage Fund shareholders
and on the Closing Date and will not on such dates include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading;
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(d) At the Closing Date, the MFS Trust, will have good and marketable
title to the assets of the MFS Fund;
(e) The MFS Trust is not, and the execution, delivery and performance
of this Agreement will not result, in violation of any provisions of its
Declaration of Trust or By-Laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the MFS Trust is a party or
by which the MFS Trust or the MFS Fund is bound;
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the MFS Trust or any of its properties or
assets, except as previously disclosed in writing to the Advantage Fund.
The MFS Trust knows of no facts which might form the basis for the
institution of such proceedings, and the MFS Trust is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transaction herein contemplated;
(g) The statements of assets and liabilities, including the schedule
of portfolio investments, of the MFS Fund as of September 30, 1994, and the
related statement of operations for the six months then ended, and the
statement of changes in net assets for the six months ended September 30,
1994, for the four months ended March 31, 1994 and for the year ended
November 30, 1993 (copies of which have been furnished to the Advantage
Fund) have been audited by Deloitte & Touche LLP, independent auditors, and
present fairly in all material respects the financial position of the MFS
Fund as of September 30, 1994 and the results of its operations and changes
in net assets for the respective stated periods in accordance with
generally accepted accounting principles consistently applied and there are
no known actual or contingent liabilities of the MFS Fund as of the
respective dates thereof not disclosed therein;
(h) Since September 30, 1994, there has not been any material adverse
change in the MFS Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business or
any incurrence by the MFS Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred except as otherwise disclosed
to the Advantage Fund. For the purposes of this subparagraph (h), a decline
in net asset value per share of beneficial interest of the MFS Fund
resulting from losses upon the disposition of investments or from changes
in the value of investments held by the MFS Fund, or a distribution or a
payment of dividends, shall not constitute a material adverse change;
(i) The MFS Fund has elected to be treated as a regulated investment
company for federal tax purposes, has qualified as such for each taxable
year of its operation, and will qualify as such as of the Closing Date;
(j) At the date hereof and at the Closing Date, all federal, state and
other tax returns and reports, including information returns and payee
statements, of the MFS Fund required by law to have been filed or furnished
by such dates shall have been filed or furnished, and all federal, state
and other taxes, interest and penalties shall have been paid so far as due,
or provision shall have been made for the payment thereof, and to the best
of the MFS Fund's knowledge no such return is currently under audit and no
assessment has been asserted with respect to such returns or reports;
(k) The authorized capital of the MFS Trust consists of an unlimited
number of shares of beneficial interest, no par value, divided into
nineteen series and, with respect to the MFS Fund, into three classes, at
the date hereof. All issued and outstanding shares of beneficial interest
attributable to the MFS Fund are, and at the Closing Date will be, duly and
validly issued and outstanding, fully paid and nonassessable by the MFS
Trust. The MFS Trust does not have outstanding any options, warrants or
other rights to subscribe for or purchase any shares of beneficial interest
attributable to the MFS Fund, nor is there outstanding any security
convertible into any shares of beneficial interest attributable to the MFS
Fund;
(l) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the MFS Trust,
and this Agreement constitutes a valid and binding obligation of the MFS
Trust enforceable in accordance with its terms;
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(m) The MFS Fund Shares to be issued and delivered to the Advantage
Trust pursuant to the terms of this Agreement will have been duly
authorized at the Closing Date, and when so issued and delivered, will be
duly and validly issued MFS Fund Shares and will be fully paid and
nonassessable by the MFS Trust;
(n) The information to be furnished by the MFS Fund for use in
applications for orders, registration statements, proxy materials and other
documents which may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete and shall comply fully
with federal securities and other laws and regulations applicable thereto;
(o) The MFS Trust agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and
such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations and the operations of the MFS Fund after
the Closing Date;
(p) All of the MFS Trust's issued and outstanding shares of beneficial
interest attributable to the MFS Fund have been offered for sale and sold
in conformity with all applicable federal and state securities laws, except
as may have been previously disclosed in writing to the Advantage Fund; and
(q) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the MFS Trust of
the transactions contemplated by the Agreement, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and such as may
be required under state securities laws.
5. COVENANTS
5.1 The Advantage Fund and the MFS Fund each will operate its business in the
ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include the declaration
and payment of customary dividends and distributions.
5.2 The Advantage Trust will call a meeting of shareholders of the Advantage
Fund (the "Meeting") to consider and act upon this Agreement and to take all
other action necessary to obtain approval of the transactions contemplated
herein.
5.3 The Advantage Trust covenants that the MFS Fund Shares to be issued
hereunder are not being acquired for the purpose of making any distribution
thereof other than in accordance with the terms of this Agreement.
5.4 The Advantage Trust will provide such information as the MFS Trust
reasonably requests concerning the ownership of the Advantage Fund's shares of
beneficial interest, including the information specified in paragraph 3.4.
5.5 Subject to the provisions of this Agreement, the Advantage Trust and the
MFS Trust each will take, or cause to be taken, all action, and do or cause to
be done all things, reasonably necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement.
5.6 The Advantage Trust shall furnish to the MFS Trust on the Closing Date the
Statement of Assets and Liabilities of the Advantage Fund as of the Valuation
Date, which statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified by the
Advantage Trust's Treasurer or Assistant Treasurer. As promptly as practicable,
but in any case within 60 days after the Closing Date, the Advantage Trust or
its designee shall furnish to the MFS Trust, in such form as is reasonably
satisfactory to the MFS Trust, a statement of the earnings and profits of the
Advantage Fund for federal income tax purposes, and of any capital loss
carryovers and other items that the MFS Fund will succeed to and take into
account as a result of Section 381 of the Code.
5.7 The MFS Trust will prepare and file with the Securities and Exchange
Commission a Registration Statement on Form N-14 (the "Registration Statement"),
in compliance with the 1933 Act and the 1940 Act, in connection with the
issuance of the MFS Fund Shares as contemplated herein.
5.8 The MFS Trust will prepare a Proxy Statement, to be included in the
Registration Statement in compliance with the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder (collectively, the "Acts") in
connection with the Meeting of Advantage Fund shareholders to consider approval
of this Agreement. The Advantage
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Trust agrees to provide the MFS Trust with information applicable to the
Advantage Trust and Advantage Fund required under the Acts for inclusion in the
Proxy Statement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ADVANTAGE TRUST
The obligations of the Advantage Trust to consummate the transactions provided
for herein shall be, at its election, subject to the performance by the MFS
Trust of all the obligations to be performed by it hereunder on or before the
Closing Date, and, in addition thereto, the following further conditions:
6.1 All representations and warranties of the MFS Trust and the MFS Fund
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;
6.2 The MFS Trust shall have delivered to the Advantage Trust a certificate
executed in its name by its President, Vice President, Secretary or its
Assistant Secretary and its Treasurer or Assistant Treasurer, in form
satisfactory to the Advantage Trust and dated as of the Closing Date, to the
effect that the representations and warranties of the MFS Trust and the MFS Fund
made in this Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the Advantage Trust shall reasonably
request; and
6.3 The Advantage Trust shall have received on the Closing Date a favorable
opinion from Stephen E. Cavan, General Counsel and Senior Vice President of
Massachusetts Financial Services Company ("MFS"), the MFS Trust's investment
adviser, dated as of the Closing Date, in a form satisfactory to Ropes & Gray,
counsel to the Advantage Trust, to the effect that:
(a) The MFS Trust is a business trust duly organized and validly
existing under the laws of The Commonwealth of Massachusetts and has power
to own all of its properties and assets and to carry on its business as
currently conducted, as described in the Registration Statement; (b) the
Agreement has been duly authorized, executed and delivered by the MFS Trust
and, assuming that the MFS Fund Prospectus contained in the Registration
Statement, the Registration Statement, and Proxy Statement comply with the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and assuming the due authorization, execution and delivery of
the Agreement by the Advantage Trust, is a valid and binding obligation of
the MFS Trust enforceable against the MFS Trust in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally and other equitable principles; (c) the MFS
Fund Shares to be issued to the Advantage Fund shareholders as provided by
this Agreement are duly authorized and upon such delivery will be validly
issued and outstanding and fully paid and nonassessable by the MFS Trust,
and no shareholder of the MFS Fund has any preemptive right to subscription
or purchase in respect thereof pursuant to any federal or Massachusetts law
or the Declaration of Trust or By-laws of the MFS Trust; (d) the execution
and delivery of the Agreement did not, and the consummation of the
transactions contemplated hereby will not, violate the MFS Trust's
Declaration of Trust or By-Laws, or any material provision of any agreement
(known to such counsel) to which the MFS Trust is a party or by which it or
the MFS Fund is bound; (e) to the knowledge of such counsel, no consent,
approval, authorization or order of any court or governmental authority is
required for the consummation by the MFS Trust of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act, and such as may be required under state
securities laws; (f) the descriptions in the Registration Statement of
statutes, legal and governmental proceedings and contracts and other
documents, if any, only insofar as they relate to the MFS Trust and the MFS
Fund, are accurate in all material respects; (g) such counsel does not know
of any legal or governmental proceedings existing on or before the date of
mailing of the Proxy Statement or the Closing Date, only insofar as they
relate to the MFS Trust or the MFS Fund, required to be described in the
Registration Statement which are not described as required; (h) to the
knowledge of such counsel, the MFS Trust is a duly registered investment
company and its registration with the Securities and Exchange Commission as
an investment company under the 1940 Act is in full force and effect; and
(i) to the best knowledge of such counsel, no litigation or administrative
proceeding or investigation of or before any court or governmental body
currently is pending or
A-8
<PAGE> 43
threatened as to the MFS Trust or the MFS Fund or any of the MFS Trust's
properties or assets, and the MFS Trust is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body, which materially and adversely affects its business or its ability to
consummate the transactions contemplated hereby. Such opinion shall also
state that while such counsel has not verified, and is not passing upon and
does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement, he
generally reviewed and discussed certain of such statements with certain
officers of the MFS Trust and that in the course of such review and
discussion no facts came to the attention of such counsel which led him to
believe that, on the effective date of the Registration Statement or on the
date of the Advantage Fund shareholders' meeting and only insofar as such
statements relate to the MFS Trust and the MFS Fund, the Registration
Statement contained any statement which, in the light of the circumstances
under which it was made, was false or misleading with respect to any
material fact or which omitted to state any material fact required to be
stated therein or necessary to make the statements therein not false or
misleading. Such opinion may state that such counsel does not express any
opinion or belief as to the financial statements or other financial or
statistical data, or as to the information relating to the Advantage Trust
or the Advantage Fund, contained in the Proxy Statement or Registration
Statement. Such opinion may also state that such opinion is solely for the
benefit of the Advantage Trust, its Board of Trustees and its officers and
of the Advantage Fund. Such opinion shall also include such other matters
incidental to the transaction contemplated hereby as the Advantage Trust
may reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE MFS TRUST
The obligations of the MFS Trust to complete the transactions provided for
herein shall be, at its election, subject to the performance by the Advantage
Trust of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of the Advantage Trust and the Advantage
Fund contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date;
7.2 The Advantage Trust shall have delivered to the MFS Trust the Statement of
Assets and Liabilities, together with a list of the Advantage Fund's portfolio
securities showing the federal income tax bases and holding periods of such
securities, as of the Closing Date, certified by the Treasurer or Assistant
Treasurer of the Advantage Trust;
7.3 The Advantage Trust shall have delivered to the MFS Trust on the Closing
Date a certificate executed in its name by its President, Vice President,
Secretary or its Assistant Secretary and its Treasurer or Assistant Treasurer,
in form and substance satisfactory to the MFS Trust and dated as of the Closing
Date, to the effect that the representations and warranties of the Advantage
Trust in this Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the MFS Trust shall reasonably
request;
7.4 The MFS Trust shall have received on the Closing Date a favorable opinion
from Ropes & Gray, counsel to the the Advantage Trust, in a form satisfactory to
the MFS Trust to the effect that:
(a) the Advantage Trust is a business trust duly organized and validly
existing under the laws of The Commonwealth of Massachusetts and has power
to own all of its properties and assets and to carry on its business as
currently conducted; (b) the Agreement has been duly authorized, executed
and delivered by the Advantage Trust and, assuming that the MFS Fund
Prospectus, the Registration Statement and the Proxy Statement comply with
the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and assuming due authorization, execution and delivery of the
Agreement by the MFS Trust, is a valid and binding obligation of the
Advantage Trust enforceable against the Advantage Trust and the Advantage
Fund in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and other equitable principles;
(c) the execution and delivery of the Agreement did not, and the
consummation of the transactions contemplated hereby will not, violate the
Advantage Trust's Declaration of Trust or By-Laws, or any material
provision of any agreement (known to such counsel) to which the Advantage
Trust is a party or by which it or the Advantage
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<PAGE> 44
Fund is bound; (d) to the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority is required
for the consummation by the Advantage Trust of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act, and such as may be required under state
securities laws; (e) the descriptions in the Proxy Statement of statutes,
legal and governmental proceedings and contracts and other documents, if
any, only insofar as they relate to the Advantage Trust and the Advantage
Fund, are accurate in all material respects; (f) such counsel does not know
of any legal or governmental proceedings existing on or before the date of
mailing the Proxy Statement or the Closing Date, only insofar as they
relate to the Advantage Trust or the Advantage Fund, required to be
described in the Proxy Statement which are not described as required; (g)
to the knowledge of such counsel, the Advantage Trust is a duly registered
investment company and its registration with the Securities and Exchange
Commission as an investment company under the 1940 Act is in full force and
effect; and (h) to the best knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is currently pending or threatened as to the Advantage
Trust or any of its properties or assets and the Advantage Trust is not a
party to or subject to the provisions of any order, decree or judgment of
any court or governmental body, which materially and adversely affects its
business or its ability to consummate the transactions contemplated hereby.
Such opinion shall also state that while such counsel have not verified,
and are not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the Proxy
Statement, they generally reviewed and discussed certain of such statements
with certain officers of the Advantage Trust and that in the course of such
review and discussion no facts came to the attention of such counsel which
led them to believe that, on the effective date of the Registration
Statement or on the date of the Advantage Fund shareholders' meeting and
only insofar as such statements relate to the Advantage Trust or the
Advantage Fund, the Proxy Statement contained any statement which, in the
light of the circumstances under which it was made, was false or misleading
with respect to any material fact or which omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not false or misleading. Such opinion may state that such counsel
does not express any opinion or belief as to the financial statements or
other financial or statistical data, or as to the information relating to
the MFS Trust and the MFS Fund, contained in the Proxy Statement or
Registration Statement. Such opinion may also state that such opinion is
solely for the benefit of the MFS Trust, its Board of Trustees and its
officers and of the MFS Fund. Such opinion shall also include such other
matters incident to the transaction contemplated hereby as the MFS Trust
may reasonably request; and
7.5 Any shares of the Advantage Fund issued in order to provide the initial
capital of the Advantage Trust as required by Section 14(a) of the 1940 Act and
outstanding as of the date of this Agreement shall have been redeemed and the
proceeds of such redemption reduced by the amount of any unamortized
organizational expenses allocated to the Advantage Fund prior to the Valuation
Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE MFS TRUST AND ADVANTAGE
TRUST
The obligations of the Advantage Trust hereunder are, at the option of the MFS
Trust, and the obligations of the MFS Trust hereunder are, at the option of the
Advantage Trust, each subject to the further conditions that on or before the
Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest of the Advantage Fund in accordance with the provisions of
the Advantage Trust's Declaration of Trust and By-Laws, and certified copies of
the resolutions evidencing such approval shall have been delivered to the MFS
Trust;
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and permits of
federal, state and local regulatory authorities (including those of the
Commission and of state Blue Sky and securities authorities, including "no-
action" positions of such federal or state authorities) deemed necessary by the
MFS Trust or the Advantage Trust to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
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<PAGE> 45
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
MFS Fund or the Advantage Fund, provided that either the MFS Trust or the
Advantage Trust may waive any such conditions for itself or for the MFS Fund or
the Advantage Fund, respectively;
8.4 The Registration Statement shall have become effective under the 1933 Act
and no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act;
8.5 The Advantage Fund shall have distributed to its shareholders all of the
excess of (i) its investment income excludable from gross income under Section
103(a) of the Code over (ii) its deductions disallowed under Sections 265 and
171(a)(2) of the Code, for its taxable year ending on the Closing Date and all
of its net capital gain as such term is used in Section 852(b)(3)(C) of the
Code, after reduction by any capital loss carryforward, for its taxable year
ending on the Closing Date;
8.6 The parties shall have received an opinion of Ropes & Gray, satisfactory to
the Advantage Trust and the MFS Trust, substantially to the effect that for
federal income tax purposes:
(a) The acquisition by the MFS Fund of all of the assets of the
Advantage Fund, solely in exchange for MFS Fund Shares and the assumption
by the MFS Fund, of the stated liabilities of the Advantage Fund as set
forth in the Statement of Assets and Liabilities followed by the
distribution by the Advantage Fund of the MFS Fund Shares in complete
liquidation to the shareholders of the Advantage Fund in exchange for their
Advantage Fund shares of beneficial interest and the termination of the
Advantage Trust pursuant to this Agreement, will constitute a
reorganization within the meaning of Section 368(a) of the Code, and the
Advantage Fund and the MFS Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Advantage Fund upon the
transfer of all of its assets to the MFS Fund solely in exchange for MFS
Fund Shares and the assumption by the MFS Fund of the stated liabilities of
the Advantage Fund as set forth in the Statement of Assets and Liabilities
or upon the distribution to the Advantage Fund shareholders of such MFS
Fund Shares pursuant to the Agreement;
(c) No gain or loss will be recognized by the MFS Fund upon the
receipt of the assets of the Advantage Fund solely in exchange for MFS Fund
Shares and the assumption by the MFS Fund of the stated liabilities of the
Advantage Fund as set forth in the Statement of Assets and Liabilities;
(d) The basis of the assets of the Advantage Fund acquired by the MFS
Fund will be, in each instance, the same as the basis of those assets in
the hands of the Advantage Fund immediately prior to the transfer;
(e) The holding period of the assets of the Advantage Fund in the
hands of the MFS Fund will include, in each instance, the holding period of
such assets in the hands of the Advantage Fund;
(f) The shareholders of the Advantage Fund will not recognize gain or
loss upon the exchange of all of their Advantage Fund shares of beneficial
interest solely for MFS Fund Shares as part of the transaction;
(g) The basis of the MFS Fund Shares to be received by each Advantage
Fund shareholder will be, in the aggregate, the same as the basis, in the
aggregate, of the Advantage Fund shares of beneficial interest surrendered
by such shareholder in exchange therefor; and
(h) The holding period of the MFS Fund Shares to be received by each
Advantage Fund shareholder will include the holding period of the Advantage
Fund shares of beneficial interest surrendered by such shareholder in
exchange therefor, provided the Advantage Fund shares were held by such
shareholder as capital assets on the date of the exchange.
The MFS Trust and the Advantage Trust each agree to make and provide
representations with respect to the MFS Fund and the Advantage Fund,
respectively, which are reasonably necessary to enable legal counsel to deliver
an opinion substantially as set forth in this paragraph 8.6. Notwithstanding
anything herein to the contrary, the MFS Trust and the Advantage Trust may not
waive in any material respect the conditions set forth in this paragraph 8.6;
and
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<PAGE> 46
8.7 Separate agreements and plans of reorganization shall be approved by the
vote of not less than a majority of the outstanding shares of The New York
Portfolio and The Pennsylvania Portfolio (each of which is a separate series of
the Advantage Trust), respectively, which, subject to such approvals and the
satisfaction of certain other conditions, will transfer all of their respective
assets to the MFS New York Municipal Bond Fund and the MFS Pennsylvania
Municipal Bond Fund (each of which is a separate series of the MFS Trust),
respectively, in separate transactions, which are substantially similar to the
Reorganization, scheduled to occur contemporaneously with the Reorganization
(the "Related Reorganizations").
9. BROKERAGE FEES AND EXPENSES; CONTINGENT DEFERRED SALES CHARGES; CERTAIN TAX
MATTERS; CERTAIN RECORDS
9.1 The MFS Trust and the Advantage Trust each represents and warrants to the
other that there are no brokers or finders entitled to receive any payments from
either party to this Agreement in connection with the transactions provided for
herein.
9.2 Except to the extent that, pursuant to an agreement dated February 7, 1995,
(i) The Advest Group, Inc. has agreed to pay all of the following expenses
associated with the Reorganization: (a) typesetting the Registration Statement;
(b) printing the Proxy Statement and the Advantage Fund Prospectus; (c) mailing
the Proxy Statement, the MFS Fund Prospectus, other than the MFS Fund Statement
of Additional Information (the "MFS Fund SAI"), and, if requested, the MFS Fund
SAI and the Advantage Fund Prospectus to shareholders of the Advantage Fund in
connection with the Meeting; and (d) any solicitation and Meeting expenses
associated with the Meeting; and (ii) The Advest Group, Inc. and Massachusetts
Financial Services Company ("MFS") have each agreed to pay 50% of the reasonable
legal expenses of the MFS Fund and the Advantage Fund incurred in connection
with the Reorganization, provided that MFS' maximum obligation in relation to
the Reorganization and the Related Reorganizations is limited to $25,000 in the
aggregate; the MFS Fund and the Advantage Fund will each be liable for its own
expenses incurred in connection with entering into and carrying out the
provisions of this Agreement whether or not the Reorganization is consummated.
9.3 MFS Fund Shares issued in connection with the transactions contemplated
herein will not be subject to any initial sales charge; however, if any
Advantage Fund shares are at the Closing Date subject to a contingent deferred
sales charge ("CDSC"), the MFS Fund CDSC schedule for shares purchased on or
after September 1, 1993 and the methodology of aging such shares as set forth in
the MFS Fund Prospectus will apply to the MFS Fund Shares issued in respect of
such Advantage Fund shares and the MFS Fund Shares received by Advantage Fund
shareholders pursuant to paragraph 1.4 hereof will, for purposes of calculating
the CDSC, if applicable, and determining when the MFS Fund Shares will convert
to Class A shares of the MFS Fund, be treated as if purchased by the Advantage
Fund shareholders forty-two months prior to the Closing Date.
9.4 The Advantage Trust agrees that it or its designee shall, on behalf of the
Advantage Fund, file or furnish all federal, state and other tax returns, forms
and reports, including information returns and payee statements, if applicable,
of the Advantage Fund required by law to be filed or furnished by such dates as
required by law to be filed or furnished, and shall provide such other federal
and state tax information to shareholders of the Advantage Fund as has been
customarily provided by the Advantage Fund, all with respect to the fiscal
period commencing January 1, 1995 and ending on the Closing Date.
9.5 The Advantage Trust agrees that it or its designee shall, on behalf of the
Advantage Fund, deliver to MFS on the Closing Date or as soon thereafter as
possible: (i) Advantage Fund shareholder statements and tax forms (i.e. Forms
1099) for the year ended December 31, 1993, the year ended December 31, 1994 and
the period commencing January 1, 1995 through the Closing Date (all on microfilm
or microfiche, if available); (ii) detailed records indicating the status of all
certificates representing ownership of Advantage Fund shares issued since
inception of the Advantage Fund (e.g., indicating whether the certificates are
outstanding or cancelled); and (iii) for each Advantage Fund shareholder as of
the Valuation Date, a record indicating the dollar amount of such shareholder's
Advantage Fund share holdings as of such Date representing that portion of such
holdings subject to a CDSC as of such Date and that portion of such holdings not
subject to a CDSC as of such Date, together with such other information with
respect thereto as MFS may reasonably request.
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10. ENTIRE AGREEMENT
The MFS Trust and the Advantage Trust agree that neither party has made any
representation, warranty or covenant not set forth herein or referred to in
paragraph 4 hereof or required in connection with paragraph 8.6 hereof and that
this Agreement constitutes the entire agreement between the parties.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the MFS Trust
and the Advantage Trust. In addition, either party may at its option terminate
this Agreement at or prior to the Closing Date because of:
(a) a material breach by the other of any representation, warranty or
agreement contained herein to be performed at or prior to the Closing Date;
or
(b) a condition herein expressed to be precedent to the obligations of
the terminating party which has not been met and which reasonably appears
will not or cannot be met.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of either the MFS Trust or the Advantage Trust, or their
respective trustees or officers, to the other party or its trustees or officers,
but each shall bear the expenses incurred by it incidental to the preparation
and carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon in writing by the authorized officers of the Advantage
Trust and the MFS Trust; provided, however, that following the meeting of
shareholders called by the Advantage Trust pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of MFS Fund Shares to be issued to the Advantage Fund
shareholders under this Agreement to the detriment of such shareholders without
their further approval; and provided further that nothing contained in this
Article 12 shall be construed to prohibit the parties from amending this
Agreement to change the Closing Date or the Valuation Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any provisions
of this Agreement shall be in writing and shall be given by prepaid telegraph,
telecopy or certified mail addressed to the MFS Trust, 500 Boylston Street,
Boston, Massachusetts 02116, Attention: President, or to the Advantage Trust,
100 Federal Street, Boston, Massachusetts 02110, Attention: President, in either
case with a copy to Stephen E. Cavan, General Counsel, MFS, 500 Boylston Street,
Boston, Massachusetts 02116, and to Ropes & Gray, One International Place,
Boston, Massachusetts 02110, Attention: John M. Loder, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by any party
without the written consent of the other party. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
14.5 A copy of the MFS Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Advantage Trust
acknowledges that the obligations of or arising out of this instrument are not
binding upon any of the MFS Trust's trustees, officers, employees, agents or
shareholders individually, but are binding solely upon the assets and property
of the MFS Trust in accordance with its proportionate interest
A-13
<PAGE> 48
hereunder. The Advantage Trust further acknowledges that the assets and
liabilities of each series of the MFS Trust are separate and distinct and that
the obligations of or arising out of this instrument are binding solely upon the
assets or property of the series on whose behalf the MFS Trust has executed this
instrument.
14.6 A copy of the Advantage Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The MFS Trust
acknowledges that the obligations of or arising out of this instrument are not
binding upon any of the Advantage Trust's trustees, officers, employees, agents
or shareholders individually, but are binding solely upon the assets and
property of the Advantage Trust in accordance with its proportionate interest
hereunder. The MFS Trust further acknowledges that the assets and liabilities of
each series of the Advantage Trust are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon the
assets or property of the series on whose behalf the Advantage Trust has
executed this instrument.
14.7 Notwithstanding Article 12 of the Agreement, but subject to the first
proviso contained therein, either party to this Agreement, with the consent of
its President, Vice President, Secretary or its Assistant Secretary, may waive
any condition or covenant to which the other party is subject or may modify such
condition or covenant in a manner deemed appropriate by any such officer.
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<PAGE> 49
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed by its Chairman or President and its seal to be affixed thereto and
attested by its Secretary or Assistant Secretary.
<TABLE>
<S> <C>
Attest: THE ADVANTAGE MUNICIPAL BOND FUND, on its
behalf and on behalf of THE NATIONAL PORTFOLIO,
DAVID A. HOROWITZ one of its series
- ---------------------------------------------
DAVID A. HOROWITZ, SECRETARY
AND NOT INDIVIDUALLY BY: ROBERT L. THOMAS
-------------------------------------------
ROBERT L. THOMAS, PRESIDENT AND
NOT INDIVIDUALLY
Attest:
MFS MUNICIPAL SERIES TRUST, on its behalf and
STEPHEN E. CAVAN on behalf of MFS MUNICIPAL INCOME FUND, one of
- --------------------------------------------- its series
STEPHEN E. CAVAN, SECRETARY
AND NOT INDIVIDUALLY
BY: A. KEITH BRODKIN
-------------------------------------------
A. KEITH BRODKIN, PRESIDENT
AND NOT INDIVIDUALLY
</TABLE>
A-15
<PAGE> 50
THE NATIONAL PORTFOLIO, A SERIES OF THE ADVANTAGE MUNICIPAL BOND FUND
PROXY BALLOT
PROXY FOR A MEETING OF SHAREHOLDERS, APRIL 27, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE FUND.
The undersigned hereby appoints Robert Thomas, David A. Horowitz and John M.
Loder, and each of them separately, proxies, with power of substitution, and
hereby authorizes them to represent and to vote, as designated below, at the
Meeting of Shareholders of The National Portfolio, a Series of the Advantage
Municipal Bond Fund on April 27, 1995 at 11:30 a.m., Boston time, and at any
adjournments thereof, all of the shares of the Fund which the undersigned would
be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES
RECOMMEND A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE.
NOTE: Please sign exactly as name appears on this card. All joint owners
should sign. When signing as executor, administrator, attorney, trustee or
guardian or as custodian for a minor, please give full title as such. If a
corporation, please sign in full corporate name and indicate the signer's
office. If a partner, sign in the partnership name.
PLEASE FOLD AT PERFORATION BEFORE DETACHING
THE ADVANTAGE MUNICIPAL BOND FUND
CHANGE OF ADDRESS NOTIFICATION. Please use this form to inform us of any
change in address or telephone number or to provide us with your comments.
Detach this form from the Proxy Ballot and return it with your executed Proxy
in the enclosed envelope.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
Telephone
<PAGE> 51
Please mark your choice [x] in blue or black ink.
<TABLE>
THE TRUSTEES RECOMMEND A VOTE FOR THE PROPOSAL LISTED BELOW.
<S> <C>
PROPOSAL: For Against Abstain
1. Approval of the Agreement [ ] [ ] [ ]
Dear Shareholder: and Plan of Reorganization providing for the transfer of all of the assets
of The National Portfolio, a Series of the Advantage Municipal Bond Fund
YOUR VOTE IS IMPORTANT. Please (the "Advantage Fund") to MFS Municipal Income Fund, a Series of the MFS
help us to eliminate the expense Municipal Series Trust (the "MFS Fund") in exchange for shares of beneficial
of follow-up mailings by executing interest designated as Class B shares of the MFS Fund and the assumption by
and returning this Proxy as soon the MFS Fund of the stated liabilities of the Advantage Fund, and the
as possible. A postage-paid distribution of such Class B shares to the shareholders of the Advantage
business reply envelope is Fund in liquidation of the Advantage Fund and the termination of the
enclosed for your convenience. Advantage Trust.
Thank you!
Please be sure to sign and date this Proxy. Date ___________________
_____________________ _______________________
Shareholder sign here Co-owner sign here
Please fold at perforation before
detaching
</TABLE>
-2-
<PAGE> 52
<PAGE>
<TABLE>
Portfolio of Investments - March 31, 1994
Municipal Bonds - 98.9%
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Student Loan Revenue - 1.2%
AAA Pennsylvania Higher Education Assistance Agency,
10.758s, 2026 $ 5,500 $ 5,816,250
General Obligations - 11.7%
NR Arlington, TX, Independent School Refunding Rev.,
0s, 2007<F1> $ 3,070 $ 1,404,525
A+ Commonwealth of Massachusetts, 7s, 2007 2,590 2,800,438
AAA Commonwealth of Pennsylvania, 0s, 2007<F1> 4,520 2,034,000
AA- Commonwealth of Pennsylvania, 6.375s 2011 1,250 1,264,062
AA+ Harris County, TX, Certificates of Obligation (Astrodome
Improvements Project), 8.1s, 2008 1,385 1,542,543
AAA Lowell, Ml, Area School District, FGIC, 0s, 2020<F1> 5,000 925,000
AAA Maricopa County, AZ, School District Number 11
Peoria, 0s, 2004<F1> 5,245 2,884,750
A- New York, NY, 8.2s 2003 5,000 5,668,750
A- New York, NY, 7.5s, 2008 1,350 1,471,500
A- New York, NY, 8.25s, 2010 4,500 5,180,625
A- New York, NY, 8s, 2018 3,000 3,401,250
AAA Northwest Texas, Independent School District, AMBAC,
0s, 2011<F1> 3,000 1,027,500
AA State of Texas, 7.625s, 2018 14,405 15,731,463
AA State of Wisconsin, 8.1s, 2018 7,115 7,835,394
AA State of Wisconsin, 7.6s, 2020 2,865 2,958,113
AAA Westmoreland County, PA, 0s, 2009<F1> 3,120 1,224,600
------------
$ 57,360,513
- -------------------------------------------------------------------------------------------------------------------
State and Local Appropriations -5.8%
AAA Houston, TX, water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2014 $ 1,100 $ 1,093,125
AAA Houston, TX, Water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2015 2,300 2,285,625
A+ Indianapolis, IN, Local Public Improvement Bond Bank,
6.75s, 2020 1,000 1,008,750
A+ Massachusetts Bay Transportation Authority, 5.5s, 2012 4,500 4,111,875
BBB New York Dormitory Authority Rev. (City University),
7.5s, 2010 2,500 2,753,125
A New York Local Government Assistance Corp.,
5.5s, 2017 3,400 3,051,500
BB+ New York State, Medical Care Facility, 7.55s, 2021 540 589,950
BB+ New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 2007 770 862,400
BB+ New York State, Medical Care Facility, Financial Agency
Rev., 7.875s, 2008 800 901,000
BB+ New York State, Medical Care Facility, Financial Agency
Rev., 7.875s, 2020 2,735 3,039,269
BBB New York Urban Development Corp. (State Facilities),
7.5s, 2011 2,500 2,712,500
AAA Philadelphia, PA, Regional Port Authority Lease Rev.,
9.545s, 2020 2,500 2,559,375
AAA Sand Bernardino, CA, Short Rites, 8.55s, 2016<F2> 3,500 3,438,750
------------
$ 28,407,244
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Refunded and Special Obligations - 13.1%
AAA Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,203,388
AAA Commonwealth of Massachusetts, 7.5s, 2000 1,990 2,290,988
A+ Commonwealth of Massachusetts, 7.5s, 2000 2,010 2,314,013
NR Dayton, OH, Special Facilities Rev. (Emery Air Freight),
"A", 12.5s, 2009 1,000 1,168,750
AA Intermountain Power Agency, Utah Power Supply Rev.,
7s, 1999 5,000 5,531,250
NR Los Angeles, CA, Convention & Exhibition Center
Authority, Certificates of Participation, 7.375s, 1999 2,000 2,247,500
NR Massachusetts Health & Education Facilities Authority
(Suffolk University), 8s, 2000 1,000 1,163,750
AAA Massachusetts Water Resources Authority, 7.625s, 2000 3,200 3,668,000
A New York Local Government Assistance Corp.,
7.25s, 2001 2,750 3,124,687
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 680 784,550
BB + New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 1,030 1,181,925
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 670 781,387
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 3,565 4,157,681
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 1,460 1,677,175
BBB New York Urban Development Corp. (Correctional
Facilities), 7.75s, 2000 5,000 5,737,500
BBB New York Urban Development Corp. Rev., 7.3s, 2002 2,340 2,673,450
AAA Philadelphia, PA, Municipal Authority Rev., 7s, 2001 2,000 2,250,000
AAA Washington County, PA, Authority Lease Rev.,
7.45s, 2000 1,200 1,374,000
AA Washington Public Power Supply System Rev., Nuclear
Proj. #1, 7.25s, 2000 3,350 3,743,625
AAA Washington Public Power Supply System Rev., Project
#1, 14.375s, 2001 1,000 1,390,000
AAA Washington Public Power Supply System Rev., Nuclear
Project #2, 7.375s, 2000 5,355 6,057,844
AA Washington Public Power Supply System Rev., Nuclear
Project #3, 7.25s, 2000 5,000 5,587,500
BB+ West Virginia Water Development Authority,
8.125s, 1998 1,000 1,148,750
BB+ West Virginia Water Development Authority,
8.625s, 1998 1,000 1,168,750
-----------
$64,426,463
- -------------------------------------------------------------------------------------------------------------------
Single-Family Housing Revenue - 10.2%
AAA Berkeley, Brookes, & Fayette Counties, WV, MBIA,
0s, 2016<F1> $14,000 $ 1,540,000
AAA Chicago, IL, Residential Mortgage Refunding Rev.,
0s, 2009<F1> 7,000 2,450,000
BB Cook County, IL, 0s, 2015+ 23,280 2,357,100
NR De Kalb, IL, Single Family Mortgage Rev., 7.45s, 2009 350 368,375
NR Delaware Housing Authority Rev., 9.125s, 2018 915 934,444
NR El Paso, TX, Housing Finance Corp., 8.75s, 2011 2,040 2,208,300
-----------
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Single-Family Housing Revenue - continued
BB+ Harris County, TX, Housing Finance Corp.,
9.625s, 2003 $ 390 $ 383,663
BB+ Harris County, TX, Housing Finance Corp.,
9.875s, 2014 615 599,625
A+ Illinois Housing Development Agency, 0s, 2016<F1> 8,785 911,444
AAA Jefferson County, CO, 8.875s, 2013 1,055 1,110,387
AAA Kentucky Housing Corp., Housing Rev., 7.45s, 2023 6,750 6,825,937
AAA Louisiana Housing Finance Agency, Single Family
Mortgage Rev., FGIC, 9.375s, 2015 380 395,675
AA+ Minnesota Housing Finance Agency, 9s, 2018 4,655 4,823,743
NR Mississippi Home Corp., Single Family Rev., 7.1s, 2023 945 983,981
A+ New Hampshire Housing Finance Authority, 7.2s, 2010 7,000 7,297,500
A+ New Hampshire Housing Finance Authority,
8.625s, 2013 805 841,225
A+ Tennessee Housing Development Agency, 8.25s, 2020 1,985 2,089,213
A+ Tennessee Housing Development Agency, 8.125s, 2021 2,145 2,246,888
AA Utah Housing Finance Agency, 8.625s, 2019 3,120 3,225,300
AA Utah Housing Finance Agency, 9.125s, 2019 480 519,600
AA Utah Housing Finance Agency, 9.25s, 2019 345 394,594
A+ Virginia Housing Development Authority, 7.1s, 2022 1,000 1,017,500
A+ West Virginia Housing Development Fund, 7.85s, 2014 6,150 6,380,625
------------
$ 49,905,119
- -------------------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.9%
NR Baytown, TX, Property Management & Development
Corp. (Baytown Terrace Project), 6.1s, 2021 $ 1,000 $ 965,000
AA Colorado Housing Finance Authority, 8.3s, 2023 2,750 2,894,375
NR Maryland Community Development Administration,
8.5s, 2028 3,000 3,138,750
A New Jersey Housing & Mortgage Finance Agency Rev.,
6.6s, 2014 3,000 3,060,000
A+ Pennsylvania Housing Finance Agency, 7.6s, 2013 2,000 2,147,500
AA- Vermont Housing Finance Agency, 8.375s, 2020 2,795 2,934,750
A Wisconsin Housing & Economic Development Authority
Housing, 7.2s, 2013 4,000 4,150,000
------------
$ 19,290,375
- -------------------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 3.4%
AAA California Statewide Community Development Authority
Rev., 0s, 2005<F1> $ 3,000 $ 1,522,500
AAA Claremont County, OH, Hospital Facilities Rev. (Mercy
Health System), AMBAC, MVR, 10.691s, 2021 1,500 1,696,875
AAA Colorado Health Facilities Authority Rev. (PSL Health
Systems), FSA, 7.25s, 2016 2,000 2,177,500
AAA Fredericksburg, VA, Industrial Development Authority
Hospital, 10.127s, 2023 1,500 1,593,750
AAA Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, 10.14s, 2014 1,500 1,595,625
A Massachusetts Health & Education Facilities Authority
(Youville Hospital), 9.1s, 2015 915 987,056
AAA Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Foundation), 6.7s, 2018 1,000 1,022,500
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - continued
AAA Rio Grande Valley, TX, Health Facilities Development
Corp., 9.46s, 2015<F2> $ 2,800 $ 2,943,500
AAA Tulsa, OK, industrial Authority Hospital Rev.,
0s, 2006<F3> 6,430 2,965,838
------------
$ 16,505,144
- -------------------------------------------------------------------------------------------------------------------
Health Care Revenue - 4.1%
BB- Bell County, TX, Health Facilities Authority (Kings
Daughters Hospital), 9.25s, 2008 $ 1,785 $ 2,008,125
NR Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 10.5s, 2018 2,000 1,840,000
BBB Colorado Health Facilities Authority Rev. (Rocky
Mountain Adventist), 6.625s, 2013 1,000 963,750
NR Fulton County, GA, Residential Care Facilities, Elderly
Authority Rev. (Lenbrook Square Foundation), 9.75s, 2017 485 501,369
NR Gadsden County, FL, industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,990 2,069,600
NR Louisiana Public Facilities Authority (Southwest Medical
Center), 11s 2006<F1> 1,735 1,197,276
A Massachusetts Health & Educational Facilities Rev.,
6.875s, 2022 5,000 5,062,500
NR Philadelphia, PA, industrial Development Authority,
10.25s, 2018 1,500 1,567,500
NR Philadelphia, PA, industrial Development Authority,
10.25s, 2018 2,000 2,052,500
A-- St. Tammany Parish, LA, Hospital Service District
#1, Hospital Rev., 6.5s, 2017 1,140 1,083,000
A Torrance, CA, Hospital Rev., 6.875s, 2015 1,845 1,911,881
------------
$ 20,257,501
- -------------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 8. 9%
NR Chelan County, WA, Public Utility District #1,
Consolidated Rev., 9.3s, 2062 $ 4,450 $ 5,006,250
AA - Georgia Municipal Electric Authority, 6.375s, 2016 2,000 2,012,500
AA Intermountain Power Agency, Utah Power Supply Rev.,
8.28s, 2021 4,500 3,948,750
AA Los Angeles, CA, Electric Plant Rev., 4.25s, 2014 2,000 1,535,000
NR Midland Michigan Environmental Development
Authority, Pollution Control Rev. (Midland
Cogeneration), 9.5s, 2009 2,000 2,215,000
NR Montana Board of investment Resources Recovery Rev.
(Yellowstone Energy), 7s, 2019 3,000 2,910,000
AA-- Municipal Electric Authority, GA, Special Obligation,
6.5s, 2020 7,350 7,469,438
A-- North Carolina Eastern Municipal Power Agency,
7.25s, 2007 3,250 3,522,187
AAA Sacramento, CA, Metropolitan Utility District, Electric
Rev., 8.7s, 2007<F2> 2,000 1,872,500
AAA Texas Municipal Power Agency Rev., 0s, 2013<F3> 6,000 1,725,000
AA Washington Public Power Supply System Rev., Nuclear
Proj. #1, 0s, 2003<F3> 2,000 1,147,500
AA Washington Public Power Supply System Rev., Nuclear
Proj. #1, 7s, 2011 4,050 4,247,438
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - continued
AA Washington Public Power Supply System Rev., Nuclear
Proj. #3, 0s, 2004<F3> $ 4,885 $ 2,613,475
AA Washington Public Power Supply System Rev., Nuclear
Proj. #3, 0s, 2015<F3> 4,500 1,091,250
AAA Washington Public Power Supply System Rev., Nuclear
Proj. #3, 7.125s, 2016 2,000 2,160,000
------------
$ 43,476,288
- -------------------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.6%
AA+ Gwinnett County, GA, Water and Sewer Rev., 0s, 2009<F3> $ 6,000 $ 2,310,000
AA+ Harris County, TX, Flood Control District, 0s, 2009<F3> 3,205 1,205,881
AA+ Harris County, TX, Flood Control District, 0s, 2009<F3> 5,845 2,199,181
AA+ Harris County, TX, Flood Control District, 0s, 2010<F3> 3,545 1,240,750
A Massachusetts Water Resources Authority, 6.25s, 2010 3,000 2,955,000
A Massachusetts Water Resources Authority, 5.25s, 2015 1,825 1,576,343
A Massachusetts Water Resources Authority, 6.5s, 2019 7,495 7,551,213
AAA Salt Lake County, UT, Water Conservancy District,
0s, 2008<F3> 2,100 847,875
AAA Salt Lake County, UT, Water Conservancy District,
0s, 2009<F3> 3,800 1,425,000
A-- Union County, NJ, Utilities Authority Solid Waste,
7.2s, 2014 1,500 1,520,625
------------
$ 22,83l,868
- -------------------------------------------------------------------------------------------------------------------
Turnpike Revenue - 3.4%
AAA Harris County, TX, Toll Road, Senior Loan, 5s, 2016 $ 2,650 $ 2,219,375
NR Massachusetts industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 2,925 2,983,500
AAA New Hampshire Turnpike, System Rev., 7s, 2015 5,000 4,518,750
A New Jersey Turnpike Authority, Turnpike Rev.,
6.5s, 2016 1,450 1,497,125
NR San Joaquin Hills, CA, Transportation Corridor,
0s, 2009<F3> 6,750 1,864,687
NR San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005<F3> 1,800 729,000
NR Texas Turnpike Authority (Houston Ship Channel
Bridge), 0s to 1/01/96 (12.625s thereafter), 2020<F3> 3,000 3,063,750
------------
$ 16,876,187
- -------------------------------------------------------------------------------------------------------------------
Airport and Port Revenue -12.8%
AAA Chicago, IL, O'Hare international Airport, Special
Facilities Rev. (United Airlines), 8.75s, 2012 $ 2,000 $ 2,052,500
BB Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 2,055 2,198,850
BB Chicago, IL, O'Hare international Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,740 7,498,250
NR Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 5,300 5,518,625
AAA Connecticut Airport Rev., FGIC, 7.65s, 2012 1,000 1,125,000
BB Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp., 7.625s, 2021 4,500 4,573,125
BBB Denver, CO, Apartment Revenue, 6.75s, 2013 2,535 2,420,925
BBB Denver, CO, City & County Airport Rev., 8.875s, 2012 6,000 6,712,500
BBB Denver, CO, City & County Airport Rev., 7.75s, 2013 1,500 1,590,000
BBB Denver, CO, City & County Airport Rev., 8.75s, 2023 4,750 5,278,437
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Airport and Port Revenue - continued
AAA Hawaii Airports Systems Rev., 5.75s 2008 $ 2,300 $ 2,208,000
AAA Hawaii Airports Systems Rev., Second Series, FGIC,
7.5s, 2020 5,350 5,831,500
BB Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 4,000 4,030,000
AAA Metropolitan Washington District of Columbia Airports
Authority, 7.25s, 2010 4,000 4,320,000
NR St. Augustine, FL, Airport Authority, Airport Rev.
(Grumman Repair Facility), 11s, 2004 500 550,000
BB+ Tulsa, OK, Municipal Airport Trust Rev., 7.6s, 2030 3,815 3,891,300
A+ Virginia Port Authority, 8.2s, 2008 3,000 3,337,500
------------
$ 63,136,512
- -------------------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
AAA Metropolitan Pier & Exposition Authority, Dedicated
State Tax Rev., 0s, 2018 $ 6,400 $ 1,320,000
- -------------------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 5. 7%
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.875s, 2017 $ 8,890 $ 10,134,600
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.25s, 2018 1,000 1,127,500
A-- Burke County, GA, Pollution Control Rev. (Georgia
Power Co./Vogtle Project), 9.375s, 2017 2,650 3,017,687
A Charleston County, SC, Resource Recovery Rev. (Foster
Wheeler), 9.25s, 2010 3,200 3,612,000
AA-- Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s, 2020 2,000 2,237,500
A-- Erie County, PA (International Paper), 7.875s, 2016 1,200 1,320,000
NR Illinois Development Finance Authority, Economic
Development Rev. (America Tire), 10.5s, 2007 750 637,500
A-- Matagorda County, TX, Pollution Control Rev. (Central
Power & Light), 7.875s, 2016 1,500 1,612,500
BB-- Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 1,000 992,500
NR San Joaquin Hills, CA, Transportation Corridor,
0s, 2004<F3> 3,000 1,320,000
BBB West Side Calhoun County, TX, Navigation District,
8.2s, 2021 2,000 2,205,000
------------
$ 28,216,787
- -------------------------------------------------------------------------------------------------------------------
Universities - 0.6%
NR Illinois Educational Facilities Authority Rev.,
8.75s, 2015 $ 1,500 $ 1,599,375
AAA University of lllinois, University Rev., 0s, 2009<F3> 2,915 1,129,562
------------
$ 2,728,937
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Miscellaneous Revenue - 8.5%
NR Atlanta, GA, Downtown Development Authority,
11.5s, 2015<F1><F5> $ 1,055 $ 422,064
NR Bristol, CT, Resource Recovery Facilities, 6.5s, 2014<F4> 8,000 7,620,000
NR Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.125s, 2013 980 1,041,250
NR Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.25s, 2023 1,000 1,063,750
NR Crystal City, TX, Lease Obligations, 10.5s, 2008<F1> 1,251 1,189,173
BB- Greater Detroit, Ml, Resource Recovery Authority,
9.25s, 2008 2,130 2,279,100
A Hillsborough County, FL, Capital improvement Rev.,
6.75s, 2022 2,810 2,890,788
NR Martha's Vineyard, MA, Land Bank, 8.125s, 2011 2,000 2,025,000
NR Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 1,000 1,035,000
BB+ New York State Medical Care Facility, 7.75s, 2020 1,055 1,116,981
A- Pennsylvania industrial Development Authority Rev.,
7s, 2011 7,000 7,288,750
NR Retema, TX, Special Facilities Rev. (Retema Park
Racetrack Project), 8.75s, 2018 4,000 3,700,000
AAA San Mateo County, CA, Joint Powers Financing
Authority, 6s, 2019 4,675 4,552,281
A State of Pennsylvania Finance Authority Rev., 6.6s, 2009 3,305 3,276,081
AAA Tulsa, OK, Public Facilities Authority, AMBAC,
5.55s, 2005 2,175 2,107,031
------------
$ 41,607,249
- -------------------------------------------------------------------------------------------------------------------
Special Assessment District - 0.7%
NR Northeast Maryland, Waste Disposal Authority
(Montgomery County Resource Recovery), 6.3s, 2016 $ 3,750 $ 3,562,500
- -------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $466,731,454) $485,724,937
- -------------------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.2%
- -------------------------------------------------------------------------------------------------------------------
Parish of East Baton Rouge, LA, Pollution Control Rev., due 11/01/19 $ 300 $ 300,000
Peninsula Ports Authority, VA (Shell Oil Co.), due 12/01/05 100 100,000
Unita County, WY, Pollution Control Rev., due 8/15/20 700 700,000
- -------------------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,100,000
- -------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $467,831,454) $486,824,937
Other Assets, Less Liabilities - 0.9% 4,641,184
- -------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $491,466,121
- -------------------------------------------------------------------------------------------------------------------
<FN>
<F1>Security valued by or at the direction of the Trustees.
<F2>Indexed security (see Note 7).
<F3>Non-income producing security in default.
<F4>When-issued security. At March 31, 1994, the Fund had sufficient cash and/or
securities at least equal to the value of the when-issued security.
<F5>Non-income producing.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Statement of Assets and Liabilities
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
March 31 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $467,831,454) $486,824,937
Cash 1,039,653
Receivable for investments sold 7,491,454
Receivable for daily variation margin on open futures contracts 17,188
Receivable for Fund shares sold 4,277,514
Interest receivable 9,345,063
Other assets 19,426
------------
Total assets $509,015,235
------------
Liabilities:
Distributions payable $ 896,518
Payable for investments purchased 6,906,186
Payable for when-issued investments purchased 8,000,000
Payable for Fund shares reacquired 1,535,503
Payable to affiliates
Management fee 30,288
Shareholder servicing agent fee 2,964
Distribution fee 13,425
Accrued expenses and other liabilities 164,230
------------
Total liabilities $ 17,549,114
------------
Net assets $491,466,121
------------
Net assets consist of:
Paid-in capital $475,041,627
Unrealized appreciation on investments 19,145,046
Accumulated distributions in excess of net realized gain on investments (1,230,985)
Accumulated distributions in excess of net investment income (1,489,567)
------------
Total $491,466,121
------------
Shares of beneficial interest outstanding 57,408,348
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $5,594,908 / 653,752 shares of beneficial interest outstanding) $8.56
-----
Offering price per share (100/5.25) $8.99
-----
Class B shares:
Net asset value offering price and redemption price per share
(net assets of $479,478,472 / 56,008,099 shares of beneficial interest outstanding) $8.56
-----
Class C shares:
Net asset value offering price and redemption price per share
(net assets of $6,392,741/746,497 shares of beneficial interest outstanding) $8.56
-----
On sales of $ 100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
Financial Statements - continued
Statement of Operations
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Four Months Ended Year Ended
March 31, 1994 November 30, 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income
Interest income $ 11,966,182 $35,097,495
------------ -----------
Expenses --
Management fee $ 1,301,038 $ 3,751,548
Trustees' compensation 10,848 33,617
Shareholder servicing agent fee (Class A) 687 65
Shareholder servicing agent fee (Class B) 384,766 1,041,705
Shareholder servicing agent fee (Class C) 1,212
Distribution and service fee (Class B) 1,759,118 4,985,509
Distribution and service fee (Class C) 7,981
Custodian fee 61,028 174,090
Printing 60,049 54,007
Auditing fees 38,916 54,047
Legal fees 20,328 48,565
Postage 14,939 47,497
Miscellaneous 170,158 337,597
------------ -----------
Total expenses $ 3,831,068 $l0,528,247
------------ -----------
Net investment income $ 8,135,114 $24,569,248
------------ -----------
Realized and Unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ (1,579,438) $ 3,158,715
Futures contracts - (983,969)
------------ -----------
Net realized gain (loss) on investments $ (1,579,438) $ 2,174,746
------------ -----------
Change in unrealized appreciation (depreciation) --
Investments $(21,911,339) $20,124,474
Futures contracts 151,563 (272,031)
------------ -----------
Net unrealized gain (loss) on investments $(21,759,776) $19,852,443
------------ -----------
Net realized and unrealized gain (loss) on investments $(23,339,214) $22,027,189
------------ -----------
Increase (decrease) in net assets from operations $(15,204,100) $46,596,437
------------ -----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
Financlal Statements, - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30,
Four Months Ended --------------------------------
March 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase decrease) in net assets:
From operations --
Net investment income $ 8,135,114 $ 24,569,248 $ 23,383,890
Net realized gain (loss) on investments (1,579,438) 2,174,746 4,966,272
Net unrealized gain (loss) on investments (21,759,776) 19,852,443 7,393,722
------------- ------------ ------------
Increase (decrease) in net assets from operations $ (15,204,100) $ 46,596,437 $ 35,743,884
------------- ------------ ------------
Equalization $ -- $ -- $ 60,720
------------- ------------ ------------
Distributions declared to shareholders --
From net investment income (Class A) $ (24,388) $ (2,142) $ --
From net investment income (Class B) (6,513,043) (25,152,570) (23,444,653)
From net investment income (Class C) (36,953) -- --
In excess of net investment income (Class A) (444) (150) --
In excess of net investment income (Class B) (1,488,102) (1,560,580) --
In excess of net investment income (Class C) (1,021) -- --
From net realized gain on investments (Class A) (332) -- --
From net realized gain on investments (Class B) (319,911) (5,237,004) (1,001,217)
In excess of net realized gain on investments (Class A) (1,280) -- --
In excess of net realized gain on investments (Class B) (1,229,705) -- --
------------- ------------ ------------
Total distributions declared to shareholders $ (9,615,179) $(31,952,446) $(24,445,870)
------------- ------------ ------------
Fund share (principal) transactions --
Net proceeds from sale of shares $ 31,229,236 $118,919,014 $ 86,677,236
Net asset value of shares issued to shareholders in
reinvestment of distributions 5,241,616 18,199,816 13,232,047
Cost of shares reacquired (38,825,729) (83,071,056) (70,403,847)
------------- ------------ ------------
Increase (decrease) in net assets from Fund share
transactions $ (2,354,877) $ 54,047,774 $ 29,505,436
------------- ------------ ------------
Total increase (decrease) in net assets $ (27,174,156) $ 68,691,765 $ 40,864,170
------------- ------------ ------------
Net assets:
At beginning of period 518,640,277 449,948,512 409,084,342
------------- ------------ ------------
At end of period (including undistributed
[distributions in excess of] net investment income of
$(1,489,567), $(1,560,730) and $1,925,820,respectively) $491,466, 121 $518,640,277 $449,948,512
------------- ------------ ------------
See notes to financial statenents
</TABLE>
<PAGE>
<TABLE>
Financial Statements - continued
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Four Months Four Months
Ended Period Ended Ended Year Ended November 30,
March 31, November 30, March 31, -----------------------
1994 1993<F1> 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 8.99 $ 9.15 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------
Income from investment operations<F4>--
Net investment income $ 0.15 $ 0.12 $ 0.14 $ 0.42 $ 0.47
Net realized and unrealized gain (loss)
on investments (0.51) (0.16) (0.51) 0.42 0.26
------ ------ ------ ------ ------
Total from investment operations $(0.36) $(0.04) $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $(0.02) $(0.11) $(0.01) $(0.45) $(0.48)
In excess of net investment income _ -- (0.01) -- (0.03) --
From net realized gains (0.01) -- (0.01) (0.10) --
In excess of net realized gains (0.04) -- (0.04) -- --
From paid-in capital-- -- -- -- -- (0.02)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.07) $(0.12) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.56 $ 8.99 $ 8.56 $ 8.99 $ 8.73
------ ------ ------ ------ ------
Total return<F2> (7.90)%<F3> (1.80)%<F3> (8.97)%<F3> 9.95% 8.82%
Ratios (to average net assets)/Supplemental data:
Expenses 1.07%<F3> 0.76%<F3> 2.24%<F3> 2.11% 2.03%
Net investment income 5.31%<F3> 4.94%<F3> 4.74%<F3> 4.92% 5.50%
Portfolio turnover 9% 30% 9% 30% 52%
Net assets at end of period (000 omitted) $5,595 $461 $479,478 $518,179 $449,949
<FN>
<F1>For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
<F2>Total returns do not include the sales charge. If the sales charge had been
included, the results would have been lower.
<F3>Annualized.
<F4>Per share data for the four months ended March 31, 1994 is based on average
shares outstanding.
See notes to financial statements
</TABLE>
<PAGE>
Financial Statements-continued
Financial Highlights-continued
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, Period Ended
------------------------------------------------------------ March 31,
1991 1990 1989 1988 1987<F1> 1994<F2>
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47 $ 9.07
------ ------ ------ ------ ------ ------
Income from investment operations<F5>--
Net investment income 0.49 $ 0.49 $ 0.51 $ 0.50 0.38 $ 0.09
Net realized and unrealized gain (loss)
on investments 0.25 (0.15) 0.30 0.43 (0.83) (0.59)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45) $(0.50)
------ ------ ------ ------ ------ ------
Less net investment income distributions
declared to shareholders $(0.49) $(0.50) $(0.51) $(0.49) $(0.35) $(0.01)
------ ------ ------ ------ ------ ------
Net asset value-end of period $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.56
------ ------ ------ ------ ------ ------
Total return<F3> 9.21% 4.18% 10.24% 12.53% (5.79)%<F3> (19.42)%<F3>
Ratios (to average net assets)/Supplemental data:
Expenses 2.04% 2.05% 2.07% 2.09% 2.03%<F3> 2.18%
Net investment income 5.82% 5.99% 6.09% 6.38% 6.00%<F3> 4.62%
Portfolio turnover 73% 91% 127% 171% 138% 9%
Net assets at end of period (000 omitted) $409,084 $379,239 $343,887 $244,825 $183,935 $6,393
<FN>
<F1>For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
<F2>For the period from the commencement of offering of Class C shares, January
3, 1994 to March 31, 1994.
<F3>Total returns do not include the sales charge. If the charge had been
included, the results would have been lower.
<F4>Annualized.
<F5>Per share data for the four months ended March 31, 1994 is based on average
shares outstanding.
See notes to financial statements
</TABLE>
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Municipal income Fund (the Fund) is a diversified series of MFS(R) Municipal
Series Trust (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the investment Company Act of 1940, as amended, as
an open-end management investment company. During 1993 the Fund changed its
fiscal year end from November 30 to March 31, and financial statements are thus
being presented for the four-month period ended March 31, 1994. The Fund offers
Class A, Class B and Class C shares.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of fixed income securities and indexes on such securities at a
fixed price on a future date and may enter into options on such futures
contracts. The Fund is required to deposit either in cash or securities an
amount equal to a certain percentage of the contract amount. Subsequent payments
are made or received by the Fund each day, dependent on the daily fluctuations
in the value of the underlying security, and are recorded for financial
statement purposes as unrealized gains or losses by the Fund. The Fund's
investment in financial futures contracts is designed to hedge against
anticipated future changes in interest or securities prices. Should interest or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss.
<PAGE>
Notes to Financial Statements - continued
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At March 31, 1994, the Fund had no securities on loan.
Investment Transactions and Incone - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
Effective December 1, 1992, the Fund adopted Statement of Position (SOP) 93-1,
Financial Accounting and Reporting for High-Yield Debt Securities by investment
Companies, which establishes the use of the effective interest method for
reporting interest income on payment in-kind (PIK) bonds, whereby interest
income on PIK bonds is recorded ratably by the Fund at a constant yield to
maturity. The SOP also provides guidance on accounting for, and reporting of,
costs incurred in support of defaulted debt securities. Capital infusions, which
are generally non-recurring and incurred to protect or enhance the value of
high-yield debt securities are reported as an addition to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization are
considered workout expenses and are reported as realized losses. Ongoing costs
incurred to protect or enhance an investment, or costs incurred to pursue other
claims or legal actions are reported as operating expenses. The adoption of this
SOP had no significant effect on the financial statements of the Fund.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. Distributions paid by the Fund from
net interest received on tax-exempt municipal bonds are not includable by
shareholders as gross income for federal income tax purposes because the Fund
intends to meet certain requirements of the Code applicable to regulated
investment companies which will enable the Fund to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private activity
bonds issued after August 7, 1986 may be considered a tax preference item to
shareholders.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Distributions to shareholders are recorded on the
ex-dividend date.
<PAGE>
Notes to Financial Statements - continued
Effective December 1, 1992, the Fund adopted Statement of Position (SOP) 93-2,
Determination, Disclosure, and Financial Statement Presentation of income,
Capital Gain, and Return of Capital Distributions by investment Companies. The
SOP distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits be reported in the financial statements as a return of capital. The SOP
also requires that differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. The cumulative effect of adopting the SOP decreased undistributed net
investment income and increased paid-in capital and accumulated net realized
gain on investments by $62,989, $62,835 and $154, respectively. This change had
no effect on the net assets or net asset value per share of the Fund.
Equalization- Prior to December 1, 1992, the Fund followed the accounting
practice known as equalization by which a portion of the proceeds from sales and
costs of reacquisitions of Fund shares is allocated to undistributed net
investment income. As a result, undistributed net investment income per share
was unaffected by sales or reacquisitions of Fund shares. Effective December 1,
1992, the Fund discontinued the use of equalization. This change had no effect
on the Fund's net assets, net asset value per share, and distributions.
Discontinuing the use of equalization will result in a simpler and more
meaningful financial statement presentation. The cumulative effect of the change
was to decrease undistributed net investment income and increase paid-in capital
by $1,277,367.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class A and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective sales charges, service fees and
distribution fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on average daily net assets, without distinction
between share class. Dividends are declared separately for each class. No class
has preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses, including distribution
and service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general of five facilities. Prior to
September 1, 1993, Lifetime Advisers, Inc. (LAI), a wholly owned subsidiary of
MFS, was the investment adviser for the Fund. The management fee, computed and
paid monthly at an annual rate of 0.30% of average daily net assets and 6.43% of
investment income, amounted to $1,301,038 for the four months ended March 31,
1994 and $3,751,548 for the year ended November 30, 1993.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are of fixers or directors of LAI, MFS, MFS Financial Services, inc.
(FSI) and MFS Service Center, inc. (MFSC). The Fund has an unfunded defined
benefit plan for all its independent Trustees. Included in Trustees'
compensation is a net periodic pension expense of $2,115 for the four months
ended March 31, 1994 and $6,192 for the year ended November 30, 1993.
<PAGE>
Notes to Flnaneial Statements - continued
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$5,109 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate Distribution Plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% of the Fund's
average daily net assets attributable to Class A shares which are attributable
to that securities dealer, commissions to dealers and payments to FSI
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. Payments will
commence under the distribution plan on the date on which the net assets of the
Fund attributable to Class A shares first equals or exceeds $40 million.
The Class B Distribution Plan provides that the Fund will pay FSI a distribution
fee, equal to 0.75% annually, and a service fee of up to 0.25%, of the Fund's
average daily net assets attributable to Class B shares which FSI will pay to
each securities dealer that enters into a sales agreement with FSI at a rate of
up to 0.25% of the Fund's average daily net assets attributable to Class B
shares. The service fee is intended to be additional consideration for services
rendered by the dealer with respect to Class B shares. Fees incurred under the
distribution plan during the period ended March 31, 1994 and year ended November
30, 1993 were 1.00% of average daily net assets attributable to Class B shares
on an annualized basis and amounted to $1,759,118 and $4,985,509, respectively.
The Class C Distribution Plan provides that the Fund will pay FSI a monthly
distribution fee, equal to 0.75% annually, and a service fee of up to 0.25%, of
the Fund's average daily net assets attributable to Class C shares which FSI
will pay to each securities dealer that enters into a sales agreement with FSI
at a rate of up to 0.25% of the Fund's average daily net assets attributable to
Class C shares. The service fee is intended to be additional consideration for
services rendered by the dealer with respect to Class C shares. Fees incurred
under the distribution plan during the four months ended March 31, 1994 were
1.00% of average daily net assets attributable to Class C shares on an
annualized basis and amounted to $7,981.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the four months ended March 31, 1994 were $0 and $291,492 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$687, $384,766 and $1,212 for Class A, Class B and Class C shares, respectively,
during the four months ended March 31, 1994 and $65 and $1,041,705,
respectively, for Class A and Class B shares for the year ended November 30,
1993. The fee is calculated as a percentage of average daily net assets of each
class of shares at an effective annual rate of up to 0.15%, 0.22% and 0.15%
attributable to Class A, Class B and Class C shares, respectively.
<PAGE>
Notes to Financial Statements - continued
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased options transactions and short-term obligations, aggregated
$47,924,790 and $53,002,471, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 467,831,454
-------------
Gross unrealized appreciation $ 27,891,736
Gross unrealized depreciation (8,898,253)
-------------
Net unrealized appreciation $ 18,993,483
-------------
At March 31, 1994, the Fund, for federal income tax purposes, had a capital loss
carryforward of $1,413,222, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on March 31, 2002.
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
<CAPTION>
Four Months Ended Period Ended
March 31, 1994 November 30, 1993<F1>
-------------------------- --------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 766,727 $ 6,792,015 51,270 $ 466,122
Shares issued to shareholders
in reinvestment of
distributions 1,368 12,126 134 1,211
Shares reacquired (165,634) (1,507,352) (113) (1,021)
-------- ------------ ------ ------------
Net increase 602,461 $ 5,296,789 51,291 $ 466,312
-------- ------------ ------ ------------
Class B Shares
<CAPTION>
Four Months Ended Year Ended Year Ended
March 31, 1994 November 30, 1993 November 30, 1992
-------------------------- -------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,771,398 $ 16,008,151 13,299,141 $118,452,892 10,070,064 $86,677,236
Shares issued to shareholders
in reinvestment of
distributions 581,143 5,207,213 2,056,699 18,198,605 1,542,486 13,232,047
Shares reacquired (3,964,973) (35,578,939) (9,277,213) (83,070,035) (8,203,836) (70,403,847)
---------- ------------ ---------- ------------ ---------- -----------
Net increase (decrease) (1,612,432) $(14,363,575) 6,078,627 $ 53,581,462 3,408,714 $29,505,436
---------- ------------ ---------- ------------ ---------- -----------
Class C Shares
<CAPTION>
Period Ended
March 31, 1994<F2>
--------------------------
Shares Amount
- ------------------------------------------------------------
<S> <C> <C>
Shares sold 940,881 $ 8,429,070
Shares issued to shareholders
in reinvestment of
distributions 2,564 22,277
Shares reacquired (196,948) (1,739,438)
-------- ------------
Net increase 746,497 $ 6,711,909
-------- ------------
<FN>
<F1> Period from September 7, 1993 (commencement of offering of Class A shares)
to November 30, 1993.
<F2> Period from January 3, 1994 (commencement of offering of Class C shares) to
March 31, 1994
</TABLE>
<PAGE>
Notes to Financial Statements - continued
(6) Line of credit
The Fund has entered into an agreement which enables it to participate with
other funds managed by MFS, or an affiliate of MFS, in an unsecured line of
credit with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
four months ended March 31, 1994 and for the year ended November 30, 1993 was
$665 and $10,096, respectively.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities and to assist in managing exposure
to market risks such as interest rates. These financial instruments include
written options and futures contracts. The potential or contractual amounts of
these instruments represent the investment the Fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at March 31, 1994 is
as follows:
Futures Contracts
Unrealized
Expiration Contracts Position Appreciation
- -----------------------------------------------------------------------------
June 1994 100 Treasury Bonds Short $134,375
June 1994 100 Treasury Bonds Short 9,375
June 1994 50 Treasury Bonds Short 7,813
--------
$151,563
--------
At March 31, 1994, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
The Fund also invests in indexed securities whose value may be linked to
interest rates, commodities, indices or other financial indicators. Indexed
securities are fixed-income securities whose proceeds at maturity
(principal-indexed securities) or interest rates (coupon-indexed securities)
rise and fall according to the change in one or more specified underlying
instruments. Indexed securities may be more volatile than the underlying
instrument itself. A summary of indexed securities held at March 31, 1994
follows on the next page.
<PAGE>
Notes to Financial Statements-continued
<TABLE>
Coupon indexed Securities
Unrealized
Principal Appreciation
Description Index (000 omitted) Value (Depreciation)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Hampshire Turnpike
System Rev., 7s, 2015 PSA $5,000 $4,518,750 $(481,250)
Rio Grande Valley, TX,
Health Facilities Development
Corp., 9.46s, 2015 J.J. Kenny 2,800 2,943,500 176,736
Sacramento, CA, Metropolitan
Utility District, Electric Rev.,
8.7s, 2007 PSA 2,000 1,872,500 (127,500)
San Bernardino, CA,
Short Rites, 8.55s, 2016 J.J. Kenny 3,500 3,438,750 (274,213)
---------
$(706,227)
---------
</TABLE>
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Municipal Series Trust and the Shareholders of MFS
Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Income Fund (one of the series
constituting MFS Municipal Series Trust) as of March 31, 1994, the related
statement of operations for the four months ended March 31, 1994 and the year
ended November 30, 1993, the statement of changes in net assets for the four
months ended March 31, 1994 and the years ended November 30, 1993 and 1992, and
the financial highlights for the four months ended March 31, 1994 and each of
the years in the seven-year period ended November 30, 1993. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal Income
Fund at March 31, 1994, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
May 5, 1994
-----------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE> 53
MFS MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
("COMBINED SAI")
MARCH 29, 1995
This Combined SAI is not a prospectus but should be read in conjunction with the
related Proxy Statement and Prospectus (the "Prospectus") dated March 29, 1995
which covers shares of beneficial interest of MFS Municipal Income Fund (the
"MFS Fund"), a series of MFS Municipal Series Trust (the "MFS Trust"), to be
issued in exchange for all of the net assets of The National Portfolio (the
"Advantage Fund"), a series of The Advantage Municipal Bond Fund (the "Advantage
Trust"). Please retain this Combined SAI for further reference.
To obtain additional copies of the Prospectus or Combined SAI, please call
Advest Transfer Services, Inc. at 800-544-9268.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Introduction................................................................... 2
Additional Information About the Advantage Fund................................ 2
Cover Page and Table of Contents.......................................... 2
General Information and History........................................... 2
Investment Objective and Policies......................................... 2
Management of the Advantage Fund.......................................... 2
Investment Advisory and Other Services.................................... 2
Brokerage Allocation and Portfolio Turnover............................... 2
Shares of Beneficial Interest............................................. 2
Redemption and Pricing of Shares.......................................... 2
Tax Status................................................................ 3
Distribution Agreement.................................................... 3
Performance Information................................................... 3
Financial Statements...................................................... 3
Additional Information About the MFS Fund...................................... 3
Cover Page and Table of Contents.......................................... 3
General Information and History........................................... 3
Investment Objective and Policies......................................... 3
Management of the MFS Fund................................................ 3
Principal Holders of Securities........................................... 3
Investment Advisory and Other Services.................................... 3
Brokerage Allocation and Portfolio Turnover............................... 4
Shares of Beneficial Interest............................................. 4
Purchase, Redemption and Pricing of Shares................................ 4
Tax Status................................................................ 4
Distribution Agreement.................................................... 4
Performance Information................................................... 4
Financial Statements...................................................... 4
Exhibits
A -- The MFS Fund SAI, dated March 1, 1995, together with the MFS Fund
Annual Report for the four months ended March 31, 1994 and
Semi-Annual Report for the six months ended September 30, 1994
B -- The Advantage Fund Prospectus dated April 18, 1994
C -- The Advantage Fund SAI dated April 18, 1994, together with the
Advantage Fund Annual Report for the year ended December 31, 1994 and
Annual Report for the year ended December 31, 1993
</TABLE>
<PAGE> 54
INTRODUCTION
This Combined SAI is intended to supplement the information provided in the
Prospectus. The Prospectus has been sent to the shareholders of the Advantage
Fund in connection with the solicitation of proxies by the management of the
Advantage Fund to be voted at the Special Meeting of Shareholders of the
Advantage Fund to be held on April 27, 1995. This Combined SAI includes the
Statement of Additional Information of the MFS Fund dated March 1, 1995 (the
"MFS Fund SAI"), the Annual Report of the MFS Fund for the year ended March 31,
1994 (the "MFS Fund's Annual Report"), the Semi-Annual Report of the MFS Fund
for the six-month period ended September 30, 1994 (the "MFS Fund's Semi-Annual
Report"), the Prospectus of the Advantage Fund dated April 18, 1994, as
supplemented (the "Advantage Fund Prospectus"), the Statement of Additional
Information of the Advantage Fund dated April 18, 1994, as supplemented (the
"Advantage Fund SAI"), the Annual Report of the Advantage Fund for the year
ended December 31, 1994 (the "Advantage Fund's 1994 Annual Report") and the
Annual Report for the Advantage Fund for the year ended December 31, 1993 (the
"Advantage Fund's 1993 Annual Report"). Each of the MFS Fund SAI, together with
the financial statements from the MFS Fund's Annual Report and the MFS Fund's
Semi-Annual Report, the Advantage Fund Prospectus and the Advantage Fund SAI,
together with the financial statements from the Advantage Fund's 1994 Annual
Report and the Advantage Fund's 1993 Annual Report, is included with this
Combined SAI as Exhibits A, B and C, respectively, and is incorporated herein by
reference.
ADDITIONAL INFORMATION ABOUT THE ADVANTAGE FUND
COVER PAGE AND TABLE OF CONTENTS
See the cover page and inside cover page of the Advantage Fund SAI.
GENERAL INFORMATION AND HISTORY
For additional information about the Advantage Fund generally and its history,
see "Description of the Fund" in the Advantage Fund SAI.
INVESTMENT OBJECTIVE AND POLICIES
For additional information about the Advantage Fund's investment objective and
policies, see "Investment Policies and Techniques" and "Investment Restrictions"
in the Advantage Fund SAI.
MANAGEMENT OF THE ADVANTAGE FUND
For additional information about the Advantage Trust's Trustees and officers,
see "Trustees and Officers" in the Advantage Fund SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about the Advantage Fund's investment adviser,
custodian, principal underwriter, shareholder servicing agent and independent
accountants, see "Investment Adviser," "Transfer Agent and Dividend Disbursing
Agent," "Distribution Agreement and Rule 12b-1 Plans" and "Financial Statements"
in the Advantage Fund SAI, and the Advantage Fund's 1994 Annual Report and the
Advantage Fund's 1993 Annual Report.
BROKERAGE ALLOCATION AND PORTFOLIO TURNOVER
For additional information about the Advantage Fund's brokerage allocation
practices and portfolio turnover rate, see "Portfolio Transactions" in the
Advantage Fund SAI, and the Advantage Fund's 1994 Annual Report and the
Advantage Fund's 1993 Annual Report.
SHARES OF BENEFICIAL INTEREST
For additional information about the voting rights and other characteristics of
the Advantage Fund shares of beneficial interest, see "Description of the Fund"
in the Advantage Fund SAI.
REDEMPTION AND PRICING OF SHARES
For additional information about the redemption of the Advantage Fund shares of
beneficial interest and the determination of net asset value, see "Special
Redemptions" and "Net Asset Value" in the Advantage Fund SAI.
2
<PAGE> 55
TAX STATUS
For additional information about tax matters affecting the Advantage Fund and
its shareholders, see "Taxation" in the Advantage Fund SAI.
DISTRIBUTION AGREEMENT
For additional information about the Advantage Fund's distributor and the
distribution agreement between the distributor and the Advantage Fund, see
"Distribution Agreement and Rule 12B-1 Plans" in the Advantage Fund SAI.
PERFORMANCE INFORMATION
For additional information about the investment performance of the Advantage
Fund, see "Net Asset Value" and "Performance Information" in the Advantage Fund
SAI, and the Advantage Fund's 1994 Annual Report and the Advantage Fund's 1993
Annual Report.
FINANCIAL STATEMENTS
Audited financial statements of the Advantage Fund as at December 31, 1994 are
set forth in the Advantage Fund's 1994 Annual Report, and audited financial
statements of the Advantage Fund as at December 31, 1993 are set forth in the
Advantage Fund's 1993 Annual Report, each of which is attached hereto as Exhibit
C.
ADDITIONAL INFORMATION ABOUT THE MFS FUND
COVER PAGE AND TABLE OF CONTENTS
See the cover page of the MFS Fund SAI.
GENERAL INFORMATION AND HISTORY
For additional information about the MFS Fund generally and its history, see
"Definitions" and "Description of Shares, Voting Rights and Liabilities" in the
MFS Fund SAI.
INVESTMENT OBJECTIVE AND POLICIES
For additional information about the MFS Fund's investment objective and
policies, see "Investment Techniques" and "Investment Restrictions" in the MFS
Fund SAI.
MANAGEMENT OF THE MFS FUND
For additional information about the MFS Trust's Trustees and officers, see
"Management of the Fund" in the MFS Fund SAI.
PRINCIPAL HOLDERS OF SECURITIES
For additional information about principal holders of the shares of beneficial
interest of the MFS Fund, see "Management of the Fund" in the MFS Fund SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about the MFS Fund's investment adviser, custodian,
principal underwriter, shareholder servicing agent and independent accountants,
see "Management of the Fund," "Management of the Fund -- Investment Adviser,
Custodian, Shareholder Servicing Agent and Distributor" and "Independent
Accountants and Financial Statements" in the MFS Fund SAI, and the MFS Fund's
Annual Report and the MFS Fund's Semi-Annual Report.
3
<PAGE> 56
BROKERAGE ALLOCATION AND PORTFOLIO TURNOVER
For additional information about the MFS Fund's brokerage allocation practices
and portfolio turnover rate, see "Portfolio Transactions and Brokerage
Commissions" in the MFS Fund SAI, and the MFS Fund's Annual Report and the MFS
Fund's Semi-Annual Report.
SHARES OF BENEFICIAL INTEREST
For additional information about the voting rights and other characteristics of
the MFS Fund shares of beneficial interest, see "Description of Shares, Voting
Rights and Liabilities" in the MFS Fund SAI.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about the purchase and redemption of the MFS Fund
shares of beneficial interest and the determination of net asset value, see
"Shareholder Services," "Management of the Fund -- Distributor" and
"Determination of Net Asset Value; Performance Information" in the MFS Fund SAI.
TAX STATUS
For additional information about tax matters affecting the MFS Fund and its
shareholders, see "Tax Status" in the MFS Fund SAI.
DISTRIBUTION AGREEMENT
For additional information about the MFS Fund's distributor and the distribution
agreement between the distributor and the MFS Fund, see "Management of the Funds
- -- Distributor" in the MFS Fund SAI.
PERFORMANCE INFORMATION
For additional information about the investment performance of the MFS Fund, see
"Determination of Net Asset Value; Performance Information" in the MFS Fund SAI,
and the MFS Fund's Annual Report and the MFS Fund's Semi-Annual Report.
FINANCIAL STATEMENTS
Audited financial statements of the MFS Fund as at March 31, 1994, and unaudited
financial statements of the MFS Fund as at September 30, 1994, are set forth in
the MFS Fund's Annual Report and the MFS Fund's Semi-Annual Report,
respectively, included in Exhibit A hereto.
4
<PAGE> 57
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - September 30, 1994
Municipal Bonds - 97.9%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Student Loan Revenue - 1.2%
AAA Pennsylvania Higher Education Assistance Agency,
10.129s, 2026*<F3> $ 5,500 $ 5,458,750
- ------------------------------------------------------------------------------------------------------------
General Obligation - 10.9%
NR Arlington, TX, Independent School Refunding Rev.,
0s, 2007 $ 3,070 $ 1,459,110
A+ Commonwealth of Massachusetts, 7s, 2007 2,590 2,779,148
AA- Commonwealth of Pennsylvania, 6.375s, 2011 1,250 1,254,512
AA+ Harris County, TX, Certificates of Obligation
(Astrodome Improvements Project), 8.1s, 2008 1,385 1,525,647
AAA Lowell, MI, Area School District, FGIC, 0s, 2020 5,000 937,250
AAA Maricopa County, AZ, School District #11,
Peoria Unified, 0s, 2004 5,245 2,980,051
A- New York, NY, 8.2s, 2003 5,000 5,631,050
A- New York, NY, 7.5s, 2008 1,350 1,451,506
A- New York, NY, 8.25s, 2010 4,500 5,077,980
A- New York, NY, 8s, 2018 30 33,305
AAA Northwest Texas, Independent School District, AMBAC,
0s, 2011 3,000 1,033,680
AA State of Texas, 7.625s, 2018 14,405 15,676,529
AA State of Wisconsin, 8.1s, 2018 7,115 7,763,248
AA State of Wisconsin, 7.6s, 2020 2,865 2,957,941
-----------
$ 50,560,957
- ------------------------------------------------------------------------------------------------------------
State and Local Appropriation - 4.6%
AAA Houston, TX, Water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2014 $ 1,100 $ 1,087,306
AAA Houston, TX, Water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2015 2,300 2,272,906
A+ Indianapolis, IN, Local Public Improvement Bond
Bank, 6.75s, 2020 1,000 990,230
A+ Massachusetts Bay Transportation Authority, 5.5s,
2012 4,500 4,063,950
BBB New York Dormitory Authority Rev. (City University),
7.5s, 2010 2,500 2,748,325
BBB+ New York Medical Care Facility, Financial Agency
Rev., 8.875s, 2007 770 854,153
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2008 745 826,540
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2020 2,580 2,842,128
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.5s, 2021 540 581,526
BBB New York Urban Development Corp. (State Facilities),
7.5s, 2011 2,500 2,687,925
AAA Philadelphia, PA, Regional Port Authority Lease
Rev., MVRIC, 8.87s, 2020*<F3> 2,500 2,320,950
-----------
$ 21,275,939
- ------------------------------------------------------------------------------------------------------------
Refunded and Special Obligations - 17.9%
AAA Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,161,747
NR Chapel Hill, NC, Packaging Facilities Rev.,
8.125s, 2000 980 1,138,917
NR Chapel Hill, NC, Packaging Facilities Rev.,
8.25s, 2000 1,000 1,168,650
AAA Commonwealth of Massachusetts, 7.5s, 2000 1,990 2,257,118
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Refunded and Special Obligations - continued
A+ Commonwealth of Massachusetts, 7.5s, 2000 $ 2,010 $ 2,279,802
NR Dayton, OH, Special Facilities Rev. (Emery Air
Freight), "A", 12.5s, 2009 1,000 1,161,670
NR Illinois Education and Facilites Authority, 8.75s,
1995 1,500 1,588,884
AA Intermountain Power Agency, UT, Power Supply Rev.,
7s, 1999 5,000 5,451,200
AAA Los Angeles, CA, Convention & Exhibition Center
Authority, Certificates of Participation, 7.375s,
1999 2,000 2,221,380
NR Massachusetts Health & Education Facilities
Authority Rev., 9.1s, 1996 915 986,233
NR Massachusetts Health & Education Facilities
Authority Rev. (Suffolk University), 8s, 2000 1,000 1,144,050
AAA Massachusetts Water Resources Authority, 7.625s,
2000 3,200 3,614,368
AAA New York Local Government Assistance Corp.,
7.25s, 2001 2,750 3,088,195
A- New York, NY, Pre-refunded, "A", 8s, 2001 2,970 3,451,170
AAA New York Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 680 766,292
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.75s, 2000 1,030 1,166,949
AAA New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2000 670 771,170
AAA New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2000 3,565 4,103,315
AAA New York Medical Care Facility, Financial Agency
Rev., 7.5s, 2001 1,460 1,656,443
BBB New York Urban Development Corp. (Correctional
Facilities), 7.75s, 2000 5,000 5,665,750
NR New York Urban Development Corp. Rev., 7.3s, 2002 2,340 2,642,398
A- Pennsylvania Industrial Development Authority Rev.,
7s, 2001 7,000 7,743,190
AAA Philadelphia, PA, Municipal Authority Rev., 7s, 2001 2,000 2,226,560
NR Texas Turnpike Authority Rev., 0s, 2002 3,000 3,870,420
AAA Washington County, PA, Authority Lease Rev.,
7.45s, 2000 1,200 1,358,243
AA Washington Public Power Supply System Rev., Nuclear
Project #1, 7.25s, 2000 3,350 3,695,720
AAA Washington Public Power Supply System Rev., Nuclear
Project #1, 14.375s, 2001 1,000 1,368,260
AAA Washington Public Power Supply System Rev., Nuclear
Project #2, 7.375s, 2000 5,355 5,976,930
AA Washington Public Power Supply System Rev., Nuclear
Project #3, 7.25s, 2000 5,000 5,516,000
BB+ West Virginia Water Development Authority,
8.125s, 1998 1,000 1,124,900
BB+ West Virginia Water Development Authority,
8.625s, 1998 1,000 1,143,040
-----------
$ 83,508,964
- ------------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 9.4%
AAA Berkeley, Brookes & Fayette Counties, WV, MBIA,
0s, 2016 $14,000 $ 1,413,160
AAA Chicago, IL, Residential Mortgage Rev., 0s, 2009 7,000 2,425,570
BB Cook County, IL, 0s, 2015 16,975 1,807,328
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - continued
NR De Kalb, IL, Single Family Mortgage Rev., 7.45s,
2009 $ 315 $ 328,391
NR Delaware Housing Authority Rev., 9.125s, 2018 915 953,842
BB+ Harris County, TX, Housing Finance Corp.,
9.625s, 2003 310 309,801
BB+ Harris County, TX, Housing Finance Corp.,
9.875s, 2014 555 554,545
A+ Illinois Housing Development Agency, 0s, 2016 8,785 942,630
AAA Kentucky Housing Corp., Housing Rev., FHA,
7.45s, 2023 6,580 6,714,758
AAA Louisiana Housing Finance Agency, Single Family
Mortgage Rev., FGIC, 9.375s, 2015 325 338,091
AA+ Minnesota Housing Finance Agency, 9s, 2018 4,655 4,792,230
NR Mississippi Home Corp., Single Family Rev., 7.1s,
2023 910 932,140
A+ New Hampshire Housing Finance Authority, 7.2s, 2010 7,000 7,147,000
A+ New Hampshire Housing Finance Authority,
8.625s, 2013 780 809,367
A+ Tennessee Housing Development Agency, 8.25s, 2020 1,985 2,074,285
A+ Tennessee Housing Development Agency, 8.125s, 2021 2,145 2,229,749
AA Utah Housing Finance Agency, 8.625s, 2019 2,020 2,068,015
AA Utah Housing Finance Agency, 9.125s, 2019 230 236,240
AA Utah Housing Finance Agency, 9.25s, 2019 175 185,145
A+ Virginia Housing Development Authority, 7.1s, 2022 1,000 1,017,670
A+ West Virginia Housing Development Fund, 7.85s, 2014 6,150 6,344,279
-----------
$ 43,624,236
- ------------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.9%
NR Colorado Housing Finance Authority, 8.3s, 2023 $ 2,750 $ 2,870,752
NR Maryland Community Development Administration, 8.5s,
2028 3,000 3,114,210
A+ New Jersey Housing & Mortgage Finance Agency,
6.6s, 2014 3,000 2,975,820
A+ Pennsylvania Housing Finance Agency, 7.6s, 2013 2,000 2,128,480
AA- Vermont Housing Finance Agency, 8.375s, 2020 2,795 2,896,766
A Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,094,800
-----------
$ 18,080,828
- ------------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 2.9%
AAA Clermont County, OH, Hospital Facilities Rev. (Mercy
Health System), AMBAC, MVRIC, 9.991s, 2021*<F3> $ 1,500 $ 1,533,675
AAA Colorado Health Facilities Authority Rev. (PSL
Health Systems), FSA, 7.25s, 2016 2,000 2,154,140
AAA Fredericksburg, VA, Industrial Development
Authority, Hospital Facilities Rev., 9.57s, 2023*<F3> 1,500 1,504,755
AAA Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, 9.192s, 2014*<F3> 1,500 1,491,675
AAA Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation), 6.7s,
2018 1,000 1,015,800
AAA Rio Grande Valley, TX, Health Facilities Development
Corp., 7.72s, 2015(S)<F5> 2,800 2,776,424
AAA Tulsa, OK, Industrial Authority Hospital Rev. (St.
Johns Medical Center), 0s, 2006 6,430 3,072,190
-----------
$ 13,548,659
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Health Care Revenue - 4.4%
BB- Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 $ 1,720 $ 1,906,276
NR Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 10.5s, 2018 2,000 1,840,000
BBB Colorado Health Facilites Authority Rev.
(Rocky Mountain Adventist), 6.625s, 2013 1,000 956,000
NR Fulton County, GA, Residential Care Facilities,
Elderly Authority Rev. (Lenbrook Square
Foundation), 9.75s, 2017 485 496,790
NR Gadsden County, FL, Industrial Development
Authority, (RHA/FLA Properties), 10.45s, 2018 1,970 2,026,973
NR Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,681 1,032,526
A Massachusetts Health & Educational Facilities Rev.,
6.875s, 2022 5,000 4,753,900
BBB New York Medical Care Facilities, Financing Agency
Rev., 7.75s, 2020 1,025 1,124,118
NR Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 1,500 1,548,240
NR Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 2,000 2,033,800
A- St. Tammany Parish, LA, Hospital Service District
#1, Hospital Rev., 6.5s, 2017 1,140 1,067,678
A Torrance, CA, Hospital Rev., 6.875s, 2015 1,815 1,801,260
-----------
$ 20,587,561
- ------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 8.0%
NR Chelan County, WA, Public Utility District #1,
Consolidated Rev., 9.3s, 2017 $ 4,450 $ 4,941,057
A+ Georgia Municipal Electric Authority, 6.375s, 2016 2,000 1,970,920
NR Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 2,000 2,168,920
NR Montana Board of Investment Resources Recovery Rev.
(Yellowstone Energy), 7s, 2019 3,000 2,819,970
A+ Municipal Electric Authority, GA, Special
Obligation, 6.5s, 2020 7,350 7,285,761
A- North Carolina Eastern Municipal Power Agency,
7.25s, 2007 3,250 3,543,865
AAA Sacramento, CA, Municipal Utility District, Electric
Rev., 5.32s, 2007(S)<F5> 2,000 1,630,560
AAA Texas Municipal Power Agency Rev., 0s, 2011 2,530 852,306
AAA Texas Municipal Power Agency Rev., 0s, 2013 6,000 1,744,620
AAA Texas Municipal Power Agency Rev., 0s, 2014 7,685 2,093,087
AA Washington Public Power Supply System Rev., Nuclear
Project #1, 0s, 2003 2,000 1,167,920
AA Washington Public Power Supply System Rev., Nuclear
Project #1, 7s, 2011 4,050 4,168,422
AA Washington Public Power Supply System Rev., Nuclear
Project #3, 0s, 2004 4,885 2,657,245
-----------
$ 37,044,653
- ------------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 5.5%
AAA Contra Costa, CA, Water District Rev., 5.5s, 2019 $ 4,000 $ 3,544,480
AA+ Gwinnett County, GA, Water and Sewer Rev., 0s, 2009 6,000 2,453,520
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - continued
AAA Harris County, TX, Flood Control District FGIC,
0s, 2009 $ 3,205 $ 1,230,431
AAA Harris County, TX, Flood Control District FGIC,
0s, 2010 3,545 1,266,877
A Massachusetts Water Resources Authority, 6.25s, 2010 3,000 2,965,530
A Massachusetts Water Resources Authority, 6.5s, 2019 7,495 7,510,365
A New York, NY, City Municipal Water Finance
Authority, 5.5s, 2019 3,400 2,949,432
AAA Salt Lake County, UT, Water Conservancy District
Rev., 0s, 2008 2,100 879,480
AAA Salt Lake County, UT, Water Conservancy District
Rev., 0s, 2009 3,800 1,452,512
A- Union County, NJ, Utilities Authority Solid Waste,
7.2s, 2014 1,500 1,510,365
-----------
$ 25,762,992
- ------------------------------------------------------------------------------------------------------------
Turnpike Revenue - 1.6%
NR Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 $ 2,900 $ 3,040,447
A New Jersey Turnpike Authority, Turnpike Rev.,
6.5s, 2016 1,450 1,483,408
NR San Jaoquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,800 761,904
NR San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2009 6,750 2,000,093
-----------
$ 7,285,852
- ------------------------------------------------------------------------------------------------------------
Airport and Port Revenue - 12.4%
BB+ Alliance Airport Authority, Inc., TX, Special
Facilities Rev., 7.5s, 2029 $ 4,500 $ 4,374,090
AAA Chicago, IL, O' Hare International Airport, Special
Facilities Rev. (United Airlines), 6.75s, 2012 2,000 2,030,140
BB Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 2,055 2,178,095
BB Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,640 7,238,662
NR Cleveland, OH, Airport, Special Rev. (Continental
Airlines), 9s, 2019 5,300 5,468,699
AAA Connecticut Airport Rev., FGIC, 7.65s, 2012 1,000 1,117,330
BB Denver, CO, City & County Airport Rev., 8.875s, 2012 6,000 6,390,480
BB Denver, CO, City & County Airport Rev., 8.75s, 2023 4,750 5,005,170
AAA Hawaii Airports Systems Rev., 5.75s, 2008 2,300 2,193,924
AAA Hawaii Airports Systems Rev., 7.5s, 2020 5,350 5,800,577
BB Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 4,000 3,866,200
AAA Metropolitan Washington District of Columbia
Airports Authority, 7.25s, 2010 4,000 4,274,320
NR St. Augustine, FL, Airport Authority (Grumman Repair
Facility), 11s, 2004 500 541,355
BB+ Tulsa, OK, Municipal Airport Trust Rev., 7.375s,
2020 3,000 2,902,650
BB+ Tulsa, OK, Municipal Airport Trust Rev., 7.6s, 2030 815 799,042
A+ Virginia Port Authority, 8.2s, 2008 3,000 3,326,130
-----------
$ 57,506,864
- ------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
AAA Metropolitan Pier & Exposition Authority, IL,
Dedicated State Tax Rev., 0s, 2018 $ 6,400 $ 1,323,008
- ------------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 7.6%
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.875s, 2017 $ 8,890 $ 9,969,690
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.25s, 2018 1,000 1,113,570
A- Burke County, GA, Pollution Control Rev. (Georgia
Power Co./Vogtle Project), 9.375s, 2017 2,650 2,965,535
NR Burns Harbor, IN, Solid Waste Disposal Facilities
Rev., 8s, 2024 3,000 3,115,710
A Charleston County, SC, Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 3,200 3,535,745
AA- Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s,
2020 2,000 2,204,900
A- Erie County, PA (International Paper), 7.875s, 2016 1,200 1,304,220
A- Matagorda County, TX, Pollution Control Rev.
(Central Power & Light), 7.875s, 2016 1,500 1,594,065
BBB+ Maury County, TN, Industrial Development Board,
Pollution Control Rev., 6.5s, 2024 3,000 2,907,630
NR Port of New Orleans, LA (Avondale Industries),
8.5s, 2014 2,000 2,011,580
BB- Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 1,000 978,620
NR San Joaquin Hills, CA, Transportation Corridor
Agency, 0s, 2004 3,000 1,381,050
BBB West Side Calhoun County, TX, Navigation District,
8.2s, 2021 2,000 2,179,140
-----------
$ 35,261,455
- ------------------------------------------------------------------------------------------------------------
Universities - 0.2%
AAA University of Illinois, University Rev., 0s, 2009 $ 2,915 $ 1,147,344
- ------------------------------------------------------------------------------------------------------------
Special Assessment District - 0.6%
NR Northeast Maryland, Waste Disposal Authority
(Montgomery County Resource Recovery), 6.3s, 2016 $ 3,000 $ 2,833,320
- ------------------------------------------------------------------------------------------------------------
Miscellaneous Revenue - 6.5%
NR Atlanta, GA, Downtown Development Authority,
11.5s, 2015**<F4>++<F2> $ 1,055 $ 316,548
NR Bristol, CT, Resource Recovery Facilities, 6.5s,
2014(SS)<F6> 8,000 7,409,520
NR Crystal City, TX, Lease Obligations, 10.5s,
2008+<F1> 1,252 1,172,925
BB- Greater Detroit, MI, Resource Recovery Authority,
9.25s, 2008 2,130 2,254,818
A Hillsborough County, FL, Capital Improvement Rev.,
6.75s, 2022 2,810 2,864,317
NR Martha's Vineyard, MA, Land Bank, 8.125s, 2011 2,000 1,999,540
NR Massachusetts Health & Education Facilities
Authority Rev. (Learning Center for Deaf
Children), 9.25s, 2014 1,000 1,061,820
NR Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,017,340
A Pennsylvania State Finance Authority Rev., 6.6s,
2009 3,305 3,318,683
NR Retema, TX, Special Facilities Rev. (Retema Park
Racetrack Project), 8.75s, 2018 4,000 3,937,680
-----------
$ 30,353,191
- ------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $436,871,756) $455,164,573
- ------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Floating Rate Demand Notes - 0.9%
- ------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Jackson County, MS, Pollution Control Rev. due 6/01/23 $ 100 $ 100,000
Perry County, MS, Pollution Control Rev., due 3/01/02 2,600 2,600,000
Uinta County, WY, Pollution Control Rev., due 8/15/20 1,700 1,700,000
- ------------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 4,400,000
- ------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $441,271,756) $459,564,573
Other Assets, Less Liabilities - 1.2% 5,610,013
- ------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $465,174,586
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1> + Restricted security (see Note 8).
<F2> ++ Security valued by or at the direction of the Trustees.
<F3> * Inverse floating rate security.
<F4> ** Non-income producing security in default.
<F5> (S) Indexed security (see Note 7).
<F6>(SS) When-issued security. At September 30, 1994, the Fund had sufficient
cash and/or securities at least equal to the value of the when-issued
security.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------------------
<CAPTION>
September 30, 1994
- -------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $441,271,756) $459,564,573
Cash 34,849
Receivable for investments sold 11,104,272
Receivable for Fund shares sold 701,047
Interest receivable 8,976,833
Other assets 7,096
-----------
Total assets $480,388,670
-----------
Liabilities:
Distributions payable $ 885,117
Payable for investments purchased 5,480,953
Payable for when-issued investments purchased 8,000,000
Payable for Fund shares reacquired 618,449
Payable for daily variation margin on open futures contracts 62,500
Payable to affiliates -
Management fee 9,652
Shareholder servicing agent fee 2,766
Distribution fee 9,186
Accrued expenses and other liabilities 145,461
-----------
Total liabilities $ 15,214,084
-----------
Net assets $465,174,586
-----------
Net assets consist of:
Paid-in capital $454,180,336
Unrealized appreciation on investments 18,589,692
Net realized loss on investments (6,448,156)
Accumulated distributions in excess of net investment income (1,147,286)
-----------
Total $465,174,586
-----------
Shares of beneficial interest outstanding 54,968,184
-----------
Class A shares:
Net asset value and redemption price per share
(net assets of $7,350,484 / 869,078 shares of beneficial
interest outstanding) $8.46
----
Offering price per share (100/95.25) $8.88
----
Class B shares:
Net asset value, redemption price and offering price per share (net assets of
$447,603,367 / 52,891,853 shares of beneficial
interest outstanding) $8.46
----
Class C shares:
Net asset value, redemption price and offering price per share (net assets of
$10,220,735 / 1,207,253 shares of beneficial
interest outstanding) $8.47
----
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended September 30, 1994
- ------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $17,362,684
----------
Expenses -
Management fee $ 1,805,022
Trustees' compensation 23,001
Shareholder servicing agent fee (Class A) 4,900
Shareholder servicing agent fee (Class B) 511,377
Shareholder servicing agent fee (Class C) 6,800
Distribution and service fee (Class B) 2,324,431
Distribution and service fee (Class C) 45,329
Custodian fee 74,593
Printing 38,452
Auditing fees 27,100
Postage 26,015
Legal fees 10,464
Miscellaneous 169,790
----------
Total expenses $ 5,067,274
----------
Net investment income $12,295,410
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(6,750,065)
Futures contracts 1,532,894
----------
Net realized gain (loss) on investments $(5,217,171)
----------
Change in unrealized appreciation (depreciation) -
Investment transactions $ (700,666)
Futures contracts 145,312
----------
Net unrealized gain (loss) on investments $ (555,354)
----------
Net realized and unrealized gain (loss) on
investments $(5,772,525)
----------
Increase (decrease) in net assets from operations $ 6,522,885
----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Four Months Ended Year Ended
September 30, 1994 March 31, 1994 November 30, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 12,295,410 $ 8,135,114 $ 24,569,248
Net realized gain (loss) on investments (5,217,171) (1,579,438) 2,174,746
Net unrealized gain (loss) on investments (555,354) (21,759,776) 19,852,443
----------- ----------- -----------
Increase (decrease) in net
assets from operations $ 6,522,885 $(15,204,100) $ 46,596,437
----------- ----------- -----------
Distributions declared to
shareholders -
From net investment income (Class A) $ (196,787) $ (24,388) $ (2,142)
From net investment income (Class B) (10,374,004) (6,513,043) (25,152,570)
From net investment income (Class C) (226,137) (36,953) --
In excess of net investment income (Class A) -- (444) (150)
In excess of net investment income (Class B) (1,156,201) (1,488,102) (1,560,580)
In excess of net investment income (Class C) -- (1,021) --
From net realized gain on investments (Class A) -- (332) --
From net realized gain on investments (Class B) -- (319,911) (5,237,004)
In excess of net realized gain on investments
(Class A) -- (1,280) --
In excess of net realized gain on investments
(Class B) -- (1,229,705) --
----------- ----------- -----------
Total distributions declared to shareholders $(11,953,129) $ (9,615,179) $(31,952,446)
----------- ----------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 24,505,586 $ 31,229,236 $118,919,014
Net asset value of shares issued to
shareholders in reinvestment of
distributions 6,494,788 5,241,616 18,199,816
Cost of shares reacquired (51,861,665) (38,825,729) (83,071,056)
----------- ----------- -----------
Increase (decrease) in net
assets from Fund share
transactions $(20,861,291) $ (2,354,877) $ 54,047,774
----------- ----------- -----------
Total increase (decrease) in net assets $(26,291,535) $(27,174,156) $ 68,691,765
Net assets:
At beginning of period 491,466,121 518,640,277 449,948,512
----------- ----------- -----------
At end of period (including accumulated
distributions in excess of net investment
income of $(1,147,286), $(1,489,567)
and $(1,560,730), respectively) $465,174,586 $ 491,466,121 $518,640,277
----------- ----------- -----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Four Months Six Months Four Months
Ended Ended Period Ended Ended Ended
September 30, March 31, November 30, September 30, March 31,
1994 1994 1993*<F1> 1994 1994
- ----------------------------------------------------------------------------------------------------------------
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 $ 8.56 $ 8.99 $ 9.15 $ 8.56 $ 8.99
------ ------ ------ ------ ------
Income from investment
operations++<F4>-
Net investment income $ 0.26 $ 0.15 $ 0.12 $ 0.22 $ 0.14
Net realized and unrealized
gain (loss) on investments (0.10) (0.51) (0.16) (0.11) (0.51)
------ ------ ------ ------ ------
Total from investment operations $ 0.16 (0.36) $(0.04) 0.11 $(0.37)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.26) $(0.02) $(0.11) $(0.19) $(0.01)
In excess of net investment income -- -- (0.01) (0.02) --
From net realized gains -- (0.01) -- -- (0.01)
In excess of net realized gains -- (0.04) -- -- (0.04)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.26) $(0.07) $(0.12) $(0.21) $(0.06)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.46 $ 8.56 $ 8.99 $ 8.46 $ 8.56
------ ------ ------ ------ ------
Total return#<F2> 1.85% (7.90)%+<F3> (1.80)%+<F3> 1.31% (8.97)%+<F3>
Ratios (to average net assets)/Supplemental data:
Expenses 1.05%+<F3> 1.07%+<F3> 0.76%+<F3> 2.12%+<F3> 2.24%+<F3>
Net investment income 6.16%+<F3> 5.31%+<F3> 4.94%+<F3> 5.10%+<F3> 4.74%+<F3>
Portfolio turnover 9% 9% 30% 9% 9%
Net assets at end of period
(000 omitted) $7,350 $5,595 $461 $447,603 $479,478
<FN>
<F1> * For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
<F2> # Total returns do not include the sales charge. If the sales charge had
been included, the results would have been lower.
<F3> + Annualized.
<F4>++ For periods subsequent to November 30, 1993, per share data is based on
average shares outstanding.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -continued
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30,
--------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987*<F1>
- ----------------------------------------------------------------------------------------------------
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 $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47
------ ------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.42 $ 0.47 $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38
Net realized and
unrealized gain (loss)
on investments 0.42 0.26 0.25 (0.15) 0.30 0.43 (0.83)
------ ------ ------ ------ ------ ------ ------
Total from
investment
operations $ 0.84 $ 0.73 $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45)
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment
income $(0.45) $(0.48) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
In excess of net
investment income (0.03) -- -- -- -- -- --
From net realized
gains (0.10) -- -- -- -- -- --
From paid-in capital -- $(0.02) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.58) $(0.50) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
------ ------ ------ ------ ------ ------ ------
Net asset value - end
of period $ 8.99 $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67
------ ------ ------ ------ ------ ------ ------
Total return 9.95% 8.82% 9.21% 4.18% 10.24% 12.53% (5.79)%+<F2>
Ratios (to average net assets)/Supplemental data:
Expenses 2.11% 2.03% 2.04% 2.05% 2.07% 2.09% 2.03%+<F2>
Net investment
income 4.92% 5.50% 5.82% 5.99% 6.09% 6.38% 6.00%+<F2>
Portfolio turnover 30% 52% 73% 91% 127% 171% 138%
Net assets at end of
period (000 omitted) $518,179 $449,949 $409,084 $379,239 $343,887 $244,825 $183,935
<FN>
<F1>* For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
<F2>+ Annualized.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Period Ended
September 30, 1994 March 31, 1994*<F1>
- -----------------------------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value - beginning of period $ 8.56 $ 9.07
----- -----
Income from investment operations++<F3> -
Net investment income $ 0.22 $ 0.09
Net realized and unrealized
gain (loss) on investments (0.09) (0.59)
----- -----
Total from investment operations $ 0.13 $(0.50)
----- -----
Less net investment income distributions
declared to shareholders $(0.22) $(0.01)
----- -----
Net asset value - end of period $ 8.47 $ 8.56
----- -----
Total return 1.45% (19.42)%+<F2>
Ratios (to average net assets)/Supplemental data:
Expenses 2.05%+<F2> 2.18%+<F2>
Net investment income 5.13%+<F2> 4.62%+<F2>
Portfolio turnover 9% 9%
Net assets at end of period (000 omitted) $10,221 $6,393
<FN>
<F1> * For the period from the commencement of offering of Class C shares,
January 3, 1994 to March 31, 1994.
<F2> + Annualized.
<F3>++ For periods subsequent to November 30, 1993, per share data is based on
average shares outstanding.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal Income Fund (the Fund) is a diversified series of MFS Municipal
Series Trust (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into interest rate futures contracts for
the delayed delivery of fixed-income securities and indexes of such securities
at a fixed price on a future date and may enter into options on such futures
contracts. In entering such contracts, the Fund is required to deposit either in
cash or securities an amount equal to a certain percentage of the contract
amount. Subsequent payments are made or received by the Fund each day, depending
on the daily fluctuations in the value of the underlying security, and are
recorded for financial statement purposes as unrealized gains or losses by the
Fund. The Fund's investment in interest rate futures contracts is designed to
hedge against anticipated future changes in interest rates or securities prices.
The Fund may also invest in financial futures contracts for non-hedging
purposes. Should interest rates or securities prices move unexpectedly, the Fund
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss.
<PAGE>
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At September 30, 1994, the Fund had no securities on loan.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986, may be considered a tax
preference item to shareholders. Distributions to shareholders are recorded on
the ex-dividend date.
<PAGE>
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits be reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class A and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective shareholder servicing agent, distribution
and service fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on average daily net assets of each class, without
distinction between share classes. Dividends are declared separately for each
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses,
including distribution and shareholder service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. Prior to
September l, 1993, Lifetime Advisers, Inc. (LAI), a wholly owned subsidiary of
MFS, was the investment adviser for the Fund. The management fee, computed daily
and paid monthly at an annual rate of 0.30% of average daily net assets and
6.43% of investment income, amounted to $1,805,022 for the period ended
September 30, 1994.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all of its independent Trustees. Included in Trustees' compensation is
a net periodic pension expense of $6,751 for the period ended September 30,
1994.
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$3,857 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. Payments will commence under the distribution plan when
the value of the net assets of the Fund attributable to Class A shares first
equals or exceeds $40 million.
<PAGE>
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
daily distribution fee, equal to 0.75% per annum, and a service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class B
and Class C shares. FSI will pay to securities dealers that enter into a sales
agreement with FSI, all or a portion of the service fee, attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. Fees incurred under the distribution plans during
the period ended September 30, 1994 were 1.0% of average daily net assets
attributable to Class B and Class C shares on an annualized basis and amounted
to $2,324,431 and $45,329, respectively (of which FSI retained $47,354 and
$3,499 for Class B and Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the period ended September 30, 1994 was $332,112 for Class B shares.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$4,900, $511,377 and $6,800 for Class A, Class B, and Class C shares,
respectively, for its services as shareholder servicing agent for the period
ended September 30, 1994. The fee is calculated as a percentage of the average
daily net assets of each class of shares at an effective annual rate of up to
0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B and Class C
shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated $44,606,400
and $69,106,969, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $441,271,756
-----------
Gross unrealized appreciation $ 24,443,924
Gross unrealized depreciation (6,151,025)
-----------
Net unrealized appreciation $ 18,292,899
-----------
At March 31, 1994, the Fund, for federal income tax purposes, had a capital loss
carryforward of $1,413,222, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on March 31, 2002.
<PAGE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
</TABLE>
<TABLE>
<CAPTION>
Class A Shares
Six Months Ended Four Months Ended
September 30, 1994 March 31, 1994
-------------------------------- --------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 411,312 $ 3,515,871 766,727 $ 6,792,015
Shares issued to shareholders in
reinvestment of distributions 4,305 36,803 1,368 12,126
Shares reacquired (200,291) (1,710,053) (165,634) (1,507,352)
-------------- ---------------- -------------- ----------------
Net increase 215,326 $ 1,842,621 602,461 $ 5,296,789
-------------- ---------------- -------------- ----------------
Class B Shares
Six Months Ended Four Months Ended
September 30, 1994 March 31, 1994
-------------------------------- --------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
Shares sold 1,631,728 $ 14,001,860 1,771,398 $ 16,008,151
Shares issued to shareholders in
reinvestment of distributions 735,875 6,297,579 581,143 5,207,213
Shares reacquired (5,483,849) (46,965,760) (3,964,973) (35,578,939)
-------------- ---------------- -------------- ----------------
Net decrease (3,116,246) $(26,666,321) (1,612,432) $(14,363,575)
-------------- ---------------- -------------- ----------------
Class C Shares
Six Months Ended Period Ended
September 30, 1994 March 31, 1994*<F1>
-------------------------------- --------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
Shares sold 814,164 $ 6,987,855 940,881 $ 8,429,070
Shares issued to shareholders in
reinvestment of distributions 18,738 160,406 2,564 22,277
Shares reacquired (372,146) (3,185,852) (196,948) (1,739,438)
-------------- ---------------- -------------- ----------------
Net increase 460,756 $ 3,962,409 746,497 $ 6,711,909
-------------- ---------------- -------------- ----------------
<FN>
<F1>* For the period from the commencement of offering of Class C shares,
January 3, 1994 to March 31, 1994.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
period ended September 30, 1994 was $3,575.
<PAGE>
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, futures contracts and indexed
securities. The notional or contractual amounts of these instruments represent
the investment the Fund has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at September 30, 1994 is as
follows:
Futures Contracts
Unrealized
Expiration Contracts Position Appreciation
- -----------------------------------------------------------------------------
December 1994 250 Treasury Bonds Short $296,875
-------
At September 30, 1994, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
Indexed Securities
The Fund also invests in indexed securities whose value may be linked to
interest rates, commodities, indices or other financial indicators. Indexed
securities are fixed-income securities whose proceeds at maturity (principal-
indexed securities) or interest rates (coupon-indexed securities) rise and fall
according to the change in one or more specified underlying instruments. Indexed
securities may be more volatile than the underlying instrument itself. The
following is a summary of such securities held at September 30, 1994.
Principal Unrealized
Description Index (000 omitted) Value Depreciation
- ------------------------------------------------------------------------------
Rio Grande Valley, TX
Health Facilities
Development
Corp., 7.72s, 2015 J.J. Kenny $2,800 $2,776,424 $ (23,576)
Sacramento, CA,
Municipal
Utility District,
Electric Rev.,
5.32s, 2007 PSA 2,000 1,630,560 (369,440)
--------
$(393,016)
--------
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At September 30, 1994,
the Fund owned the following restricted securities (constituting 0.25% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers.
Description Date of Acquisition Par Amount Cost Value
- ------------------------------------------------------------------------------
Crystal City, TX,
Lease Obligations,
10.5s, 2008 5/25/88 $1,251,761 $948,056 $1,172,925
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Municipal Series Trust and Shareholders of MFS Municipal
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Income Fund (one of the series
constituting MFS Municipal Series Trust) as of September 30, 1994, the related
statement of operations for the six months then ended, the statement of changes
in net assets for the six months then ended, the four months ended March 31,
1994, and the year ended November 30, 1993, and the financial highlights for the
six months ended September 30, 1994, the four months ended March 31, 1994 and
for each of the years in the seven-year period ended November 30, 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
September 30, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal Income
Fund at September 30, 1994, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 4, 1994
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE> 58
<PAGE>
<TABLE>
Portfolio of Investments - March 31, 1994
Municipal Bonds - 98.9%
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Student Loan Revenue - 1.2%
AAA Pennsylvania Higher Education Assistance Agency,
10.758s, 2026 $ 5,500 $ 5,816,250
General Obligations - 11.7%
NR Arlington, TX, Independent School Refunding Rev.,
0s, 2007<F1> $ 3,070 $ 1,404,525
A+ Commonwealth of Massachusetts, 7s, 2007 2,590 2,800,438
AAA Commonwealth of Pennsylvania, 0s, 2007<F1> 4,520 2,034,000
AA- Commonwealth of Pennsylvania, 6.375s 2011 1,250 1,264,062
AA+ Harris County, TX, Certificates of Obligation (Astrodome
Improvements Project), 8.1s, 2008 1,385 1,542,543
AAA Lowell, Ml, Area School District, FGIC, 0s, 2020<F1> 5,000 925,000
AAA Maricopa County, AZ, School District Number 11
Peoria, 0s, 2004<F1> 5,245 2,884,750
A- New York, NY, 8.2s 2003 5,000 5,668,750
A- New York, NY, 7.5s, 2008 1,350 1,471,500
A- New York, NY, 8.25s, 2010 4,500 5,180,625
A- New York, NY, 8s, 2018 3,000 3,401,250
AAA Northwest Texas, Independent School District, AMBAC,
0s, 2011<F1> 3,000 1,027,500
AA State of Texas, 7.625s, 2018 14,405 15,731,463
AA State of Wisconsin, 8.1s, 2018 7,115 7,835,394
AA State of Wisconsin, 7.6s, 2020 2,865 2,958,113
AAA Westmoreland County, PA, 0s, 2009<F1> 3,120 1,224,600
------------
$ 57,360,513
- -------------------------------------------------------------------------------------------------------------------
State and Local Appropriations -5.8%
AAA Houston, TX, water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2014 $ 1,100 $ 1,093,125
AAA Houston, TX, Water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2015 2,300 2,285,625
A+ Indianapolis, IN, Local Public Improvement Bond Bank,
6.75s, 2020 1,000 1,008,750
A+ Massachusetts Bay Transportation Authority, 5.5s, 2012 4,500 4,111,875
BBB New York Dormitory Authority Rev. (City University),
7.5s, 2010 2,500 2,753,125
A New York Local Government Assistance Corp.,
5.5s, 2017 3,400 3,051,500
BB+ New York State, Medical Care Facility, 7.55s, 2021 540 589,950
BB+ New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 2007 770 862,400
BB+ New York State, Medical Care Facility, Financial Agency
Rev., 7.875s, 2008 800 901,000
BB+ New York State, Medical Care Facility, Financial Agency
Rev., 7.875s, 2020 2,735 3,039,269
BBB New York Urban Development Corp. (State Facilities),
7.5s, 2011 2,500 2,712,500
AAA Philadelphia, PA, Regional Port Authority Lease Rev.,
9.545s, 2020 2,500 2,559,375
AAA Sand Bernardino, CA, Short Rites, 8.55s, 2016<F2> 3,500 3,438,750
------------
$ 28,407,244
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Refunded and Special Obligations - 13.1%
AAA Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,203,388
AAA Commonwealth of Massachusetts, 7.5s, 2000 1,990 2,290,988
A+ Commonwealth of Massachusetts, 7.5s, 2000 2,010 2,314,013
NR Dayton, OH, Special Facilities Rev. (Emery Air Freight),
"A", 12.5s, 2009 1,000 1,168,750
AA Intermountain Power Agency, Utah Power Supply Rev.,
7s, 1999 5,000 5,531,250
NR Los Angeles, CA, Convention & Exhibition Center
Authority, Certificates of Participation, 7.375s, 1999 2,000 2,247,500
NR Massachusetts Health & Education Facilities Authority
(Suffolk University), 8s, 2000 1,000 1,163,750
AAA Massachusetts Water Resources Authority, 7.625s, 2000 3,200 3,668,000
A New York Local Government Assistance Corp.,
7.25s, 2001 2,750 3,124,687
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 680 784,550
BB + New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 1,030 1,181,925
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 670 781,387
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 3,565 4,157,681
AAA New York State, Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 1,460 1,677,175
BBB New York Urban Development Corp. (Correctional
Facilities), 7.75s, 2000 5,000 5,737,500
BBB New York Urban Development Corp. Rev., 7.3s, 2002 2,340 2,673,450
AAA Philadelphia, PA, Municipal Authority Rev., 7s, 2001 2,000 2,250,000
AAA Washington County, PA, Authority Lease Rev.,
7.45s, 2000 1,200 1,374,000
AA Washington Public Power Supply System Rev., Nuclear
Proj. #1, 7.25s, 2000 3,350 3,743,625
AAA Washington Public Power Supply System Rev., Project
#1, 14.375s, 2001 1,000 1,390,000
AAA Washington Public Power Supply System Rev., Nuclear
Project #2, 7.375s, 2000 5,355 6,057,844
AA Washington Public Power Supply System Rev., Nuclear
Project #3, 7.25s, 2000 5,000 5,587,500
BB+ West Virginia Water Development Authority,
8.125s, 1998 1,000 1,148,750
BB+ West Virginia Water Development Authority,
8.625s, 1998 1,000 1,168,750
-----------
$64,426,463
- -------------------------------------------------------------------------------------------------------------------
Single-Family Housing Revenue - 10.2%
AAA Berkeley, Brookes, & Fayette Counties, WV, MBIA,
0s, 2016<F1> $14,000 $ 1,540,000
AAA Chicago, IL, Residential Mortgage Refunding Rev.,
0s, 2009<F1> 7,000 2,450,000
BB Cook County, IL, 0s, 2015+ 23,280 2,357,100
NR De Kalb, IL, Single Family Mortgage Rev., 7.45s, 2009 350 368,375
NR Delaware Housing Authority Rev., 9.125s, 2018 915 934,444
NR El Paso, TX, Housing Finance Corp., 8.75s, 2011 2,040 2,208,300
-----------
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Single-Family Housing Revenue - continued
BB+ Harris County, TX, Housing Finance Corp.,
9.625s, 2003 $ 390 $ 383,663
BB+ Harris County, TX, Housing Finance Corp.,
9.875s, 2014 615 599,625
A+ Illinois Housing Development Agency, 0s, 2016<F1> 8,785 911,444
AAA Jefferson County, CO, 8.875s, 2013 1,055 1,110,387
AAA Kentucky Housing Corp., Housing Rev., 7.45s, 2023 6,750 6,825,937
AAA Louisiana Housing Finance Agency, Single Family
Mortgage Rev., FGIC, 9.375s, 2015 380 395,675
AA+ Minnesota Housing Finance Agency, 9s, 2018 4,655 4,823,743
NR Mississippi Home Corp., Single Family Rev., 7.1s, 2023 945 983,981
A+ New Hampshire Housing Finance Authority, 7.2s, 2010 7,000 7,297,500
A+ New Hampshire Housing Finance Authority,
8.625s, 2013 805 841,225
A+ Tennessee Housing Development Agency, 8.25s, 2020 1,985 2,089,213
A+ Tennessee Housing Development Agency, 8.125s, 2021 2,145 2,246,888
AA Utah Housing Finance Agency, 8.625s, 2019 3,120 3,225,300
AA Utah Housing Finance Agency, 9.125s, 2019 480 519,600
AA Utah Housing Finance Agency, 9.25s, 2019 345 394,594
A+ Virginia Housing Development Authority, 7.1s, 2022 1,000 1,017,500
A+ West Virginia Housing Development Fund, 7.85s, 2014 6,150 6,380,625
------------
$ 49,905,119
- -------------------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.9%
NR Baytown, TX, Property Management & Development
Corp. (Baytown Terrace Project), 6.1s, 2021 $ 1,000 $ 965,000
AA Colorado Housing Finance Authority, 8.3s, 2023 2,750 2,894,375
NR Maryland Community Development Administration,
8.5s, 2028 3,000 3,138,750
A New Jersey Housing & Mortgage Finance Agency Rev.,
6.6s, 2014 3,000 3,060,000
A+ Pennsylvania Housing Finance Agency, 7.6s, 2013 2,000 2,147,500
AA- Vermont Housing Finance Agency, 8.375s, 2020 2,795 2,934,750
A Wisconsin Housing & Economic Development Authority
Housing, 7.2s, 2013 4,000 4,150,000
------------
$ 19,290,375
- -------------------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 3.4%
AAA California Statewide Community Development Authority
Rev., 0s, 2005<F1> $ 3,000 $ 1,522,500
AAA Claremont County, OH, Hospital Facilities Rev. (Mercy
Health System), AMBAC, MVR, 10.691s, 2021 1,500 1,696,875
AAA Colorado Health Facilities Authority Rev. (PSL Health
Systems), FSA, 7.25s, 2016 2,000 2,177,500
AAA Fredericksburg, VA, Industrial Development Authority
Hospital, 10.127s, 2023 1,500 1,593,750
AAA Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, 10.14s, 2014 1,500 1,595,625
A Massachusetts Health & Education Facilities Authority
(Youville Hospital), 9.1s, 2015 915 987,056
AAA Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Foundation), 6.7s, 2018 1,000 1,022,500
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - continued
AAA Rio Grande Valley, TX, Health Facilities Development
Corp., 9.46s, 2015<F2> $ 2,800 $ 2,943,500
AAA Tulsa, OK, industrial Authority Hospital Rev.,
0s, 2006<F3> 6,430 2,965,838
------------
$ 16,505,144
- -------------------------------------------------------------------------------------------------------------------
Health Care Revenue - 4.1%
BB- Bell County, TX, Health Facilities Authority (Kings
Daughters Hospital), 9.25s, 2008 $ 1,785 $ 2,008,125
NR Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 10.5s, 2018 2,000 1,840,000
BBB Colorado Health Facilities Authority Rev. (Rocky
Mountain Adventist), 6.625s, 2013 1,000 963,750
NR Fulton County, GA, Residential Care Facilities, Elderly
Authority Rev. (Lenbrook Square Foundation), 9.75s, 2017 485 501,369
NR Gadsden County, FL, industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,990 2,069,600
NR Louisiana Public Facilities Authority (Southwest Medical
Center), 11s 2006<F1> 1,735 1,197,276
A Massachusetts Health & Educational Facilities Rev.,
6.875s, 2022 5,000 5,062,500
NR Philadelphia, PA, industrial Development Authority,
10.25s, 2018 1,500 1,567,500
NR Philadelphia, PA, industrial Development Authority,
10.25s, 2018 2,000 2,052,500
A-- St. Tammany Parish, LA, Hospital Service District
#1, Hospital Rev., 6.5s, 2017 1,140 1,083,000
A Torrance, CA, Hospital Rev., 6.875s, 2015 1,845 1,911,881
------------
$ 20,257,501
- -------------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 8. 9%
NR Chelan County, WA, Public Utility District #1,
Consolidated Rev., 9.3s, 2062 $ 4,450 $ 5,006,250
AA - Georgia Municipal Electric Authority, 6.375s, 2016 2,000 2,012,500
AA Intermountain Power Agency, Utah Power Supply Rev.,
8.28s, 2021 4,500 3,948,750
AA Los Angeles, CA, Electric Plant Rev., 4.25s, 2014 2,000 1,535,000
NR Midland Michigan Environmental Development
Authority, Pollution Control Rev. (Midland
Cogeneration), 9.5s, 2009 2,000 2,215,000
NR Montana Board of investment Resources Recovery Rev.
(Yellowstone Energy), 7s, 2019 3,000 2,910,000
AA-- Municipal Electric Authority, GA, Special Obligation,
6.5s, 2020 7,350 7,469,438
A-- North Carolina Eastern Municipal Power Agency,
7.25s, 2007 3,250 3,522,187
AAA Sacramento, CA, Metropolitan Utility District, Electric
Rev., 8.7s, 2007<F2> 2,000 1,872,500
AAA Texas Municipal Power Agency Rev., 0s, 2013<F3> 6,000 1,725,000
AA Washington Public Power Supply System Rev., Nuclear
Proj. #1, 0s, 2003<F3> 2,000 1,147,500
AA Washington Public Power Supply System Rev., Nuclear
Proj. #1, 7s, 2011 4,050 4,247,438
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - continued
AA Washington Public Power Supply System Rev., Nuclear
Proj. #3, 0s, 2004<F3> $ 4,885 $ 2,613,475
AA Washington Public Power Supply System Rev., Nuclear
Proj. #3, 0s, 2015<F3> 4,500 1,091,250
AAA Washington Public Power Supply System Rev., Nuclear
Proj. #3, 7.125s, 2016 2,000 2,160,000
------------
$ 43,476,288
- -------------------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.6%
AA+ Gwinnett County, GA, Water and Sewer Rev., 0s, 2009<F3> $ 6,000 $ 2,310,000
AA+ Harris County, TX, Flood Control District, 0s, 2009<F3> 3,205 1,205,881
AA+ Harris County, TX, Flood Control District, 0s, 2009<F3> 5,845 2,199,181
AA+ Harris County, TX, Flood Control District, 0s, 2010<F3> 3,545 1,240,750
A Massachusetts Water Resources Authority, 6.25s, 2010 3,000 2,955,000
A Massachusetts Water Resources Authority, 5.25s, 2015 1,825 1,576,343
A Massachusetts Water Resources Authority, 6.5s, 2019 7,495 7,551,213
AAA Salt Lake County, UT, Water Conservancy District,
0s, 2008<F3> 2,100 847,875
AAA Salt Lake County, UT, Water Conservancy District,
0s, 2009<F3> 3,800 1,425,000
A-- Union County, NJ, Utilities Authority Solid Waste,
7.2s, 2014 1,500 1,520,625
------------
$ 22,83l,868
- -------------------------------------------------------------------------------------------------------------------
Turnpike Revenue - 3.4%
AAA Harris County, TX, Toll Road, Senior Loan, 5s, 2016 $ 2,650 $ 2,219,375
NR Massachusetts industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 2,925 2,983,500
AAA New Hampshire Turnpike, System Rev., 7s, 2015 5,000 4,518,750
A New Jersey Turnpike Authority, Turnpike Rev.,
6.5s, 2016 1,450 1,497,125
NR San Joaquin Hills, CA, Transportation Corridor,
0s, 2009<F3> 6,750 1,864,687
NR San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005<F3> 1,800 729,000
NR Texas Turnpike Authority (Houston Ship Channel
Bridge), 0s to 1/01/96 (12.625s thereafter), 2020<F3> 3,000 3,063,750
------------
$ 16,876,187
- -------------------------------------------------------------------------------------------------------------------
Airport and Port Revenue -12.8%
AAA Chicago, IL, O'Hare international Airport, Special
Facilities Rev. (United Airlines), 8.75s, 2012 $ 2,000 $ 2,052,500
BB Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 2,055 2,198,850
BB Chicago, IL, O'Hare international Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,740 7,498,250
NR Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 5,300 5,518,625
AAA Connecticut Airport Rev., FGIC, 7.65s, 2012 1,000 1,125,000
BB Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp., 7.625s, 2021 4,500 4,573,125
BBB Denver, CO, Apartment Revenue, 6.75s, 2013 2,535 2,420,925
BBB Denver, CO, City & County Airport Rev., 8.875s, 2012 6,000 6,712,500
BBB Denver, CO, City & County Airport Rev., 7.75s, 2013 1,500 1,590,000
BBB Denver, CO, City & County Airport Rev., 8.75s, 2023 4,750 5,278,437
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Airport and Port Revenue - continued
AAA Hawaii Airports Systems Rev., 5.75s 2008 $ 2,300 $ 2,208,000
AAA Hawaii Airports Systems Rev., Second Series, FGIC,
7.5s, 2020 5,350 5,831,500
BB Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 4,000 4,030,000
AAA Metropolitan Washington District of Columbia Airports
Authority, 7.25s, 2010 4,000 4,320,000
NR St. Augustine, FL, Airport Authority, Airport Rev.
(Grumman Repair Facility), 11s, 2004 500 550,000
BB+ Tulsa, OK, Municipal Airport Trust Rev., 7.6s, 2030 3,815 3,891,300
A+ Virginia Port Authority, 8.2s, 2008 3,000 3,337,500
------------
$ 63,136,512
- -------------------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
AAA Metropolitan Pier & Exposition Authority, Dedicated
State Tax Rev., 0s, 2018 $ 6,400 $ 1,320,000
- -------------------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 5. 7%
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.875s, 2017 $ 8,890 $ 10,134,600
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.25s, 2018 1,000 1,127,500
A-- Burke County, GA, Pollution Control Rev. (Georgia
Power Co./Vogtle Project), 9.375s, 2017 2,650 3,017,687
A Charleston County, SC, Resource Recovery Rev. (Foster
Wheeler), 9.25s, 2010 3,200 3,612,000
AA-- Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s, 2020 2,000 2,237,500
A-- Erie County, PA (International Paper), 7.875s, 2016 1,200 1,320,000
NR Illinois Development Finance Authority, Economic
Development Rev. (America Tire), 10.5s, 2007 750 637,500
A-- Matagorda County, TX, Pollution Control Rev. (Central
Power & Light), 7.875s, 2016 1,500 1,612,500
BB-- Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 1,000 992,500
NR San Joaquin Hills, CA, Transportation Corridor,
0s, 2004<F3> 3,000 1,320,000
BBB West Side Calhoun County, TX, Navigation District,
8.2s, 2021 2,000 2,205,000
------------
$ 28,216,787
- -------------------------------------------------------------------------------------------------------------------
Universities - 0.6%
NR Illinois Educational Facilities Authority Rev.,
8.75s, 2015 $ 1,500 $ 1,599,375
AAA University of lllinois, University Rev., 0s, 2009<F3> 2,915 1,129,562
------------
$ 2,728,937
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------------------------
Miscellaneous Revenue - 8.5%
NR Atlanta, GA, Downtown Development Authority,
11.5s, 2015<F1><F5> $ 1,055 $ 422,064
NR Bristol, CT, Resource Recovery Facilities, 6.5s, 2014<F4> 8,000 7,620,000
NR Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.125s, 2013 980 1,041,250
NR Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.25s, 2023 1,000 1,063,750
NR Crystal City, TX, Lease Obligations, 10.5s, 2008<F1> 1,251 1,189,173
BB- Greater Detroit, Ml, Resource Recovery Authority,
9.25s, 2008 2,130 2,279,100
A Hillsborough County, FL, Capital improvement Rev.,
6.75s, 2022 2,810 2,890,788
NR Martha's Vineyard, MA, Land Bank, 8.125s, 2011 2,000 2,025,000
NR Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 1,000 1,035,000
BB+ New York State Medical Care Facility, 7.75s, 2020 1,055 1,116,981
A- Pennsylvania industrial Development Authority Rev.,
7s, 2011 7,000 7,288,750
NR Retema, TX, Special Facilities Rev. (Retema Park
Racetrack Project), 8.75s, 2018 4,000 3,700,000
AAA San Mateo County, CA, Joint Powers Financing
Authority, 6s, 2019 4,675 4,552,281
A State of Pennsylvania Finance Authority Rev., 6.6s, 2009 3,305 3,276,081
AAA Tulsa, OK, Public Facilities Authority, AMBAC,
5.55s, 2005 2,175 2,107,031
------------
$ 41,607,249
- -------------------------------------------------------------------------------------------------------------------
Special Assessment District - 0.7%
NR Northeast Maryland, Waste Disposal Authority
(Montgomery County Resource Recovery), 6.3s, 2016 $ 3,750 $ 3,562,500
- -------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $466,731,454) $485,724,937
- -------------------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.2%
- -------------------------------------------------------------------------------------------------------------------
Parish of East Baton Rouge, LA, Pollution Control Rev., due 11/01/19 $ 300 $ 300,000
Peninsula Ports Authority, VA (Shell Oil Co.), due 12/01/05 100 100,000
Unita County, WY, Pollution Control Rev., due 8/15/20 700 700,000
- -------------------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,100,000
- -------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $467,831,454) $486,824,937
Other Assets, Less Liabilities - 0.9% 4,641,184
- -------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $491,466,121
- -------------------------------------------------------------------------------------------------------------------
<FN>
<F1>Security valued by or at the direction of the Trustees.
<F2>Indexed security (see Note 7).
<F3>Non-income producing security in default.
<F4>When-issued security. At March 31, 1994, the Fund had sufficient cash and/or
securities at least equal to the value of the when-issued security.
<F5>Non-income producing.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Statement of Assets and Liabilities
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
March 31 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $467,831,454) $486,824,937
Cash 1,039,653
Receivable for investments sold 7,491,454
Receivable for daily variation margin on open futures contracts 17,188
Receivable for Fund shares sold 4,277,514
Interest receivable 9,345,063
Other assets 19,426
------------
Total assets $509,015,235
------------
Liabilities:
Distributions payable $ 896,518
Payable for investments purchased 6,906,186
Payable for when-issued investments purchased 8,000,000
Payable for Fund shares reacquired 1,535,503
Payable to affiliates
Management fee 30,288
Shareholder servicing agent fee 2,964
Distribution fee 13,425
Accrued expenses and other liabilities 164,230
------------
Total liabilities $ 17,549,114
------------
Net assets $491,466,121
------------
Net assets consist of:
Paid-in capital $475,041,627
Unrealized appreciation on investments 19,145,046
Accumulated distributions in excess of net realized gain on investments (1,230,985)
Accumulated distributions in excess of net investment income (1,489,567)
------------
Total $491,466,121
------------
Shares of beneficial interest outstanding 57,408,348
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $5,594,908 / 653,752 shares of beneficial interest outstanding) $8.56
-----
Offering price per share (100/5.25) $8.99
-----
Class B shares:
Net asset value offering price and redemption price per share
(net assets of $479,478,472 / 56,008,099 shares of beneficial interest outstanding) $8.56
-----
Class C shares:
Net asset value offering price and redemption price per share
(net assets of $6,392,741/746,497 shares of beneficial interest outstanding) $8.56
-----
On sales of $ 100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
Financial Statements - continued
Statement of Operations
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Four Months Ended Year Ended
March 31, 1994 November 30, 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income
Interest income $ 11,966,182 $35,097,495
------------ -----------
Expenses --
Management fee $ 1,301,038 $ 3,751,548
Trustees' compensation 10,848 33,617
Shareholder servicing agent fee (Class A) 687 65
Shareholder servicing agent fee (Class B) 384,766 1,041,705
Shareholder servicing agent fee (Class C) 1,212
Distribution and service fee (Class B) 1,759,118 4,985,509
Distribution and service fee (Class C) 7,981
Custodian fee 61,028 174,090
Printing 60,049 54,007
Auditing fees 38,916 54,047
Legal fees 20,328 48,565
Postage 14,939 47,497
Miscellaneous 170,158 337,597
------------ -----------
Total expenses $ 3,831,068 $l0,528,247
------------ -----------
Net investment income $ 8,135,114 $24,569,248
------------ -----------
Realized and Unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ (1,579,438) $ 3,158,715
Futures contracts - (983,969)
------------ -----------
Net realized gain (loss) on investments $ (1,579,438) $ 2,174,746
------------ -----------
Change in unrealized appreciation (depreciation) --
Investments $(21,911,339) $20,124,474
Futures contracts 151,563 (272,031)
------------ -----------
Net unrealized gain (loss) on investments $(21,759,776) $19,852,443
------------ -----------
Net realized and unrealized gain (loss) on investments $(23,339,214) $22,027,189
------------ -----------
Increase (decrease) in net assets from operations $(15,204,100) $46,596,437
------------ -----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
Financlal Statements, - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30,
Four Months Ended --------------------------------
March 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase decrease) in net assets:
From operations --
Net investment income $ 8,135,114 $ 24,569,248 $ 23,383,890
Net realized gain (loss) on investments (1,579,438) 2,174,746 4,966,272
Net unrealized gain (loss) on investments (21,759,776) 19,852,443 7,393,722
------------- ------------ ------------
Increase (decrease) in net assets from operations $ (15,204,100) $ 46,596,437 $ 35,743,884
------------- ------------ ------------
Equalization $ -- $ -- $ 60,720
------------- ------------ ------------
Distributions declared to shareholders --
From net investment income (Class A) $ (24,388) $ (2,142) $ --
From net investment income (Class B) (6,513,043) (25,152,570) (23,444,653)
From net investment income (Class C) (36,953) -- --
In excess of net investment income (Class A) (444) (150) --
In excess of net investment income (Class B) (1,488,102) (1,560,580) --
In excess of net investment income (Class C) (1,021) -- --
From net realized gain on investments (Class A) (332) -- --
From net realized gain on investments (Class B) (319,911) (5,237,004) (1,001,217)
In excess of net realized gain on investments (Class A) (1,280) -- --
In excess of net realized gain on investments (Class B) (1,229,705) -- --
------------- ------------ ------------
Total distributions declared to shareholders $ (9,615,179) $(31,952,446) $(24,445,870)
------------- ------------ ------------
Fund share (principal) transactions --
Net proceeds from sale of shares $ 31,229,236 $118,919,014 $ 86,677,236
Net asset value of shares issued to shareholders in
reinvestment of distributions 5,241,616 18,199,816 13,232,047
Cost of shares reacquired (38,825,729) (83,071,056) (70,403,847)
------------- ------------ ------------
Increase (decrease) in net assets from Fund share
transactions $ (2,354,877) $ 54,047,774 $ 29,505,436
------------- ------------ ------------
Total increase (decrease) in net assets $ (27,174,156) $ 68,691,765 $ 40,864,170
------------- ------------ ------------
Net assets:
At beginning of period 518,640,277 449,948,512 409,084,342
------------- ------------ ------------
At end of period (including undistributed
[distributions in excess of] net investment income of
$(1,489,567), $(1,560,730) and $1,925,820,respectively) $491,466, 121 $518,640,277 $449,948,512
------------- ------------ ------------
See notes to financial statenents
</TABLE>
<PAGE>
<TABLE>
Financial Statements - continued
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Four Months Four Months
Ended Period Ended Ended Year Ended November 30,
March 31, November 30, March 31, -----------------------
1994 1993<F1> 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 8.99 $ 9.15 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------
Income from investment operations<F4>--
Net investment income $ 0.15 $ 0.12 $ 0.14 $ 0.42 $ 0.47
Net realized and unrealized gain (loss)
on investments (0.51) (0.16) (0.51) 0.42 0.26
------ ------ ------ ------ ------
Total from investment operations $(0.36) $(0.04) $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $(0.02) $(0.11) $(0.01) $(0.45) $(0.48)
In excess of net investment income _ -- (0.01) -- (0.03) --
From net realized gains (0.01) -- (0.01) (0.10) --
In excess of net realized gains (0.04) -- (0.04) -- --
From paid-in capital-- -- -- -- -- (0.02)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.07) $(0.12) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.56 $ 8.99 $ 8.56 $ 8.99 $ 8.73
------ ------ ------ ------ ------
Total return<F2> (7.90)%<F3> (1.80)%<F3> (8.97)%<F3> 9.95% 8.82%
Ratios (to average net assets)/Supplemental data:
Expenses 1.07%<F3> 0.76%<F3> 2.24%<F3> 2.11% 2.03%
Net investment income 5.31%<F3> 4.94%<F3> 4.74%<F3> 4.92% 5.50%
Portfolio turnover 9% 30% 9% 30% 52%
Net assets at end of period (000 omitted) $5,595 $461 $479,478 $518,179 $449,949
<FN>
<F1>For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
<F2>Total returns do not include the sales charge. If the sales charge had been
included, the results would have been lower.
<F3>Annualized.
<F4>Per share data for the four months ended March 31, 1994 is based on average
shares outstanding.
See notes to financial statements
</TABLE>
<PAGE>
Financial Statements-continued
Financial Highlights-continued
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, Period Ended
------------------------------------------------------------ March 31,
1991 1990 1989 1988 1987<F1> 1994<F2>
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47 $ 9.07
------ ------ ------ ------ ------ ------
Income from investment operations<F5>--
Net investment income 0.49 $ 0.49 $ 0.51 $ 0.50 0.38 $ 0.09
Net realized and unrealized gain (loss)
on investments 0.25 (0.15) 0.30 0.43 (0.83) (0.59)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45) $(0.50)
------ ------ ------ ------ ------ ------
Less net investment income distributions
declared to shareholders $(0.49) $(0.50) $(0.51) $(0.49) $(0.35) $(0.01)
------ ------ ------ ------ ------ ------
Net asset value-end of period $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.56
------ ------ ------ ------ ------ ------
Total return<F3> 9.21% 4.18% 10.24% 12.53% (5.79)%<F3> (19.42)%<F3>
Ratios (to average net assets)/Supplemental data:
Expenses 2.04% 2.05% 2.07% 2.09% 2.03%<F3> 2.18%
Net investment income 5.82% 5.99% 6.09% 6.38% 6.00%<F3> 4.62%
Portfolio turnover 73% 91% 127% 171% 138% 9%
Net assets at end of period (000 omitted) $409,084 $379,239 $343,887 $244,825 $183,935 $6,393
<FN>
<F1>For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
<F2>For the period from the commencement of offering of Class C shares, January
3, 1994 to March 31, 1994.
<F3>Total returns do not include the sales charge. If the charge had been
included, the results would have been lower.
<F4>Annualized.
<F5>Per share data for the four months ended March 31, 1994 is based on average
shares outstanding.
See notes to financial statements
</TABLE>
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Municipal income Fund (the Fund) is a diversified series of MFS(R) Municipal
Series Trust (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the investment Company Act of 1940, as amended, as
an open-end management investment company. During 1993 the Fund changed its
fiscal year end from November 30 to March 31, and financial statements are thus
being presented for the four-month period ended March 31, 1994. The Fund offers
Class A, Class B and Class C shares.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of fixed income securities and indexes on such securities at a
fixed price on a future date and may enter into options on such futures
contracts. The Fund is required to deposit either in cash or securities an
amount equal to a certain percentage of the contract amount. Subsequent payments
are made or received by the Fund each day, dependent on the daily fluctuations
in the value of the underlying security, and are recorded for financial
statement purposes as unrealized gains or losses by the Fund. The Fund's
investment in financial futures contracts is designed to hedge against
anticipated future changes in interest or securities prices. Should interest or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss.
<PAGE>
Notes to Financial Statements - continued
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At March 31, 1994, the Fund had no securities on loan.
Investment Transactions and Incone - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
Effective December 1, 1992, the Fund adopted Statement of Position (SOP) 93-1,
Financial Accounting and Reporting for High-Yield Debt Securities by investment
Companies, which establishes the use of the effective interest method for
reporting interest income on payment in-kind (PIK) bonds, whereby interest
income on PIK bonds is recorded ratably by the Fund at a constant yield to
maturity. The SOP also provides guidance on accounting for, and reporting of,
costs incurred in support of defaulted debt securities. Capital infusions, which
are generally non-recurring and incurred to protect or enhance the value of
high-yield debt securities are reported as an addition to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization are
considered workout expenses and are reported as realized losses. Ongoing costs
incurred to protect or enhance an investment, or costs incurred to pursue other
claims or legal actions are reported as operating expenses. The adoption of this
SOP had no significant effect on the financial statements of the Fund.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. Distributions paid by the Fund from
net interest received on tax-exempt municipal bonds are not includable by
shareholders as gross income for federal income tax purposes because the Fund
intends to meet certain requirements of the Code applicable to regulated
investment companies which will enable the Fund to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private activity
bonds issued after August 7, 1986 may be considered a tax preference item to
shareholders.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Distributions to shareholders are recorded on the
ex-dividend date.
<PAGE>
Notes to Financial Statements - continued
Effective December 1, 1992, the Fund adopted Statement of Position (SOP) 93-2,
Determination, Disclosure, and Financial Statement Presentation of income,
Capital Gain, and Return of Capital Distributions by investment Companies. The
SOP distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits be reported in the financial statements as a return of capital. The SOP
also requires that differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. The cumulative effect of adopting the SOP decreased undistributed net
investment income and increased paid-in capital and accumulated net realized
gain on investments by $62,989, $62,835 and $154, respectively. This change had
no effect on the net assets or net asset value per share of the Fund.
Equalization- Prior to December 1, 1992, the Fund followed the accounting
practice known as equalization by which a portion of the proceeds from sales and
costs of reacquisitions of Fund shares is allocated to undistributed net
investment income. As a result, undistributed net investment income per share
was unaffected by sales or reacquisitions of Fund shares. Effective December 1,
1992, the Fund discontinued the use of equalization. This change had no effect
on the Fund's net assets, net asset value per share, and distributions.
Discontinuing the use of equalization will result in a simpler and more
meaningful financial statement presentation. The cumulative effect of the change
was to decrease undistributed net investment income and increase paid-in capital
by $1,277,367.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class A and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective sales charges, service fees and
distribution fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on average daily net assets, without distinction
between share class. Dividends are declared separately for each class. No class
has preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses, including distribution
and service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general of five facilities. Prior to
September 1, 1993, Lifetime Advisers, Inc. (LAI), a wholly owned subsidiary of
MFS, was the investment adviser for the Fund. The management fee, computed and
paid monthly at an annual rate of 0.30% of average daily net assets and 6.43% of
investment income, amounted to $1,301,038 for the four months ended March 31,
1994 and $3,751,548 for the year ended November 30, 1993.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are of fixers or directors of LAI, MFS, MFS Financial Services, inc.
(FSI) and MFS Service Center, inc. (MFSC). The Fund has an unfunded defined
benefit plan for all its independent Trustees. Included in Trustees'
compensation is a net periodic pension expense of $2,115 for the four months
ended March 31, 1994 and $6,192 for the year ended November 30, 1993.
<PAGE>
Notes to Flnaneial Statements - continued
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$5,109 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate Distribution Plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% of the Fund's
average daily net assets attributable to Class A shares which are attributable
to that securities dealer, commissions to dealers and payments to FSI
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. Payments will
commence under the distribution plan on the date on which the net assets of the
Fund attributable to Class A shares first equals or exceeds $40 million.
The Class B Distribution Plan provides that the Fund will pay FSI a distribution
fee, equal to 0.75% annually, and a service fee of up to 0.25%, of the Fund's
average daily net assets attributable to Class B shares which FSI will pay to
each securities dealer that enters into a sales agreement with FSI at a rate of
up to 0.25% of the Fund's average daily net assets attributable to Class B
shares. The service fee is intended to be additional consideration for services
rendered by the dealer with respect to Class B shares. Fees incurred under the
distribution plan during the period ended March 31, 1994 and year ended November
30, 1993 were 1.00% of average daily net assets attributable to Class B shares
on an annualized basis and amounted to $1,759,118 and $4,985,509, respectively.
The Class C Distribution Plan provides that the Fund will pay FSI a monthly
distribution fee, equal to 0.75% annually, and a service fee of up to 0.25%, of
the Fund's average daily net assets attributable to Class C shares which FSI
will pay to each securities dealer that enters into a sales agreement with FSI
at a rate of up to 0.25% of the Fund's average daily net assets attributable to
Class C shares. The service fee is intended to be additional consideration for
services rendered by the dealer with respect to Class C shares. Fees incurred
under the distribution plan during the four months ended March 31, 1994 were
1.00% of average daily net assets attributable to Class C shares on an
annualized basis and amounted to $7,981.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the four months ended March 31, 1994 were $0 and $291,492 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$687, $384,766 and $1,212 for Class A, Class B and Class C shares, respectively,
during the four months ended March 31, 1994 and $65 and $1,041,705,
respectively, for Class A and Class B shares for the year ended November 30,
1993. The fee is calculated as a percentage of average daily net assets of each
class of shares at an effective annual rate of up to 0.15%, 0.22% and 0.15%
attributable to Class A, Class B and Class C shares, respectively.
<PAGE>
Notes to Financial Statements - continued
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased options transactions and short-term obligations, aggregated
$47,924,790 and $53,002,471, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 467,831,454
-------------
Gross unrealized appreciation $ 27,891,736
Gross unrealized depreciation (8,898,253)
-------------
Net unrealized appreciation $ 18,993,483
-------------
At March 31, 1994, the Fund, for federal income tax purposes, had a capital loss
carryforward of $1,413,222, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on March 31, 2002.
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
<CAPTION>
Four Months Ended Period Ended
March 31, 1994 November 30, 1993<F1>
-------------------------- --------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 766,727 $ 6,792,015 51,270 $ 466,122
Shares issued to shareholders
in reinvestment of
distributions 1,368 12,126 134 1,211
Shares reacquired (165,634) (1,507,352) (113) (1,021)
-------- ------------ ------ ------------
Net increase 602,461 $ 5,296,789 51,291 $ 466,312
-------- ------------ ------ ------------
Class B Shares
<CAPTION>
Four Months Ended Year Ended Year Ended
March 31, 1994 November 30, 1993 November 30, 1992
-------------------------- -------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,771,398 $ 16,008,151 13,299,141 $118,452,892 10,070,064 $86,677,236
Shares issued to shareholders
in reinvestment of
distributions 581,143 5,207,213 2,056,699 18,198,605 1,542,486 13,232,047
Shares reacquired (3,964,973) (35,578,939) (9,277,213) (83,070,035) (8,203,836) (70,403,847)
---------- ------------ ---------- ------------ ---------- -----------
Net increase (decrease) (1,612,432) $(14,363,575) 6,078,627 $ 53,581,462 3,408,714 $29,505,436
---------- ------------ ---------- ------------ ---------- -----------
Class C Shares
<CAPTION>
Period Ended
March 31, 1994<F2>
--------------------------
Shares Amount
- ------------------------------------------------------------
<S> <C> <C>
Shares sold 940,881 $ 8,429,070
Shares issued to shareholders
in reinvestment of
distributions 2,564 22,277
Shares reacquired (196,948) (1,739,438)
-------- ------------
Net increase 746,497 $ 6,711,909
-------- ------------
<FN>
<F1> Period from September 7, 1993 (commencement of offering of Class A shares)
to November 30, 1993.
<F2> Period from January 3, 1994 (commencement of offering of Class C shares) to
March 31, 1994
</TABLE>
<PAGE>
Notes to Financial Statements - continued
(6) Line of credit
The Fund has entered into an agreement which enables it to participate with
other funds managed by MFS, or an affiliate of MFS, in an unsecured line of
credit with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
four months ended March 31, 1994 and for the year ended November 30, 1993 was
$665 and $10,096, respectively.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities and to assist in managing exposure
to market risks such as interest rates. These financial instruments include
written options and futures contracts. The potential or contractual amounts of
these instruments represent the investment the Fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at March 31, 1994 is
as follows:
Futures Contracts
Unrealized
Expiration Contracts Position Appreciation
- -----------------------------------------------------------------------------
June 1994 100 Treasury Bonds Short $134,375
June 1994 100 Treasury Bonds Short 9,375
June 1994 50 Treasury Bonds Short 7,813
--------
$151,563
--------
At March 31, 1994, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
The Fund also invests in indexed securities whose value may be linked to
interest rates, commodities, indices or other financial indicators. Indexed
securities are fixed-income securities whose proceeds at maturity
(principal-indexed securities) or interest rates (coupon-indexed securities)
rise and fall according to the change in one or more specified underlying
instruments. Indexed securities may be more volatile than the underlying
instrument itself. A summary of indexed securities held at March 31, 1994
follows on the next page.
<PAGE>
Notes to Financial Statements-continued
<TABLE>
Coupon indexed Securities
Unrealized
Principal Appreciation
Description Index (000 omitted) Value (Depreciation)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Hampshire Turnpike
System Rev., 7s, 2015 PSA $5,000 $4,518,750 $(481,250)
Rio Grande Valley, TX,
Health Facilities Development
Corp., 9.46s, 2015 J.J. Kenny 2,800 2,943,500 176,736
Sacramento, CA, Metropolitan
Utility District, Electric Rev.,
8.7s, 2007 PSA 2,000 1,872,500 (127,500)
San Bernardino, CA,
Short Rites, 8.55s, 2016 J.J. Kenny 3,500 3,438,750 (274,213)
---------
$(706,227)
---------
</TABLE>
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Municipal Series Trust and the Shareholders of MFS
Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Income Fund (one of the series
constituting MFS Municipal Series Trust) as of March 31, 1994, the related
statement of operations for the four months ended March 31, 1994 and the year
ended November 30, 1993, the statement of changes in net assets for the four
months ended March 31, 1994 and the years ended November 30, 1993 and 1992, and
the financial highlights for the four months ended March 31, 1994 and each of
the years in the seven-year period ended November 30, 1993. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal Income
Fund at March 31, 1994, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Boston, Massachusetts
May 5, 1994
-----------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE> 59
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - September 30, 1994
Municipal Bonds - 97.9%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Student Loan Revenue - 1.2%
AAA Pennsylvania Higher Education Assistance Agency,
10.129s, 2026*<F3> $ 5,500 $ 5,458,750
- ------------------------------------------------------------------------------------------------------------
General Obligation - 10.9%
NR Arlington, TX, Independent School Refunding Rev.,
0s, 2007 $ 3,070 $ 1,459,110
A+ Commonwealth of Massachusetts, 7s, 2007 2,590 2,779,148
AA- Commonwealth of Pennsylvania, 6.375s, 2011 1,250 1,254,512
AA+ Harris County, TX, Certificates of Obligation
(Astrodome Improvements Project), 8.1s, 2008 1,385 1,525,647
AAA Lowell, MI, Area School District, FGIC, 0s, 2020 5,000 937,250
AAA Maricopa County, AZ, School District #11,
Peoria Unified, 0s, 2004 5,245 2,980,051
A- New York, NY, 8.2s, 2003 5,000 5,631,050
A- New York, NY, 7.5s, 2008 1,350 1,451,506
A- New York, NY, 8.25s, 2010 4,500 5,077,980
A- New York, NY, 8s, 2018 30 33,305
AAA Northwest Texas, Independent School District, AMBAC,
0s, 2011 3,000 1,033,680
AA State of Texas, 7.625s, 2018 14,405 15,676,529
AA State of Wisconsin, 8.1s, 2018 7,115 7,763,248
AA State of Wisconsin, 7.6s, 2020 2,865 2,957,941
-----------
$ 50,560,957
- ------------------------------------------------------------------------------------------------------------
State and Local Appropriation - 4.6%
AAA Houston, TX, Water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2014 $ 1,100 $ 1,087,306
AAA Houston, TX, Water Conveyance Systems Contract,
Certificates of Participation, 6.25s, 2015 2,300 2,272,906
A+ Indianapolis, IN, Local Public Improvement Bond
Bank, 6.75s, 2020 1,000 990,230
A+ Massachusetts Bay Transportation Authority, 5.5s,
2012 4,500 4,063,950
BBB New York Dormitory Authority Rev. (City University),
7.5s, 2010 2,500 2,748,325
BBB+ New York Medical Care Facility, Financial Agency
Rev., 8.875s, 2007 770 854,153
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2008 745 826,540
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2020 2,580 2,842,128
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.5s, 2021 540 581,526
BBB New York Urban Development Corp. (State Facilities),
7.5s, 2011 2,500 2,687,925
AAA Philadelphia, PA, Regional Port Authority Lease
Rev., MVRIC, 8.87s, 2020*<F3> 2,500 2,320,950
-----------
$ 21,275,939
- ------------------------------------------------------------------------------------------------------------
Refunded and Special Obligations - 17.9%
AAA Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,161,747
NR Chapel Hill, NC, Packaging Facilities Rev.,
8.125s, 2000 980 1,138,917
NR Chapel Hill, NC, Packaging Facilities Rev.,
8.25s, 2000 1,000 1,168,650
AAA Commonwealth of Massachusetts, 7.5s, 2000 1,990 2,257,118
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Refunded and Special Obligations - continued
A+ Commonwealth of Massachusetts, 7.5s, 2000 $ 2,010 $ 2,279,802
NR Dayton, OH, Special Facilities Rev. (Emery Air
Freight), "A", 12.5s, 2009 1,000 1,161,670
NR Illinois Education and Facilites Authority, 8.75s,
1995 1,500 1,588,884
AA Intermountain Power Agency, UT, Power Supply Rev.,
7s, 1999 5,000 5,451,200
AAA Los Angeles, CA, Convention & Exhibition Center
Authority, Certificates of Participation, 7.375s,
1999 2,000 2,221,380
NR Massachusetts Health & Education Facilities
Authority Rev., 9.1s, 1996 915 986,233
NR Massachusetts Health & Education Facilities
Authority Rev. (Suffolk University), 8s, 2000 1,000 1,144,050
AAA Massachusetts Water Resources Authority, 7.625s,
2000 3,200 3,614,368
AAA New York Local Government Assistance Corp.,
7.25s, 2001 2,750 3,088,195
A- New York, NY, Pre-refunded, "A", 8s, 2001 2,970 3,451,170
AAA New York Medical Care Facility, Financial Agency
Rev., 8.875s, 1997 680 766,292
BBB+ New York Medical Care Facility, Financial Agency
Rev., 7.75s, 2000 1,030 1,166,949
AAA New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2000 670 771,170
AAA New York Medical Care Facility, Financial Agency
Rev., 7.875s, 2000 3,565 4,103,315
AAA New York Medical Care Facility, Financial Agency
Rev., 7.5s, 2001 1,460 1,656,443
BBB New York Urban Development Corp. (Correctional
Facilities), 7.75s, 2000 5,000 5,665,750
NR New York Urban Development Corp. Rev., 7.3s, 2002 2,340 2,642,398
A- Pennsylvania Industrial Development Authority Rev.,
7s, 2001 7,000 7,743,190
AAA Philadelphia, PA, Municipal Authority Rev., 7s, 2001 2,000 2,226,560
NR Texas Turnpike Authority Rev., 0s, 2002 3,000 3,870,420
AAA Washington County, PA, Authority Lease Rev.,
7.45s, 2000 1,200 1,358,243
AA Washington Public Power Supply System Rev., Nuclear
Project #1, 7.25s, 2000 3,350 3,695,720
AAA Washington Public Power Supply System Rev., Nuclear
Project #1, 14.375s, 2001 1,000 1,368,260
AAA Washington Public Power Supply System Rev., Nuclear
Project #2, 7.375s, 2000 5,355 5,976,930
AA Washington Public Power Supply System Rev., Nuclear
Project #3, 7.25s, 2000 5,000 5,516,000
BB+ West Virginia Water Development Authority,
8.125s, 1998 1,000 1,124,900
BB+ West Virginia Water Development Authority,
8.625s, 1998 1,000 1,143,040
-----------
$ 83,508,964
- ------------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 9.4%
AAA Berkeley, Brookes & Fayette Counties, WV, MBIA,
0s, 2016 $14,000 $ 1,413,160
AAA Chicago, IL, Residential Mortgage Rev., 0s, 2009 7,000 2,425,570
BB Cook County, IL, 0s, 2015 16,975 1,807,328
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - continued
NR De Kalb, IL, Single Family Mortgage Rev., 7.45s,
2009 $ 315 $ 328,391
NR Delaware Housing Authority Rev., 9.125s, 2018 915 953,842
BB+ Harris County, TX, Housing Finance Corp.,
9.625s, 2003 310 309,801
BB+ Harris County, TX, Housing Finance Corp.,
9.875s, 2014 555 554,545
A+ Illinois Housing Development Agency, 0s, 2016 8,785 942,630
AAA Kentucky Housing Corp., Housing Rev., FHA,
7.45s, 2023 6,580 6,714,758
AAA Louisiana Housing Finance Agency, Single Family
Mortgage Rev., FGIC, 9.375s, 2015 325 338,091
AA+ Minnesota Housing Finance Agency, 9s, 2018 4,655 4,792,230
NR Mississippi Home Corp., Single Family Rev., 7.1s,
2023 910 932,140
A+ New Hampshire Housing Finance Authority, 7.2s, 2010 7,000 7,147,000
A+ New Hampshire Housing Finance Authority,
8.625s, 2013 780 809,367
A+ Tennessee Housing Development Agency, 8.25s, 2020 1,985 2,074,285
A+ Tennessee Housing Development Agency, 8.125s, 2021 2,145 2,229,749
AA Utah Housing Finance Agency, 8.625s, 2019 2,020 2,068,015
AA Utah Housing Finance Agency, 9.125s, 2019 230 236,240
AA Utah Housing Finance Agency, 9.25s, 2019 175 185,145
A+ Virginia Housing Development Authority, 7.1s, 2022 1,000 1,017,670
A+ West Virginia Housing Development Fund, 7.85s, 2014 6,150 6,344,279
-----------
$ 43,624,236
- ------------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.9%
NR Colorado Housing Finance Authority, 8.3s, 2023 $ 2,750 $ 2,870,752
NR Maryland Community Development Administration, 8.5s,
2028 3,000 3,114,210
A+ New Jersey Housing & Mortgage Finance Agency,
6.6s, 2014 3,000 2,975,820
A+ Pennsylvania Housing Finance Agency, 7.6s, 2013 2,000 2,128,480
AA- Vermont Housing Finance Agency, 8.375s, 2020 2,795 2,896,766
A Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,094,800
-----------
$ 18,080,828
- ------------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 2.9%
AAA Clermont County, OH, Hospital Facilities Rev. (Mercy
Health System), AMBAC, MVRIC, 9.991s, 2021*<F3> $ 1,500 $ 1,533,675
AAA Colorado Health Facilities Authority Rev. (PSL
Health Systems), FSA, 7.25s, 2016 2,000 2,154,140
AAA Fredericksburg, VA, Industrial Development
Authority, Hospital Facilities Rev., 9.57s, 2023*<F3> 1,500 1,504,755
AAA Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, 9.192s, 2014*<F3> 1,500 1,491,675
AAA Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation), 6.7s,
2018 1,000 1,015,800
AAA Rio Grande Valley, TX, Health Facilities Development
Corp., 7.72s, 2015(S)<F5> 2,800 2,776,424
AAA Tulsa, OK, Industrial Authority Hospital Rev. (St.
Johns Medical Center), 0s, 2006 6,430 3,072,190
-----------
$ 13,548,659
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Health Care Revenue - 4.4%
BB- Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 $ 1,720 $ 1,906,276
NR Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 10.5s, 2018 2,000 1,840,000
BBB Colorado Health Facilites Authority Rev.
(Rocky Mountain Adventist), 6.625s, 2013 1,000 956,000
NR Fulton County, GA, Residential Care Facilities,
Elderly Authority Rev. (Lenbrook Square
Foundation), 9.75s, 2017 485 496,790
NR Gadsden County, FL, Industrial Development
Authority, (RHA/FLA Properties), 10.45s, 2018 1,970 2,026,973
NR Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,681 1,032,526
A Massachusetts Health & Educational Facilities Rev.,
6.875s, 2022 5,000 4,753,900
BBB New York Medical Care Facilities, Financing Agency
Rev., 7.75s, 2020 1,025 1,124,118
NR Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 1,500 1,548,240
NR Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 2,000 2,033,800
A- St. Tammany Parish, LA, Hospital Service District
#1, Hospital Rev., 6.5s, 2017 1,140 1,067,678
A Torrance, CA, Hospital Rev., 6.875s, 2015 1,815 1,801,260
-----------
$ 20,587,561
- ------------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 8.0%
NR Chelan County, WA, Public Utility District #1,
Consolidated Rev., 9.3s, 2017 $ 4,450 $ 4,941,057
A+ Georgia Municipal Electric Authority, 6.375s, 2016 2,000 1,970,920
NR Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 2,000 2,168,920
NR Montana Board of Investment Resources Recovery Rev.
(Yellowstone Energy), 7s, 2019 3,000 2,819,970
A+ Municipal Electric Authority, GA, Special
Obligation, 6.5s, 2020 7,350 7,285,761
A- North Carolina Eastern Municipal Power Agency,
7.25s, 2007 3,250 3,543,865
AAA Sacramento, CA, Municipal Utility District, Electric
Rev., 5.32s, 2007(S)<F5> 2,000 1,630,560
AAA Texas Municipal Power Agency Rev., 0s, 2011 2,530 852,306
AAA Texas Municipal Power Agency Rev., 0s, 2013 6,000 1,744,620
AAA Texas Municipal Power Agency Rev., 0s, 2014 7,685 2,093,087
AA Washington Public Power Supply System Rev., Nuclear
Project #1, 0s, 2003 2,000 1,167,920
AA Washington Public Power Supply System Rev., Nuclear
Project #1, 7s, 2011 4,050 4,168,422
AA Washington Public Power Supply System Rev., Nuclear
Project #3, 0s, 2004 4,885 2,657,245
-----------
$ 37,044,653
- ------------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 5.5%
AAA Contra Costa, CA, Water District Rev., 5.5s, 2019 $ 4,000 $ 3,544,480
AA+ Gwinnett County, GA, Water and Sewer Rev., 0s, 2009 6,000 2,453,520
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - continued
AAA Harris County, TX, Flood Control District FGIC,
0s, 2009 $ 3,205 $ 1,230,431
AAA Harris County, TX, Flood Control District FGIC,
0s, 2010 3,545 1,266,877
A Massachusetts Water Resources Authority, 6.25s, 2010 3,000 2,965,530
A Massachusetts Water Resources Authority, 6.5s, 2019 7,495 7,510,365
A New York, NY, City Municipal Water Finance
Authority, 5.5s, 2019 3,400 2,949,432
AAA Salt Lake County, UT, Water Conservancy District
Rev., 0s, 2008 2,100 879,480
AAA Salt Lake County, UT, Water Conservancy District
Rev., 0s, 2009 3,800 1,452,512
A- Union County, NJ, Utilities Authority Solid Waste,
7.2s, 2014 1,500 1,510,365
-----------
$ 25,762,992
- ------------------------------------------------------------------------------------------------------------
Turnpike Revenue - 1.6%
NR Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 $ 2,900 $ 3,040,447
A New Jersey Turnpike Authority, Turnpike Rev.,
6.5s, 2016 1,450 1,483,408
NR San Jaoquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,800 761,904
NR San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2009 6,750 2,000,093
-----------
$ 7,285,852
- ------------------------------------------------------------------------------------------------------------
Airport and Port Revenue - 12.4%
BB+ Alliance Airport Authority, Inc., TX, Special
Facilities Rev., 7.5s, 2029 $ 4,500 $ 4,374,090
AAA Chicago, IL, O' Hare International Airport, Special
Facilities Rev. (United Airlines), 6.75s, 2012 2,000 2,030,140
BB Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 2,055 2,178,095
BB Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,640 7,238,662
NR Cleveland, OH, Airport, Special Rev. (Continental
Airlines), 9s, 2019 5,300 5,468,699
AAA Connecticut Airport Rev., FGIC, 7.65s, 2012 1,000 1,117,330
BB Denver, CO, City & County Airport Rev., 8.875s, 2012 6,000 6,390,480
BB Denver, CO, City & County Airport Rev., 8.75s, 2023 4,750 5,005,170
AAA Hawaii Airports Systems Rev., 5.75s, 2008 2,300 2,193,924
AAA Hawaii Airports Systems Rev., 7.5s, 2020 5,350 5,800,577
BB Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 4,000 3,866,200
AAA Metropolitan Washington District of Columbia
Airports Authority, 7.25s, 2010 4,000 4,274,320
NR St. Augustine, FL, Airport Authority (Grumman Repair
Facility), 11s, 2004 500 541,355
BB+ Tulsa, OK, Municipal Airport Trust Rev., 7.375s,
2020 3,000 2,902,650
BB+ Tulsa, OK, Municipal Airport Trust Rev., 7.6s, 2030 815 799,042
A+ Virginia Port Authority, 8.2s, 2008 3,000 3,326,130
-----------
$ 57,506,864
- ------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- ------------------------------------------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
AAA Metropolitan Pier & Exposition Authority, IL,
Dedicated State Tax Rev., 0s, 2018 $ 6,400 $ 1,323,008
- ------------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 7.6%
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.875s, 2017 $ 8,890 $ 9,969,690
BBB Brazos River Authority, TX, Pollution Control Rev.
(Texas Utilities), 9.25s, 2018 1,000 1,113,570
A- Burke County, GA, Pollution Control Rev. (Georgia
Power Co./Vogtle Project), 9.375s, 2017 2,650 2,965,535
NR Burns Harbor, IN, Solid Waste Disposal Facilities
Rev., 8s, 2024 3,000 3,115,710
A Charleston County, SC, Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 3,200 3,535,745
AA- Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s,
2020 2,000 2,204,900
A- Erie County, PA (International Paper), 7.875s, 2016 1,200 1,304,220
A- Matagorda County, TX, Pollution Control Rev.
(Central Power & Light), 7.875s, 2016 1,500 1,594,065
BBB+ Maury County, TN, Industrial Development Board,
Pollution Control Rev., 6.5s, 2024 3,000 2,907,630
NR Port of New Orleans, LA (Avondale Industries),
8.5s, 2014 2,000 2,011,580
BB- Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 1,000 978,620
NR San Joaquin Hills, CA, Transportation Corridor
Agency, 0s, 2004 3,000 1,381,050
BBB West Side Calhoun County, TX, Navigation District,
8.2s, 2021 2,000 2,179,140
-----------
$ 35,261,455
- ------------------------------------------------------------------------------------------------------------
Universities - 0.2%
AAA University of Illinois, University Rev., 0s, 2009 $ 2,915 $ 1,147,344
- ------------------------------------------------------------------------------------------------------------
Special Assessment District - 0.6%
NR Northeast Maryland, Waste Disposal Authority
(Montgomery County Resource Recovery), 6.3s, 2016 $ 3,000 $ 2,833,320
- ------------------------------------------------------------------------------------------------------------
Miscellaneous Revenue - 6.5%
NR Atlanta, GA, Downtown Development Authority,
11.5s, 2015**<F4>++<F2> $ 1,055 $ 316,548
NR Bristol, CT, Resource Recovery Facilities, 6.5s,
2014(SS)<F6> 8,000 7,409,520
NR Crystal City, TX, Lease Obligations, 10.5s,
2008+<F1> 1,252 1,172,925
BB- Greater Detroit, MI, Resource Recovery Authority,
9.25s, 2008 2,130 2,254,818
A Hillsborough County, FL, Capital Improvement Rev.,
6.75s, 2022 2,810 2,864,317
NR Martha's Vineyard, MA, Land Bank, 8.125s, 2011 2,000 1,999,540
NR Massachusetts Health & Education Facilities
Authority Rev. (Learning Center for Deaf
Children), 9.25s, 2014 1,000 1,061,820
NR Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,017,340
A Pennsylvania State Finance Authority Rev., 6.6s,
2009 3,305 3,318,683
NR Retema, TX, Special Facilities Rev. (Retema Park
Racetrack Project), 8.75s, 2018 4,000 3,937,680
-----------
$ 30,353,191
- ------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $436,871,756) $455,164,573
- ------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Floating Rate Demand Notes - 0.9%
- ------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------------------
Jackson County, MS, Pollution Control Rev. due 6/01/23 $ 100 $ 100,000
Perry County, MS, Pollution Control Rev., due 3/01/02 2,600 2,600,000
Uinta County, WY, Pollution Control Rev., due 8/15/20 1,700 1,700,000
- ------------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 4,400,000
- ------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $441,271,756) $459,564,573
Other Assets, Less Liabilities - 1.2% 5,610,013
- ------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $465,174,586
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1> + Restricted security (see Note 8).
<F2> ++ Security valued by or at the direction of the Trustees.
<F3> * Inverse floating rate security.
<F4> ** Non-income producing security in default.
<F5> (S) Indexed security (see Note 7).
<F6>(SS) When-issued security. At September 30, 1994, the Fund had sufficient
cash and/or securities at least equal to the value of the when-issued
security.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------------------
<CAPTION>
September 30, 1994
- -------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $441,271,756) $459,564,573
Cash 34,849
Receivable for investments sold 11,104,272
Receivable for Fund shares sold 701,047
Interest receivable 8,976,833
Other assets 7,096
-----------
Total assets $480,388,670
-----------
Liabilities:
Distributions payable $ 885,117
Payable for investments purchased 5,480,953
Payable for when-issued investments purchased 8,000,000
Payable for Fund shares reacquired 618,449
Payable for daily variation margin on open futures contracts 62,500
Payable to affiliates -
Management fee 9,652
Shareholder servicing agent fee 2,766
Distribution fee 9,186
Accrued expenses and other liabilities 145,461
-----------
Total liabilities $ 15,214,084
-----------
Net assets $465,174,586
-----------
Net assets consist of:
Paid-in capital $454,180,336
Unrealized appreciation on investments 18,589,692
Net realized loss on investments (6,448,156)
Accumulated distributions in excess of net investment income (1,147,286)
-----------
Total $465,174,586
-----------
Shares of beneficial interest outstanding 54,968,184
-----------
Class A shares:
Net asset value and redemption price per share
(net assets of $7,350,484 / 869,078 shares of beneficial
interest outstanding) $8.46
----
Offering price per share (100/95.25) $8.88
----
Class B shares:
Net asset value, redemption price and offering price per share (net assets of
$447,603,367 / 52,891,853 shares of beneficial
interest outstanding) $8.46
----
Class C shares:
Net asset value, redemption price and offering price per share (net assets of
$10,220,735 / 1,207,253 shares of beneficial
interest outstanding) $8.47
----
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended September 30, 1994
- ------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $17,362,684
----------
Expenses -
Management fee $ 1,805,022
Trustees' compensation 23,001
Shareholder servicing agent fee (Class A) 4,900
Shareholder servicing agent fee (Class B) 511,377
Shareholder servicing agent fee (Class C) 6,800
Distribution and service fee (Class B) 2,324,431
Distribution and service fee (Class C) 45,329
Custodian fee 74,593
Printing 38,452
Auditing fees 27,100
Postage 26,015
Legal fees 10,464
Miscellaneous 169,790
----------
Total expenses $ 5,067,274
----------
Net investment income $12,295,410
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(6,750,065)
Futures contracts 1,532,894
----------
Net realized gain (loss) on investments $(5,217,171)
----------
Change in unrealized appreciation (depreciation) -
Investment transactions $ (700,666)
Futures contracts 145,312
----------
Net unrealized gain (loss) on investments $ (555,354)
----------
Net realized and unrealized gain (loss) on
investments $(5,772,525)
----------
Increase (decrease) in net assets from operations $ 6,522,885
----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Four Months Ended Year Ended
September 30, 1994 March 31, 1994 November 30, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 12,295,410 $ 8,135,114 $ 24,569,248
Net realized gain (loss) on investments (5,217,171) (1,579,438) 2,174,746
Net unrealized gain (loss) on investments (555,354) (21,759,776) 19,852,443
----------- ----------- -----------
Increase (decrease) in net
assets from operations $ 6,522,885 $(15,204,100) $ 46,596,437
----------- ----------- -----------
Distributions declared to
shareholders -
From net investment income (Class A) $ (196,787) $ (24,388) $ (2,142)
From net investment income (Class B) (10,374,004) (6,513,043) (25,152,570)
From net investment income (Class C) (226,137) (36,953) --
In excess of net investment income (Class A) -- (444) (150)
In excess of net investment income (Class B) (1,156,201) (1,488,102) (1,560,580)
In excess of net investment income (Class C) -- (1,021) --
From net realized gain on investments (Class A) -- (332) --
From net realized gain on investments (Class B) -- (319,911) (5,237,004)
In excess of net realized gain on investments
(Class A) -- (1,280) --
In excess of net realized gain on investments
(Class B) -- (1,229,705) --
----------- ----------- -----------
Total distributions declared to shareholders $(11,953,129) $ (9,615,179) $(31,952,446)
----------- ----------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 24,505,586 $ 31,229,236 $118,919,014
Net asset value of shares issued to
shareholders in reinvestment of
distributions 6,494,788 5,241,616 18,199,816
Cost of shares reacquired (51,861,665) (38,825,729) (83,071,056)
----------- ----------- -----------
Increase (decrease) in net
assets from Fund share
transactions $(20,861,291) $ (2,354,877) $ 54,047,774
----------- ----------- -----------
Total increase (decrease) in net assets $(26,291,535) $(27,174,156) $ 68,691,765
Net assets:
At beginning of period 491,466,121 518,640,277 449,948,512
----------- ----------- -----------
At end of period (including accumulated
distributions in excess of net investment
income of $(1,147,286), $(1,489,567)
and $(1,560,730), respectively) $465,174,586 $ 491,466,121 $518,640,277
----------- ----------- -----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Four Months Six Months Four Months
Ended Ended Period Ended Ended Ended
September 30, March 31, November 30, September 30, March 31,
1994 1994 1993*<F1> 1994 1994
- ----------------------------------------------------------------------------------------------------------------
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 $ 8.56 $ 8.99 $ 9.15 $ 8.56 $ 8.99
------ ------ ------ ------ ------
Income from investment
operations++<F4>-
Net investment income $ 0.26 $ 0.15 $ 0.12 $ 0.22 $ 0.14
Net realized and unrealized
gain (loss) on investments (0.10) (0.51) (0.16) (0.11) (0.51)
------ ------ ------ ------ ------
Total from investment operations $ 0.16 (0.36) $(0.04) 0.11 $(0.37)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.26) $(0.02) $(0.11) $(0.19) $(0.01)
In excess of net investment income -- -- (0.01) (0.02) --
From net realized gains -- (0.01) -- -- (0.01)
In excess of net realized gains -- (0.04) -- -- (0.04)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.26) $(0.07) $(0.12) $(0.21) $(0.06)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.46 $ 8.56 $ 8.99 $ 8.46 $ 8.56
------ ------ ------ ------ ------
Total return#<F2> 1.85% (7.90)%+<F3> (1.80)%+<F3> 1.31% (8.97)%+<F3>
Ratios (to average net assets)/Supplemental data:
Expenses 1.05%+<F3> 1.07%+<F3> 0.76%+<F3> 2.12%+<F3> 2.24%+<F3>
Net investment income 6.16%+<F3> 5.31%+<F3> 4.94%+<F3> 5.10%+<F3> 4.74%+<F3>
Portfolio turnover 9% 9% 30% 9% 9%
Net assets at end of period
(000 omitted) $7,350 $5,595 $461 $447,603 $479,478
<FN>
<F1> * For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
<F2> # Total returns do not include the sales charge. If the sales charge had
been included, the results would have been lower.
<F3> + Annualized.
<F4>++ For periods subsequent to November 30, 1993, per share data is based on
average shares outstanding.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -continued
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30,
--------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987*<F1>
- ----------------------------------------------------------------------------------------------------
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 $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47
------ ------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.42 $ 0.47 $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38
Net realized and
unrealized gain (loss)
on investments 0.42 0.26 0.25 (0.15) 0.30 0.43 (0.83)
------ ------ ------ ------ ------ ------ ------
Total from
investment
operations $ 0.84 $ 0.73 $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45)
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment
income $(0.45) $(0.48) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
In excess of net
investment income (0.03) -- -- -- -- -- --
From net realized
gains (0.10) -- -- -- -- -- --
From paid-in capital -- $(0.02) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.58) $(0.50) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
------ ------ ------ ------ ------ ------ ------
Net asset value - end
of period $ 8.99 $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67
------ ------ ------ ------ ------ ------ ------
Total return 9.95% 8.82% 9.21% 4.18% 10.24% 12.53% (5.79)%+<F2>
Ratios (to average net assets)/Supplemental data:
Expenses 2.11% 2.03% 2.04% 2.05% 2.07% 2.09% 2.03%+<F2>
Net investment
income 4.92% 5.50% 5.82% 5.99% 6.09% 6.38% 6.00%+<F2>
Portfolio turnover 30% 52% 73% 91% 127% 171% 138%
Net assets at end of
period (000 omitted) $518,179 $449,949 $409,084 $379,239 $343,887 $244,825 $183,935
<FN>
<F1>* For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
<F2>+ Annualized.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Period Ended
September 30, 1994 March 31, 1994*<F1>
- -----------------------------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value - beginning of period $ 8.56 $ 9.07
----- -----
Income from investment operations++<F3> -
Net investment income $ 0.22 $ 0.09
Net realized and unrealized
gain (loss) on investments (0.09) (0.59)
----- -----
Total from investment operations $ 0.13 $(0.50)
----- -----
Less net investment income distributions
declared to shareholders $(0.22) $(0.01)
----- -----
Net asset value - end of period $ 8.47 $ 8.56
----- -----
Total return 1.45% (19.42)%+<F2>
Ratios (to average net assets)/Supplemental data:
Expenses 2.05%+<F2> 2.18%+<F2>
Net investment income 5.13%+<F2> 4.62%+<F2>
Portfolio turnover 9% 9%
Net assets at end of period (000 omitted) $10,221 $6,393
<FN>
<F1> * For the period from the commencement of offering of Class C shares,
January 3, 1994 to March 31, 1994.
<F2> + Annualized.
<F3>++ For periods subsequent to November 30, 1993, per share data is based on
average shares outstanding.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal Income Fund (the Fund) is a diversified series of MFS Municipal
Series Trust (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into interest rate futures contracts for
the delayed delivery of fixed-income securities and indexes of such securities
at a fixed price on a future date and may enter into options on such futures
contracts. In entering such contracts, the Fund is required to deposit either in
cash or securities an amount equal to a certain percentage of the contract
amount. Subsequent payments are made or received by the Fund each day, depending
on the daily fluctuations in the value of the underlying security, and are
recorded for financial statement purposes as unrealized gains or losses by the
Fund. The Fund's investment in interest rate futures contracts is designed to
hedge against anticipated future changes in interest rates or securities prices.
The Fund may also invest in financial futures contracts for non-hedging
purposes. Should interest rates or securities prices move unexpectedly, the Fund
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss.
<PAGE>
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At September 30, 1994, the Fund had no securities on loan.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986, may be considered a tax
preference item to shareholders. Distributions to shareholders are recorded on
the ex-dividend date.
<PAGE>
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits be reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class A and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective shareholder servicing agent, distribution
and service fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on average daily net assets of each class, without
distinction between share classes. Dividends are declared separately for each
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses,
including distribution and shareholder service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. Prior to
September l, 1993, Lifetime Advisers, Inc. (LAI), a wholly owned subsidiary of
MFS, was the investment adviser for the Fund. The management fee, computed daily
and paid monthly at an annual rate of 0.30% of average daily net assets and
6.43% of investment income, amounted to $1,805,022 for the period ended
September 30, 1994.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all of its independent Trustees. Included in Trustees' compensation is
a net periodic pension expense of $6,751 for the period ended September 30,
1994.
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$3,857 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. Payments will commence under the distribution plan when
the value of the net assets of the Fund attributable to Class A shares first
equals or exceeds $40 million.
<PAGE>
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
daily distribution fee, equal to 0.75% per annum, and a service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class B
and Class C shares. FSI will pay to securities dealers that enter into a sales
agreement with FSI, all or a portion of the service fee, attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. Fees incurred under the distribution plans during
the period ended September 30, 1994 were 1.0% of average daily net assets
attributable to Class B and Class C shares on an annualized basis and amounted
to $2,324,431 and $45,329, respectively (of which FSI retained $47,354 and
$3,499 for Class B and Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the period ended September 30, 1994 was $332,112 for Class B shares.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$4,900, $511,377 and $6,800 for Class A, Class B, and Class C shares,
respectively, for its services as shareholder servicing agent for the period
ended September 30, 1994. The fee is calculated as a percentage of the average
daily net assets of each class of shares at an effective annual rate of up to
0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B and Class C
shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated $44,606,400
and $69,106,969, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $441,271,756
-----------
Gross unrealized appreciation $ 24,443,924
Gross unrealized depreciation (6,151,025)
-----------
Net unrealized appreciation $ 18,292,899
-----------
At March 31, 1994, the Fund, for federal income tax purposes, had a capital loss
carryforward of $1,413,222, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on March 31, 2002.
<PAGE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
</TABLE>
<TABLE>
<CAPTION>
Class A Shares
Six Months Ended Four Months Ended
September 30, 1994 March 31, 1994
-------------------------------- --------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 411,312 $ 3,515,871 766,727 $ 6,792,015
Shares issued to shareholders in
reinvestment of distributions 4,305 36,803 1,368 12,126
Shares reacquired (200,291) (1,710,053) (165,634) (1,507,352)
-------------- ---------------- -------------- ----------------
Net increase 215,326 $ 1,842,621 602,461 $ 5,296,789
-------------- ---------------- -------------- ----------------
Class B Shares
Six Months Ended Four Months Ended
September 30, 1994 March 31, 1994
-------------------------------- --------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
Shares sold 1,631,728 $ 14,001,860 1,771,398 $ 16,008,151
Shares issued to shareholders in
reinvestment of distributions 735,875 6,297,579 581,143 5,207,213
Shares reacquired (5,483,849) (46,965,760) (3,964,973) (35,578,939)
-------------- ---------------- -------------- ----------------
Net decrease (3,116,246) $(26,666,321) (1,612,432) $(14,363,575)
-------------- ---------------- -------------- ----------------
Class C Shares
Six Months Ended Period Ended
September 30, 1994 March 31, 1994*<F1>
-------------------------------- --------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
Shares sold 814,164 $ 6,987,855 940,881 $ 8,429,070
Shares issued to shareholders in
reinvestment of distributions 18,738 160,406 2,564 22,277
Shares reacquired (372,146) (3,185,852) (196,948) (1,739,438)
-------------- ---------------- -------------- ----------------
Net increase 460,756 $ 3,962,409 746,497 $ 6,711,909
-------------- ---------------- -------------- ----------------
<FN>
<F1>* For the period from the commencement of offering of Class C shares,
January 3, 1994 to March 31, 1994.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
period ended September 30, 1994 was $3,575.
<PAGE>
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, futures contracts and indexed
securities. The notional or contractual amounts of these instruments represent
the investment the Fund has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at September 30, 1994 is as
follows:
Futures Contracts
Unrealized
Expiration Contracts Position Appreciation
- -----------------------------------------------------------------------------
December 1994 250 Treasury Bonds Short $296,875
-------
At September 30, 1994, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
Indexed Securities
The Fund also invests in indexed securities whose value may be linked to
interest rates, commodities, indices or other financial indicators. Indexed
securities are fixed-income securities whose proceeds at maturity (principal-
indexed securities) or interest rates (coupon-indexed securities) rise and fall
according to the change in one or more specified underlying instruments. Indexed
securities may be more volatile than the underlying instrument itself. The
following is a summary of such securities held at September 30, 1994.
Principal Unrealized
Description Index (000 omitted) Value Depreciation
- ------------------------------------------------------------------------------
Rio Grande Valley, TX
Health Facilities
Development
Corp., 7.72s, 2015 J.J. Kenny $2,800 $2,776,424 $ (23,576)
Sacramento, CA,
Municipal
Utility District,
Electric Rev.,
5.32s, 2007 PSA 2,000 1,630,560 (369,440)
--------
$(393,016)
--------
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At September 30, 1994,
the Fund owned the following restricted securities (constituting 0.25% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers.
Description Date of Acquisition Par Amount Cost Value
- ------------------------------------------------------------------------------
Crystal City, TX,
Lease Obligations,
10.5s, 2008 5/25/88 $1,251,761 $948,056 $1,172,925
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Municipal Series Trust and Shareholders of MFS Municipal
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Income Fund (one of the series
constituting MFS Municipal Series Trust) as of September 30, 1994, the related
statement of operations for the six months then ended, the statement of changes
in net assets for the six months then ended, the four months ended March 31,
1994, and the year ended November 30, 1993, and the financial highlights for the
six months ended September 30, 1994, the four months ended March 31, 1994 and
for each of the years in the seven-year period ended November 30, 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
September 30, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal Income
Fund at September 30, 1994, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 4, 1994
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE> 60
SUPPLEMENT TO PROSPECTUS THE DATE OF THIS SUPPLEMENT
DATED APRIL 18, 1994 IS JULY 29, 1994
THE ADVANTAGE MUNICIPAL BOND FUND
THE NATIONAL PORTFOLIO
THE NEW YORK PORTFOLIO
THE PENNSYLVANIA PORTFOLIO
100 Federal Street
Boston, Massachusetts 02110
(617) 348-3100
The following supplements the discussion under "SHAREHOLDER SERVICES -
Exchange Privilege" appearing on page 14 of the Prospectus:
Shareholders may also exchange shares of a Portfolio for shares
of any other fund in the Advantage Family of Funds then offering shares
for sale in the shareholder's state of residence, subject to the
minimum investment requirements of the Fund into which the exchange is
being made. At July 29, 1994, the other members of the Advantage Family
of Funds included the following funds:
The Advantage Government Securities Fund
The Advantage High Yield Bond Fund
The Advantage Income Fund
The Advantage Growth Fund
The Advantage Special Fund
The Advantage Strategic Income Fund
Prospectuses for these funds are available upon request and without
charge by calling or writing the Advantage Family of Funds or by
contacting an Advest account executive. Those Prospectuses contain
further information, including information on fees and expenses. Please
read them carefully before investing.
<PAGE> 61
PROSPECTUS APRIL 18, 1994
THE ADVANTAGE MUNICIPAL BOND FUND
100 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (617) 348-3100
THE NATIONAL PORTFOLIO
THE NEW YORK PORTFOLIO
THE PENNSYLVANIA PORTFOLIO
The Advantage Municipal Bond Fund (the "Fund") consists of three separate
series portfolios (the "Portfolios") each of which issues shares evidencing
interests in the respective Portfolio. The Portfolios are the National, New
York and Pennsylvania Portfolios. Each Portfolio seeks a high level of
current income exempt from federal income taxes. In addition, each of the New
York and Pennsylvania Portfolios seeks such current income which is also
exempt from its respective state and, if applicable, local income taxes.
Each Portfolio invests primarily in high and upper medium grade quality
municipal bonds, municipal notes and tax-exempt commercial paper.
Investors may purchase shares of any Portfolio at net asset value. There is
no sales load on purchases of shares of any of the Portfolios at the time of
purchase but a contingent deferred sales load may be imposed on redemptions.
Each of the Portfolios also may use its assets to finance activities
primarily intended to result in sales of its shares.
Shares of the New York Portfolio are intended for purchase only by residents
of New York or Florida and shares of the Pennsylvania Portfolio are intended
for purchase only by residents of Pennsylvania or Florida.
This Prospectus is intended to set forth concisely the information about the
Fund that a prospective investor should know before investing. Investors are
encouraged to read this Prospectus and retain it for future reference.
Additional information about the Fund is contained in a Statement of
Additional Information which has been filed with the Securities and Exchange
Commission. It is available upon request and without charge by calling or
writing the Fund or by contacting an Advest account executive. The Statement
of Additional Information bears the same date as this Prospectus and is
incorporated by reference in this Prospectus.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and 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
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 62
INTRODUCTION
The Advantage Municipal Bond Fund is an open-end diversified management
investment company currently consisting of three separate series portfolios
which issue shares evidencing interests in the respective Portfolios: the
National, New York and Pennsylvania Portfolios.
The Fund, like most other mutual funds, employs various organizations to
perform necessary functions for its Portfolios and to provide services to
their shareholders. These organizations are selected by the Trustees of the
Fund, who supervise the Fund's business affairs and investments and review
on a regular basis the quality of the services performed for and the amount
of the fees paid by the Portfolios. The Fund employs Boston Security
Counsellors, Inc. ("BSC") to manage the Portfolios on a daily basis, Advest
to distribute their shares, Advest Transfer Services, Inc. ("ATS") to act as
their transfer and dividend disbursing agent, and State Street Bank and Trust
Company to act as their custodian. Information concerning these organizations
and the services they perform is contained elsewhere in this Prospectus as
well as in the Statement of Additional Information.
SUMMARY OF EXPENSES
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR ALL PORTFOLIOS
Sales Load Imposed on Purchases........................................................ 0%
Sales Load Imposed on Reinvested Dividends............................................. 0%
Maximum Deferred Sales Load (as percentage of original
purchase price or redemption proceeds, as applicable)................................ 4%(1)
Redemption Fees........................................................................ 0%
Exchange Fees.......................................................................... $0
ANNUAL FUND OPERATING EXPENSES FOR ALL PORTFOLIOS (as percentage of average net assets)
Management Fees........................................................................ .45%(2)
12b-1 Fees............................................................................. .50%(3)
Other Expenses (after Waivers and Reimbursements)...................................... .05%(2)
----
Total Fund Operating Expenses.......................................................... 1.00%(2)
====
</TABLE>
(1) Contingent deferred sales load on redemptions declines 1% annually from
a maximum of 4% to 0% after four years.
(2) Each Portfolio's fees and expenses will be voluntarily waived or reimbursed
by BSC and its affiliates to the extent necessary to keep Total Fund
Operating Expenses no greater than 0.70% through July 1, 1994 and no
greater than 1.00% from July 2, 1994 through April 30, 1995. Other Expenses
and Total Fund Operating Expenses in this table and in the example which
follows reflect waiver and reimbursement at the 1.00% level. If these
voluntary expense limitations were not in effect, Other Expenses and Total
Fund Operating Expenses would be 0.57% and 1.52% for the National Portfolio,
0.68% and 1.63% for the New York Portfolio and 0.70% and 1.65% for the
Pennsylvania Portfolio. These expenses are estimates for the initial period
of the Fund's operation. Actual expenses, in the absence of expense
limitations could be significantly higher or lower than these estimates,
depending on actual Portfolio asset levels and other factors.
(3) This consists of a 0.10% service fee and a 0.40% distribution fee charged
under each Portfolio's plan adopted under Rule 12b-1. Subject to NASD
rules, Trustees may increase these fees to up to a total of 1.00% annually
without further shareholder approval.
EXAMPLE FOR ALL PORTFOLIOS ONE YEAR THREE YEAR
-------- ----------
You would pay the following expenses on a $1,000
investment, assuming 5% annual return and
redemption of all shares held at the end of
each period: $50 $52
You would pay the following expenses on the
same investment, assuming no redemption: $10 $32
2
<PAGE> 63
The foregoing example is intended to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly when
investing in a Portfolio. Long-term shareholders of a Portfolio may pay more
sales charges than the economic equivalent of the maximum front-end sales
charges permitted by the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. See "Purchase of Shares," "Redemption of Shares,"
"Shareholder Services," "Investment Adviser," and "Distributor and Rule
12b-1 Plans." The example is included to provide a means for comparison of
expense levels of mutual funds with different fee structures over varying
investment periods. To facilitate this comparison, all mutual funds are
required for this purpose to assume a 5% annual return. This assumption is
unrelated to any Portfolio's past performance and is not a projection of
future performance. Also, the example is required to assume the level of
Total Fund Operating Expenses (1.00% of average net assets annually) shown
in the table above. The example should not be considered a representation of
past or future expenses of any Portfolio.
FINANCIAL HIGHLIGHTS
The financial highlights set forth below present certain information and
ratios as well as performance information about the Portfolios. Additional
information about the Portfolios' performance is contained in the Fund's
Annual Report to Shareholders for the period ended December 31, 1993 which
may be obtained without charge from the Fund. The information below has been
examined by Price Waterhouse, independent accountants, whose unqualified
report thereon is included in the Annual Report and is incorporated by
reference into the Statement of Additional Information. The following
information should be read in conjunction with the other financial
statements and notes thereto included in the Annual Report.
<TABLE>
<CAPTION>
PERIOD FROM JULY 1, 1993(1)
THROUGH DECEMBER 31, 1993
-----------------------------------
NATIONAL NEW YORK PENNSYLVANIA
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period....... $10.00 $10.00 $10.00
------ ------ ------
Income from Investment Operations
Net investment income.................. 0.24 0.24 0.24
Net realized and unrealized gains...... 0.23 0.20 0.26
------ ------ ------
Total from investment operations....... 0.47 0.44 0.50
------ ------ ------
Less Distributions
Dividends from net investment income... (0.24) (0.24) (0.24)
Distributions from net realized gains.. -- -- --
Other(2)............................... (0.01) (0.01) (0.01)
------ ------ ------
Total distributions.................... (0.25) (0.25) (0.25)
------ ------ ------
Net asset value, end of period............. $10.22 $10.19 $10.25
====== ====== ======
Total return(3)............................ 4.83% 4.43% 5.00%
3
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
PERIOD FROM JULY 1, 1993(1)
THROUGH DECEMBER 31, 1993
----------------------------------------
NATIONAL NEW YORK PENNSYLVANIA
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
Ratios/Supplemental Data
Net assets, end of period (thousands)................. $25,151 $11,835 $10,897
Ratio of operating expenses to average net assets..... 0.71%(4)(5) 0.36%(4)(5) 0.38%(4)(5)
Ratio of net investment income to average net assets.. 4.71%(4) 4.70%(4) 4.61%(4)
Portfolio turnover rate............................... 15.12%(4) 0.00% 0.00%
</TABLE>
- --------------
(1) Commencement of operations.
(2) Other dividends represent distributions in excess of investment income
due to differences in book and tax income.
(3) Total return does not reflect the Fund's contingent deferred sales load
maximum 4%. This charge goes into effect only if shares of the Fund are
redeemed within 4 years of purchase. Total returns for 1993 represent
actual, not annualized percentages.
(4) Annualized.
(5) Had BSC not elected to waive its investment advisory fee and to reimburse
expenses, the ratio of expenses to average net assets on an annualized
basis would have been as follows: National Portfolio - 1.73%; New York
Portfolio - 1.87%; Pennsylvania Portfolio - 1.94%.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio is designed to meet different investment needs, although
diversification is an important consideration in selecting the investments
for each. The differences in policies among the three Portfolios may affect
the investment return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject. The investment objective
of each Portfolio, and all investment policies other than those identified
as "fundamental," may be changed by the Fund's Trustees without shareholder
approval. There can, of course, be no guarantee that the investment
objectives of any of the Portfolios will be achieved, due to the uncertainty
inherent in all investments. Shareholders of a Portfolio will be notified
in writing at least thirty days in advance of a change in the investment
objective of that Portfolio. If there is a change in investment objective,
shareholders should consider whether the Portfolio remains an appropriate
investment in light of their then current financial position and needs.
The investment objective of each Portfolio is to earn a high level of
current income exempt from federal (and in the case of the New York and
Pennsylvania Portfolios, those states' state, and where applicable, local)
income taxes by investing in a diversified group of municipal obligations.
Under normal market conditions, each Portfolio will have at least 80% of its
net assets invested in obligations, including bonds, notes and commercial
paper, issued by or on behalf of appropriate states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies, authorities and instrumentalities, the
interest on which is, in the opinion of counsel to the issuer of such
obligations, exempt from federal income taxes, other than the federal
alternative minimum tax ("Municipal Obligations"). This
4
<PAGE> 65
policy is a fundamental policy of each Portfolio which may not be changed for
any Portfolio unless authorized by a vote of that Portfolio's shareholders.
As a non-fundamental policy of each Portfolio, which can be changed by the
Trustees without shareholder vote, under normal circumstances at least 65%
of the total assets of each Portfolio will be invested in Municipal
Obligations which are bonds. Also, under normal circumstances at least 65%
of the total assets of the New York and Pennsylvania Portfolios will be
invested in municipal bonds issued by the particular state, its political
subdivisions, agencies, authorities and instrumentalities.
Municipal notes and tax-exempt commercial paper are generally used to
provide for short-term capital needs and generally have maturities of one
year or less. Municipal bonds have extended maturities. Municipal
Obligations are issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Obligations may be issued include the funding of outstanding
obligations, obtaining funds for general operating expenses and the
obtaining of funds to lend to other public institutions and facilities.
Under normal circumstances, the portfolio turnover rate of each Portfolio is
expected to be less than 100%. A Portfolio's portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the
value of the portfolio securities owned by the Portfolio during the
particular fiscal year.
THE NATIONAL PORTFOLIO
The National Portfolio invests, under ordinary circumstances, substantially
all of its assets in Municipal Obligations the interest on which is, in the
opinion of counsel to the issuers of the obligations, exempt from federal
income tax (other than the possible incidence of any alternative minimum
taxes). These securities include debt obligations of the various states and
their political subdivisions, agencies, authorities and instrumentalities,
the District of Columbia, Puerto Rico, the Virgin Islands and other United
States territories. The National Portfolio will not invest more than 25% of
its total assets in Municipal Obligations whose issuers are located in any
one state.
THE NEW YORK PORTFOLIO
The New York Portfolio invests, under ordinary circumstances, substantially
all of its assets in Municipal Obligations the interest on which is, in the
opinion of counsel to the issuers of these obligations, exempt from federal,
New York State and New York City income taxes (other than the possible
incidence of any alternative minimum taxes). These securities include debt
obligations of New York and its political subdivisions, agencies,
authorities and instrumentalities, as well as debt obligations of other
qualifying issuers such as Puerto Rico and the Virgin Islands. For a further
discussion of New York tax treatment and the factors affecting investment in
New York Municipal Obligations, see Appendix B.
THE PENNSYLVANIA PORTFOLIO
The Pennsylvania Portfolio invests, under ordinary circumstances,
substantially all of its assets in Municipal Obligations the interest on
which is, in the opinion of counsel to the issuers of these obligations,
exempt from federal, Pennsylvania state income taxes and, where applicable,
local income taxes (other than the possible incidence of any alternative
minimum taxes). The Fund expects that, under ordinary circumstances,
substantially all of its assets will be
5
<PAGE> 66
invested in such Municipal Obligations. The securities include debt
obligations of the Commonwealth of Pennsylvania and its political
subdivisions, agencies, authorities and instrumentalities and debt
obligations of other qualifying issuers such as Puerto Rico and the Virgin
Islands. For a further discussion of Pennsylvania tax treatment and the
factors affecting investment in Pennsylvania Municipal Obligations, see
Appendix C.
RISK FACTORS
The investments of each Portfolio may involve certain risks. These risks are
more fully described in the sections that follow. Each Portfolio may invest
in lower rated securities which have speculative characteristics. See "Types
of Municipal Obligations" below. The Pennsylvania and New York Portfolios
concentrate their investments in securities of their respective states which
increase exposure to adverse economic or political developments affecting
those states. Since such developments affect revenues, they may result in
the state being unable to meet its expenses and the rating of its securities
being downgraded. In addition, each Portfolio may use options and futures,
which involve certain special risks. See "Other Investment Policies and
Techniques."
TYPES OF MUNICIPAL OBLIGATIONS
Each Portfolio anticipates that its assets will be invested (as appropriate
to each Portfolio) primarily in (1) Municipal Obligations (other than
tax-exempt commercial paper) which are rated at the time of purchase within
the four highest rating categories (i.e. investment grade) assigned by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa; VMIG 1, VMIG
2, VMIG 3, VMIG 4 in the case of long-term bonds; MIG 1, MIG 2, MIG 3, or
MIG 4 in the case of notes) or Standard & Poor's Corporation ("S&P") (AAA,
AA, A or BBB) or which are guaranteed, backed or secured at the time of
purchase by the U.S. Government or any of its agencies or instrumentalities
("U.S. Government Securities") or (2) tax-exempt commercial paper which is
rated at the time of purchase within the two highest rating categories
assigned by Moody's (Prime-1 or Prime-2) or S&P (A-1 or A-2). Each Portfolio
may also invest in unrated securities where, in the opinion of the
investment adviser, the unrated securities are of comparable quality to the
rated securities discussed above. See Appendix A for a description of these
rating categories. Each Portfolio may also invest in certain lower-quality
securities. See "High Yield, High Risk Securities," below.
Municipal Obligations are issued for a wide variety of both governmental and
private undertakings. In general, there are three categories of Municipal
Obligations the interest on which is exempt from federal income taxes
applicable to individuals: (i) certain "public purpose" obligations
(whenever issued), which include obligations issued directly by state and
local governments or their agencies to fulfill essential governmental
functions; (ii) certain "private activity" obligations issued before August
8, 1986; and (iii) certain "private activity" obligations issued after
August 7, 1986 which include "qualified Section 501(c)(3) bonds" or
refundings of certain "private activity" obligations issued before August 8,
1986. A fourth category of Municipal Obligations, consisting of certain
6
<PAGE> 67
"private activity" obligations issued after August 7, 1986, is exempt from
the regular federal income tax applicable to individuals and corporations,
but the interest earned on such obligations is treated as a tax preference
item which could subject the recipient to the federal alternative minimum
tax. In addition, for corporations, alternative minimum taxable income is
increased by 75% of the amount by which an alternative measure of income
that includes interest on all tax-exempt securities exceeds the amount of
alternative minimum taxable income before considering such adjustment. It
is a fundamental policy of each Portfolio that, under ordinary circumstances,
at least 80% of the Portfolio's net assets will be invested in municipal
obligations. For purposes of this policy, all obligations included in the
foregoing four categories will be deemed tax-exempt "Municipal Obligations."
ILLIQUID SECURITIES. Each Portfolio may invest up to 15% of its net assets
in illiquid securities which include Municipal Obligations issued in private
placements in connection with which the Portfolio represents that it is
purchasing for investment purposes only, repurchase agreements maturing in
more than seven days and other securities subject to legal or contractual
restrictions on resale. Municipal Obligations acquired in private placements
generally may be resold only in a privately negotiated transaction to one or
more other institutional investors. Securities so restricted often have a
market value lower than the market price of unrestricted securities of the
same issuer. Investments in restricted securities are not readily marketable
without some time delay. This could result in a Portfolio being unable to
realize a favorable price upon disposition of such securities, and in some
cases might make disposition of such securities at the time desired by the
Portfolio impossible. The 15% limitation applies at the time the purchase
commitment is made.
MUNICIPAL LEASE OBLIGATIONS. Each Portfolio may purchase municipal lease
obligations rated (at the time of investment) within the four highest rating
categories or which are unrated but considered by the investment adviser to
be of comparable quality. Municipal lease obligations are issued to acquire
land and a wide variety of equipment and facilities, such as fire and
sanitation vehicles, telecommunications equipment and other capital assets.
These obligations typically are not fully backed by the municipality's
credit and taxing power, and their interest may become taxable if the lease
is assigned. If funds are not appropriated by an issuer for a following
year's lease payments, a lease may terminate with the possibility of default
on the lease obligation and significant loss to a Portfolio. BSC, under
guidelines established by the Fund's Board of Trustees, will be responsible
for determining the credit quality of unrated municipal lease obligations on
an ongoing basis, including an assessment of the likelihood that the lease
will be cancelled. Municipal lease obligations (and participations
representing proportionate interests therein) of state and local governments
are often considered illiquid, in which case their purchase, together with
other illiquid assets, would be limited to 15% of a Portfolio's net assets.
The Fund's investment adviser, under the direction of the Board of Trustees,
will determine the liquidity of municipal lease obligations based upon
whether the lease can be terminated by the lessee, the lessee's general
credit strength, the potential recovery from a sale of the leased
7
<PAGE> 68
property upon termination of the lease, the likelihood that the lessee will
continue to appropriate funding for the leased property, any credit
enhancement or legal recourse provided upon an event of non-appropriation or
other termination of the lease, and whether the security can be disposed of
within seven days in the ordinary course of business at approximately the
amount at which the Portfolio has valued the security for purposes of
calculating the Portfolio's net asset value.
HIGH YIELD, HIGH RISK SECURITIES. Each Portfolio may also invest up to 10% of
its assets in Municipal Obligations which are rated (at the time of investment)
B by Moody's or S&P or which are unrated but considered by the investment
adviser to be of comparable quality. These lower-rated (and comparable unrated)
Municipal Obligations are subject to greater credit, liquidity and market risks
than securities in higher rating categories. See Appendix A for a description
of these rating categories.
As securities ratings become lower, their speculative characteristics increase.
Municipal Obligations that are downgraded in quality subsequent to their
purchase by a Portfolio may continue to be held by the Portfolio and will be
sold only if the investment adviser believes it to be advantageous to do so.
The ratings assigned by credit agencies to securities is only one factor
considered by the investment adviser in determining the advisability of
investing in a security. The investment adviser will also perform its own credit
analysis because credit agencies may fail to reflect events subsequent to the
issue of such securities on a timely basis and because credit agencies do not
evaluate market value risk. With lower-quality securities, the achievement of a
Portfolio's investment objective may be more dependent on the investment
adviser's credit analysis than is the case for higher-quality securities.
Both higher- and lower-quality bond prices fluctuate in response to interest
rate changes. Lower-quality bonds also fluctuate with changes in the perceived
quality of the credit of the issuers. In addition, there generally are
fewer investors in lower-quality securities, resulting in reduced market
liquidity. Accordingly, lower-quality securities tend to be more price volatile
than higher-quality securities and yields will fluctuate more over time. The
illiquidity of the market may adversely affect the market price of and the
ability to value certain lower-quality securities at various times. Also, an
economic downturn could have a more adverse effect on the value of such
securities and the ability of issuers to repay principal and interest than is
the case with higher-quality securities.
Each Portfolio may invest in lower-rated securities structured as zero-coupon
or pay-in-kind securities. The prices of these securities are affected to a
greater extent by interest rate changes and tend to be more volatile than
securities that pay interest periodically and in cash. In addition, a Portfolio
accrues income for these securities before the receipt of cash payments. To
maintain its tax qualification, each Portfolio is required to make
distributions to shareholders even with respect to securities on which the
interest is not payable currently in cash. A Portfolio that invests in
zero-coupon or pay-in-kind securities may have to sell securities under
disadvantageous circumstances or borrow cash to satisfy distribution
requirements.
8
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Shareholders should carefully consider the relative risks associated with
investing in securities that carry lower ratings. The investment adviser
believes the risks associated with lower-rated securities can be reduced by
the use of such strategies as diversification and by professional management,
economic analysis and credit research.
See the Statement of Additional Information for a more detailed description of
the risks of investing in non-rated or lower-rated Municipal Obligations.
OTHER FACTORS AFFECTING MUNICIPAL OBLIGATIONS. Economic, business or political
developments may also affect Municipal Obligations. For example, the value of
obligations issued by state or local housing finance authorities may be
adversely affected by cash flow risks resulting from possible excess or
deficiency of actual mortgage prepayments as compared to the assumed levels of
such prepayments, and obligations of municipal utilities systems may be
adversely affected by changes in technology or in environmental and safety
regulations and the availability and cost of adequate energy supplies. As the
similarity in issuers increases, the potential for fluctuation in the net
asset value of each Portfolio's shares also increases.
The net asset value of each Portfolio will fluctuate in response to
fluctuations in prevailing interest rates. When interest rates decline, the
value of fixed-income securities held by a Portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a Portfolio's holdings of
such securities can be expected to decline.
It is expected that the Portfolios may contain substantial amounts of
long-term Municipal Obligations with maturities of ten years or more because
such long-term obligations generally produce higher income than shorter-term
obligations. However, such long-term obligations are more susceptible to
fluctuations in their market price resulting from changes in interest rates than
are shorter-term obligations. The average maturity of each Portfolio will vary
from time to time depending on anticipated market conditions.
Municipal Obligations are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, and the power
or ability of any issuer of any obligation to pay principal or interest when
due may be adversely affected by litigation, applicable laws or other
conditions.
OTHER INVESTMENT POLICIES AND TECHNIQUES
In addition to investing in securities directly, a Portfolio may employ other
investment techniques which, together with their related risks, are summarized
below. These investment techniques and related risks are described further in
the Statement of Additional Information.
TEMPORARY INVESTMENTS. Each Portfolio from time to time may make temporary
investments in short-term U.S. Government Securities and other money market
instruments. Interest income from such temporary investments may be taxable to
shareholders as ordinary income. See "Dividends and Distributions; Taxes."
The Portfolios may also enter repurchase agreements with respect to Municipal
Obligations or any of the foregoing temporary investments. Under such
agreements, a Portfolio would purchase a security and concurrently obtain a
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commitment from the seller to repurchase the security at an agreed upon price
and at or within an agreed upon time.
OPTIONS AND FUTURES TRANSACTIONS. Each Portfolio may buy put and call options,
write covered call options and write covered put options on debt securities.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities. The writer of an option agrees to
buy or sell a security at a fixed price and could forgo a profit or incur a loss
from a change in the market price of the security. The buyer of an option pays a
premium whether or not the option is exercised and benefits only from a change
in price. If a liquid secondary market does not exist at a particular time, it
might not be possible to close an option position when it is desirable to do so.
Bond options in the over-the-counter market will be purchased only when the
investment adviser believes a liquid secondary market exists for the options
and only from dealers and institutions believed to present a minimal credit
risk. While some options are exercisable at any time up to a certain date,
other options are exercisable only on a specific date. In either case, or if a
liquid secondary market does not exist for a particular option, a Portfolio
could be required to buy or sell securities at disadvantageous prices, and
thereby incur losses.
Each Portfolio may enter into interest rate futures contracts, buy put
and call options on such futures contracts and write covered put and call
options on such futures contracts. Futures contracts and related options may
help a Portfolio gain exposure to or protect itself from changes in the market.
Risks of entering into futures contracts and related options include the
possibility that there may be an illiquid market in such instruments and that
changes in the value of the contract or option may not correlate with changes in
the value of the underlying securities. The Portfolios do not intend to enter
into futures contracts or related options if immediately thereafter more than 5
percent of a Portfolio's net assets will be committed to initial margin deposits
and premiums paid on open options or if more than 30 percent of total assets
would be set aside as an offset to the futures and related options.
Any income from transactions in options or futures contracts will be taxable
when distributed to Fund shareholders.
REPURCHASE AGREEMENTS. A Portfolio may invest in repurchase agreements either
for temporary defensive purposes due to adverse market conditions or to
generate income from its cash balances. Repurchase agreements maturing more than
seven days in the future are considered illiquid, and a Portfolio will invest no
more than 15% of its net assets in such repurchase agreements or other illiquid
investments at any time. Repurchase agreements acquired by a Portfolio will
always be fully collateralized by money market instruments (generally securities
issued by the U.S. Government, bankers' acceptances, or certificates of deposit)
as to principal and interest and will be entered into only with commercial
banks, brokers and dealers considered by the Fund's investment adviser to be
creditworthy under guidelines adopted by the Trustees of the Fund. The use of
repurchase agreements involves certain risks such as default by, or insolvency
of, the other party to the repurchase agreement. A Portfolio's right to
liquidate its collateral in the
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event of a default could involve certain costs, losses or delays and, to the
extent that proceeds from any sale upon default of the obligation to
repurchase are less than the repurchase price, the Portfolio could suffer a
loss. Any income from repurchase agreements will be taxable when distributed
to Fund shareholders.
INVESTMENT IN MONEY MARKET INVESTMENT COMPANIES. As an alternative to using
repurchase agreements, each Portfolio may from time-to-time invest up to 5% of
its assets in money market investment companies sponsored by a third party for
short-term liquidity purposes. Such investments are subject to a
non-fundamental investment limitation described in the Statement of Additional
Information.
LENDING PORTFOLIO SECURITIES. In order to obtain a return on its investments,
a Portfolio may lend portfolio securities to brokers, dealers and other
financial institutions in amounts up to one-third of the value of its total
assets. Loans of portfolio securities will always be fully collateralized
and will be made only to borrowers considered by the Fund's investment adviser
to be creditworthy under guidelines adopted by the Trustees of the Fund. Lending
portfolio securities involves risk of delay in the recovery of the loaned
securities and, in some cases, loss of rights in the collateral should the
borrower fail financially. Income from securities loans will be taxable when
distributed to Fund shareholders.
FORWARD COMMITMENTS. A Portfolio may make contracts to purchase securities for
a fixed price at a future date beyond customary settlement time ("forward
commitments") if it holds, and maintains until the settlement date in a
segregated account at its custodian bank, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or if it enters into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of a
Portfolio's other assets. Where such purchases are made through dealers, the
Portfolio relies on the dealer to consummate the sale. The dealer's failure to
do so may result in the loss to the Portfolio of an advantageous yield or price.
FLOATING OR VARIABLE RATE INSTRUMENTS. A Portfolio may invest in floating or
variable rate instruments, which provide for interest rate adjustments at
specified intervals. Rate adjustments on such securities are usually set at
the issuer's discretion, in which case a Portfolio would normally have the
right to resell the security to the issuer or its agent. Alternatively,
rate revisions may be determined in accordance with a prescribed formula or
other contractual procedure. A Portfolio may also acquire put options in
combination with the purchase of underlying securities or may separately acquire
put options that relate to the securities held by it in the Fund's Portfolios.
Such put options would give the Portfolio the right to require the issuer or
some other person to purchase the underlying security at an agreed upon price.
DEFENSIVE STRATEGIES. When adverse market conditions warrant a temporary
defensive strategy, a Portfolio may invest in U.S. Government Securities and
corporate or bank money market instruments. Money market instruments include
high-grade commercial paper (promissory notes issued by corporations to finance
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their short-term credit needs), negotiable certificates of deposit, non-
negotiable fixed-time deposits with maturities of less than seven days,
bankers' acceptances and repurchase agreements. Investments in commercial paper
will be rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P or F-1 or F-2
by Fitch Investors Service, Inc. Investment in bank instruments will be in
instruments which are issued by U.S. banks having assets at the time of
investment of $1 billion or more and which generally mature in one year or
less from the date of acquisition. Income from the investments described in
this paragraph will be taxable when distributed to Fund shareholders.
PURCHASE OF SHARES
Shares of the Portfolios may be purchased through the Distributor or through
certain other investment dealers. Shares of a Portfolio are sold at the
Portfolio's net asset value per share next computed after the purchase order
is received by the Fund. The minimum initial investment in each Portfolio is
$1,000 and additional investments may be made in amounts of at least $500,
except that participants in certain systematic investment plans may make
initial purchases and subsequent periodic investments of as little as $25 per
month.
The net asset value per share of each Portfolio is computed each day on which
the New York Stock Exchange is open as of the close of regular trading on the
exchange (currently 4:00 p.m., New York time). The net asset value per share
is arrived at by determining the value of all of the assets of the Portfolio,
subtracting all liabilities and dividing the result by the total number of
shares of that Portfolio outstanding. Short-term obligations with maturities
of 60 days or less are valued by the Portfolios at original cost plus either
accrued interest or amortized discount. All other investments are valued at
market value or, where market quotations are not readily available, at fair
value as determined by or under the direction of the Trustees of the Fund.
Additional information concerning the Portfolios' valuation policies is
contained in the Statement of Additional Information.
Orders for the purchase of shares of a Portfolio received by dealers by the
close of regular trading on the New York Stock Exchange on any business day
and transmitted to Advest by the close of its business day (normally 4:00 p.m.,
New York time) will be effected at the net asset value per share determined as
of the close of regular trading on the New York Stock Exchange on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers and not of the
Fund to transmit orders so that they will be received by Advest before the close
of its business day.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the best
interest of the Portfolio and (iii) to modify or eliminate the minimum for
initial investment in shares of the Portfolio.
CONTINGENT DEFERRED SALES LOAD. There is no sales load on the purchase of
shares of the Portfolios at the time of purchase. However, when shares are
redeemed within four years after their purchase, a contingent deferred sales
load will be imposed at rates declining from a maximum of 4% of the lesser of
the net asset value or total cost of shares redeemed within a
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year of purchase to 1% of such amount for shares redeemed after three years.
No contingent deferred sales load will be imposed on shares redeemed four or
more years after they are purchased, on shares acquired through reinvestment of
dividends and distributions, or on amounts derived from increases in a
Portfolio's net asset value per share. In determining whether a contingent
deferred sales load will be payable and, if so, the percentage charge
applicable, shares acquired through reinvestment and then shares held the
longest will be considered the first to be redeemed, thus resulting in the
lowest possible sales charge. The contingent deferred sales load may be waived
in connection with certain redemptions of shares of the Portfolios. See
"Redemption of Shares" and "Shareholder Services."
If imposed, the contingent deferred sales load will be deducted from the
redemption proceeds otherwise payable to the shareholder. Pursuant to the
distribution agreement between the Fund and Advest, the contingent deferred
sales load will be paid to Advest. Advest also receives payments from each of
the Portfolios pursuant to the Portfolios' Rule 12b-1 plans. See "Distributor
and Rule 12b-1 Plans."
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed for cash at any time upon written
order to the Fund, c/o Advest Transfer Services, Inc., 280 Trumbull Street,
Hartford, Connecticut 06103. The redemption price will be the Portfolio's net
asset value per share next determined after receipt of a redemption request
meeting the requirements described below. A contingent deferred sales load may
be imposed at the time of redemption. See "Purchase of Shares Contingent
Deferred Sales Load."
A redemption request must (i) state the number of shares or the dollar amount
to be redeemed, (ii) identify the shareholder's account number, and (iii)
be signed by each registered owner exactly as the shares are registered. If the
shares to be redeemed were issued in certificate form, the certificates must be
endorsed for transfer (or be accompanied by an endorsed stock power) and must be
submitted with the redemption request. Signatures on certificates, stock powers
and all written orders or authorizations must be guaranteed by a securities firm
having membership on a recognized national securities exchange, a U.S.
commercial or savings bank, a savings and loan association, a credit union, a
clearing agency, a securities exchange or securities association. Additional
supporting documents may be required in connection with redemptions made by
corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be received until all required documents are
received in proper form.
Proceeds of redemptions will be paid within seven days of receipt of a
redemption request in proper form. At various times a Portfolio may be requested
to redeem shares for which it has not yet received good payment and in such
instances may delay payment of the redemption proceeds up to 15 days to allow
for collection. This delay may be avoided by purchasing shares with a Federal
Reserve wire, cashier's check or certified check.
In addition to direct redemption by a Portfolio upon written order,
shareholders also may re-
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deem their shares through Advest. Advest, acting as agent for the Fund,
stands ready to repurchase Portfolio shares at the net asset value per share
next determined after Advest receives the order. Advest will pay the proceeds,
less any applicable contingent deferred sales load, within seven days
thereafter, assuming it has received proper documentation. No additional fee
is charged for this service.
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares depending upon the market value of a Portfolio's
securities holdings at the time of redemption or repurchase. Investors who
purchase or redeem shares of a Portfolio through brokers other than Advest may
be subject to fees imposed by those entities.
Due to the relatively high cost of maintaining small accounts, the Portfolios
reserve the right to redeem, at net asset value, the shares of any shareholder
whose account has a value of less than $1,000 (unless the value has fallen
below $1,000 solely as a result of a decline in net asset value). Before doing
so, the shareholder will be given notice that the value of the shares in the
account is less than the minimum amount and will be allowed 30 days to make an
additional investment in an amount which will increase the value of the
account to at least $1,000. The contingent deferred sales load will be waived
in connection with these redemptions.
SHAREHOLDER SERVICES
The Fund provides the shareholder services summarized below. Applications and
additional information about these services may be obtained by contacting an
Advest investment broker.
EXCHANGE PRIVILEGE. Shareholders may exchange shares of a Portfolio for
shares of any other Portfolio in the Fund then offering shares for sale in the
shareholder's state of residence, subject to the minimum investment
requirements of the Portfolio into which the exchange is being made. Exchanges
may be made only between accounts with identical registrations and will be
made on the basis of the relative net asset value per share next determined
after the request for exchange is received in proper form. If the shares being
exchanged are subject to the contingent deferred sales load, the load will be
waived at the time of exchange, but will continue to apply to the shares
acquired in the exchange. An exchange constitutes a sale for federal income
tax purposes. The Fund will give each shareholder 60 days' notice in the event
of a modification or termination of this exchange privilege.
ADVANTAGE INSURED ACCOUNT. Fund shareholders may invest proceeds of Fund
share redemptions in the Advantage Insured Account (the "AIA"). The AIA is a
money market deposit account maintained for the benefit of shareholders of the
Portfolios at Advest Bank, a Connecticut savings bank which is affiliated with
Advest. The AIA is not a Money Market Mutual Fund. Shareholders who do not hold
shares in certificate form may deposit redemption proceeds into the AIA, and the
applicable contingent deferred sales load will not be imposed. Advest Bank is an
FDIC-insured institution, and deposits in the AIA, together with any other
monies a shareholder has on deposit at Advest Bank, will be insured by the FDIC
up to $100,000. Advest Bank will pay interest on the AIA balance at the same
rate that it pays to its other money market account depositors.
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There is a minimum initial deposit requirement of $1,000. AIA depositors
may withdraw money from the AIA and invest in shares of any of the portfolios of
the Advantage family of mutual funds then offering shares for sale in the
depositor's state of residence. Alternatively, an AIA depositor may receive cash
upon withdrawal, in which case any sales load due will be deducted from the
amounts withdrawn. Whether the sales load is deferred and carried over to the
shares acquired or charged against the cash withdrawn, the holding period for
computation of the sales load will be computed from the purchase date of the
shares of the Portfolio which were originally redeemed to make the deposit. For
federal income tax purposes, redemption of shares of a Portfolio in connection
with a deposit into the AIA constitutes a sale. Only the cash on deposit in the
AIA is FDIC-insured.
REPURCHASE PRIVILEGE. A shareholder who has redeemed shares of a Portfolio may,
within 45 days after the date of redemption, reinvest all or any part of the
redemption proceeds in shares of that Portfolio and request from the Fund (at
the address set forth on the cover page of this Prospectus) a credit against
any amount of any contingent deferred sales load deducted with respect to the
redemption. For purposes of any future contingent deferred sales load, the
date of purchase of the shares acquired upon reinvestment will apply. The
repurchase privilege may be utilized only once by any shareholder with respect
to each Portfolio.
DIVIDEND REINVESTMENT PLAN. Dividends and distributions with respect to a
Portfolio will be automatically reinvested in additional shares of the
Portfolio, unless a shareholder elects to receive them in cash.
SECURITIES SWAP PROGRAM. Investors may exchange readily marketable securities
for shares of a Portfolio, provided that the Portfolio's investment adviser
determines their acquisition by the Portfolio would be consistent with the
Portfolio's investment objective. Securities acquired by a Portfolio will be
valued at their market value as of the time of acquisition according to the
Fund's valuation procedures. All transactions will be subject to the limitation
on initial and subsequent investments. An exchange of securities for Portfolio
shares constitutes a sale for federal income tax purposes.
SHAREBUILDER(SM) ACCOUNT. Shareholders may invest predetermined amounts in the
Portfolios through an arrangement with a bank or through an Advest brokerage
account under the ShareBuilder Account program. ShareBuilder Account
investments require a minimum aggregate investment in the Portfolios of $50 each
month.
DIVIDENDS AND DISTRIBUTIONS; TAXES
Each Portfolio will distribute to shareholders substantially all of its net
investment income and any net capital gains. Dividends from net investment
income will be declared daily and paid monthly; net short-term capital gains and
net long-term capital gains, if any, will be distributed at least annually.
In order to maintain a more stable monthly distribution, each Portfolio may at
times pay out more or less than the entire amount of its net investment income
and short-term capital gains earned in any particular period. As a result, the
distributions paid by a Portfolio for
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any particular period may be more or less than the amount of net investment
income and short-term capital gains actually earned by the Portfolio during
such period. There can be no assurance that any amounts retained by the
Portfolio will be available for future distribution.
"Exempt-interest dividends" (as defined in the Internal Revenue Code) paid to
shareholders of a Portfolio from the tax-exempt interest earned from Municipal
Obligations is not includable in the shareholders' gross income for federal
income tax purposes, although the receipt of such dividends may affect
the taxability of social security and railroad retirement benefits. Shareholders
will be subject to federal income taxes on other dividends and distributions
paid by a Portfolio. Except for exempt-interest dividends, distributions of net
investment income and short-term capital gains, if any, will be taxable to
shareholders as ordinary income, whether received in cash or additional shares.
Distributions of net investment income received by a Portfolio from certain
temporary investments (such as certificates of deposit, commercial paper and
U.S. Government Securities) will be taxable to shareholders as ordinary income.
Distributions of long-term capital gains, if any, will be taxable to
shareholders as long-term capital gains, whether received in cash or shares of a
Portfolio and without regard to how long a shareholder has held shares of the
Portfolio. Dividends and distributions also may be subject to state and local
taxes. The Fund will notify shareholders each year of the amount of
exempt-interest dividends and other distributions paid, including the amount of
any distribution of long-term capital gains, and the Fund will notify its
shareholders each year of the percentage of each Portfolio's dividends
attributable to interest treated as a tax preference item for purposes of the
alternative minimum tax and the percentage of each Portfolio's dividend
attributable to obligations of each state.
STATE INCOME TAXES. The exemption of interest on Municipal Obligations for
federal income tax purposes does not necessarily result in exemption under
the income, corporate or personal property tax laws of any state or city.
Individual shareholders of the Portfolios are in many states exempt from
taxation on distributions derived from the interest on Municipal Obligations of
their state of residence. Distributions to individual shareholders from the New
York Portfolio derived from obligations exempt from New York State taxation are
also generally exempt from New York City personal income tax. Distributions to
corporate taxpayers in New York may be subject to New York State and New York
City corporate franchise taxes. For a further discussion of state tax treatment
relating to the New York and Pennsylvania Portfolios, see Appendices B and C to
this Prospectus.
The foregoing is only a summary of some of the important tax considerations
generally affecting the Portfolios and theirshareholders. No attempt is made
to present a detailed explanation of the federal or state income or other tax
treatment of the Portfolios or their shareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, you are urged
to consult your own tax advisors with specific references to your tax situation.
At the end of each quarter, at least 50% of the value of a Portfolio's assets
must be invested in
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Municipal Obligations in order for distributions to qualify as exempt-interest
dividends. Under particularly unusual circumstances, such as when a Portfolio
is in a prolonged defensive investment position, it is possible that no
portion of a Portfolio's distributions of income to its shareholders for a
fiscal year would be exempt from federal income tax. However, the Fund does
not presently anticipate that such unusual circumstances will occur.
Redemptions and exchanges of shares of a Portfolio are taxable events and,
accordingly, shareholders may realize gain or loss on these transactions.
Each Portfolio intends to qualify for taxation as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended, and intends to
make sufficient distributions so that it will not be subject to federal income
tax with respect to amounts distributed to shareholders.
Shareholders may be subject to 31% withholding on reportable dividend and
redemption payments ("backup withholding"). Generally, a shareholder will be
subject to backup withholding if the shareholder's taxpayer identification
number is not on file with the Fund or if the Portfolio knows or has been
notified by the Internal Revenue Service that the taxpayer identification number
furnished is an incorrect number. An individual's taxpayer identification number
is his or her social security number.
INVESTMENT ADVISER
Boston Security Counsellors, Inc. ("BSC"), 100 Federal Street, Boston,
Massachusetts 02110, serves as investment adviser to each of the Portfolios. BSC
is a wholly-owned subsidiary of The Advest Group, Inc., which also is the parent
company of Advest, Inc., the Fund's distributor, and Advest Transfer Services,
Inc., the Fund's transfer agent and dividend disbursing agent. The Advest Group,
Inc. is a publicly-owned holding company offering diverse financial services
principally in securities-related areas through its subsidiaries. BSC and its
predecessors and affiliates have provided investment advice to individuals,
employee benefit plans, charitable and other nonprofit organizations,
corporations and mutual funds for more than 15 years.
Subject to the supervision and direction of the Trustees of the Fund, BSC
manages each Portfolio in accordance with its stated investment objective
and policies, makes investment decisions for each Portfolio, places orders to
purchase and sell securities on behalf of each Portfolio, and administers the
affairs of the Fund. For its services, each Portfolio pays BSC a monthly fee at
the accrued rate of .45% of the Portfolio's average aggregate daily net assets
(subject to voluntary waiver or reimbursement by BSC and its affiliates).
Margaret D. Patel, a Senior Vice President of BSC and a Vice President of the
Fund, serves as portfolio manager for each of the Portfolios. She has been
associated with BSC since 1988.
EXPENSES. Each Portfolio bears all expenses of its operations other than those
incurred by BSC under its investment advisory agreement with the Fund. Each
Portfolio pays the following expenses, among others: investment advisory fees;
amounts pursuant to its Rule 12b-1 plan, bookkeeping, share pricing and
shareholder servicing fees and expenses; custodian
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fees and expenses; legal and auditing fees; expenses of prospectuses,
statements of additional information and shareholder reports for distribution
to current shareholders; registration and reporting fees and expenses; and
Trustees' fees and expenses. Under the investment advisory agreement, BSC will
reduce its fee to the extent that expenses payable by a Portfolio would exceed
the limit on expenses applicable to a Portfolio in any state in which the
Portfolio's shares are then qualified for sale. Any expenses not clearly
attributable to a particular Portfolio will be allocated among the Portfolios
as deemed fair and appropriate by or under the direction of the Trustees.
PORTFOLIO BROKERAGE TRANSACTIONS. Subject to the supervision of the Trustees,
BSC selects the brokers and dealers which execute orders to purchase and sell
securities for each Portfolio. BSC seeks to obtain the best available price and
most favorable execution with respect to all transactions for each Portfolio.
Subject to the consideration of best price and execution and to applicable
regulations, sales of shares of other investment companies distributed by
Advest as principal underwriter may be considered as a factor in the selection
of brokers and dealers which execute orders to purchase and sell portfolio
securities for the Fund.
DISTRIBUTOR AND RULE 12b-1 PLANS
Advest serves as distributor of shares for each of the Portfolios. Advest is a
registered broker-dealer and is wholly-owned by The Advest Group, Inc.
The Fund and Advest have entered into a distribution agreement under which
Advest has agreed to act as exclusive distribution agent for shares of the
Portfolios. Advest may sell shares of the Portfolios to or through qualified
dealers or others. Under the distribution agreement with the Fund, Advest is
entitled to such commissions and maintenance and other fees as may be
authorized and provided under the Fund's Distribution and Service Plans. In
addition, Advest will receive the contingent deferred sales load imposed with
respect to certain redemptions of shares of the Portfolios.
RULE 12B-1 PLANS. Each Portfolio has adopted a Distribution and Service Plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Distribution and Service Plans, the Trustees have authorized the payment by each
Portfolio to Advest of .40% annually of its average daily net asset value for
each year elapsed subsequent to adoption of the Plan, as compensation to Advest
for activities which are primarily intended to result in the sale of shares of
the Portfolio (the "Distribution Fee").
In addition to the Distribution Fee, each Portfolio's Distribution and Service
Plan provides for the payment by the Portfolio to Advest of a fee at the annual
rate of .10% annually of the Portfolio's average daily net assets, as
compensation for personal services to investors in shares of the Portfolio
and/or the maintenance of shareholder accounts (the "Service Fee"). While the
Trustees of the Fund have set each Portfolio's Distribution Fee and Service
Fee at the rate of .40% and .10% per annum of average aggregate net assets of
the Portfolio, under each Plan the Trustees may raise the percentage
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of such fees to .75% and .25%, respectively, without obtaining shareholder
approval. However, they have no present intention of raising the fee rates.
Each Distribution and Service Plan requires that at least quarterly the
Trustees review a written report with respect to the amounts expended
under the Plan and the purposes therefor. The Trustees have approved the
Distribution and Service Plans and determined that there is a reasonable
likelihood that the Plans will benefit the Portfolios and their shareholders.
Rule 12b-1 requires that while the Plans are in effect the selection of
Trustees who are not interested persons of the Fund be made by the
disinterested Trustees.
PERFORMANCE INFORMATION
From time to time the Fund may advertise the "total return" or "yield"
or "tax-equivalent yield" of a Portfolio and may compare its performance with
that of other mutual funds as listed in the rankings or ratings prepared by
Lipper Analytical Services, Inc., Morningstar, Inc. or similar independent
services monitoring mutual fund performance, and with appropriate securities
indices. The "total return" of a Portfolio refers to the average annual
compounded rate of return over the stated period that would equate an initial
investment in the Portfolio at the beginning of the period to its ending
redeemable value, assuming reinvestment of all dividends and distributions and
deduction of all recurring charges and any contingent deferred sales charge. A
Portfolio's current "yield" for any period is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of such period. In computing net investment
income, all recurring charges are recognized. A Portfolio's "tax-equivalent
yield" is the net annualized taxable yield needed to produce a specified
tax-exempt yield at a given tax rate based on a specified period, assuming
semiannual compounding of income. The methods used to calculate "total return,"
"yield" and "tax-equivalent yield" are described further in the Statement of
Additional Information.
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and its expenses. Consequently, a Portfolio's
performance figures should not be considered representative of the performance
of the Portfolio for any future period. Current performance information for
each Portfolio may be obtained by contacting your Advest account executive.
THE FUND AND ITS SHARES
The Fund was established as an unincorporated business trust under the
laws of The Commonwealth of Massachusetts on February 25, 1993. The Trustees
of the Fund have authority to issue an unlimited number of shares of
beneficial interest without par value in an unlimited number of various series
(Portfolios) and classes of series. The initial Portfolios of the Fund are the
National, New York and Pennsylvania Portfolios, each of which issues one class
of shares. When issued, each share will be fully paid and nonassessable by a
Portfolio. Shareholders do not have preemptive or conversion rights. All
shares of a Portfolio have equal rights with other outstanding shares of that
19
<PAGE> 80
Portfolio with respect to redemption, dividends, distributions, liquidation
and other matters relating to that Portfolio and with all other outstanding
shares of the Fund relating to the election of Trustees and with other shares
with respect to other matters relating in the same manner to such other
shares. Each share of a Portfolio is entitled to one vote. Shares of the
Portfolios do not have cumulative voting rights. Fractional shares have
proportional voting rights and participate in any distributions and
dividends.
Certificates for shares of the Fund will be issued only upon specific written
request to the Fund. The Fund's transfer agent maintains records of each
shareholder's account and confirmations showing purchase and sale transactions
are issued.
The Fund is not required to hold annual meetings of shareholders. However,
special meetings of shareholders may be called for purposes such as
electing or removing Trustees, changing a fundamental investment policy or
approving an investment advisory agreement or a Rule 12b- 1 Plan. In addition, a
special meeting of shareholders of the Fund will be held if, at any time, less
than a majority of the Trustees then in office have been elected by shareholders
of the Fund. Shareholders of the Fund have the right to communicate with other
shareholders in accordance with the provisions of Section 16(c) of the
Investment Company Act of 1940.
The Trustees of the Fund are:
Robert L. Thomas
President of BSC; Executive Vice President of Advest and Director of Advest
and The Advest Group, Inc.
Geoffrey Nunes
Senior Vice President and General Counsel of Millipore Corporation and
Director of Reebok International, Ltd.
Richard C. Farr
Chairman and Chief Executive Officer of Farr Investment Co.; Chairman of
Bituminous Coal Corp., Inc.; and Director of Darling and Co., Inc., Seal,
Inc., Bouton Corp., Lincoln Logs, Ltd., Hunter Environ. Services, Inc. and
Northwest Direct Marketing Inc.
Linda G. Sprague
Professor of Operations Management at the Whittemore School of Business and
Economics, University of New Hampshire; Director of the Corporate
Broadcasting Network; and Management Advisor to Societe Internationale de
Chirurgie Orthopedique et de Traumotologie.
Allen Weintraub
Chief Executive Officer and Director of Advest and The Advest Group, Inc.
Inquiries concerning the Fund or a Portfolio should be made by contacting the
Fund or an Advest account executive. The Fund's address and telephone number
are listed on the cover page of this Prospectus.
CUSTODIAN; TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, serves as custodian of all cash and securities of
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<PAGE> 81
the Portfolios. Advest Transfer Services, Inc., an affiliate of Advest and BSC,
serves as the Portfolios' transfer agent and dividend disbursing agent. The
address of Advest Transfer Services, Inc. is 280 Trumbull Street, Hartford,
Connecticut 06103.
AUDITORS
Price Waterhouse, Boston, Massachusetts, serves as independent accountants for
the Fund and will audit its financial statements annually. The fiscal year of
the Fund ends on December 31.
LEGAL COUNSEL
Ropes & Gray, Boston, Massachusetts, is legal counsel to the Fund.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR IN THE STATEMENT OF ADDITIONAL INFORMATION, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE.
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<PAGE> 82
APPENDIX A - RATINGS OF DEBT INSTRUMENTS
STANDARD & POOR'S CORPORATION ("S&P"). CORPORATE AND MUNICIPAL BOND RATINGS.
An S&P corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor, with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. S&P does
not perform any audit in connection with the ratings and may, on occasion, rely
on unaudited financial information.
The ratings are based, in varying degrees, on the following considerations:
(a) Likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (b) Nature of and provisions of the obligation; and
(c) Protection afforded by and relative position of the obligation in the
event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, 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.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
Bond ratings are as follows:
AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues; however, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BBB - rating.
B - Debt rated B is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
S&P MUNICIPAL NOTE RATINGS. An S&P 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 are used in
making that assessment: (a) Amortization schedule (the larger the final
maturity relative to other maturities the more likely it will be treated as a
note), and (b) 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).
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<PAGE> 83
Note ratings are as follows:
SP-1 - Very strong or 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.
SP-3 - Speculative capacity to pay principal and interest.
TAX EXEMPT DEMAND BONDS. S&P assigns "dual" ratings to all long-term debt
issues that have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1/A-1+").
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS. Moody's ratings are as follows:
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.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
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 good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Con. (-) - Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable
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credit stature upon completion of construction or elimination of basis of
condition.
MOODY'S MUNICIPAL NOTE RATINGS. Moody's Short-Term Loan Ratings - Moody's
ratings for state and municipal short-term obligations will be designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of major importance in bond risk
are of lesser importance over the short run.
Rating symbols and their meanings follow:
MIG-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 - This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG-3 - This designation denotes favorable quality. All security elements are
accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG-4 - This designation denotes adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly
or predominantly speculative, there is specific risk.
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APPENDIX B - THE NEW YORK PORTFOLIO
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT. Individual shareholders of the
New York Portfolio who are subject to New York State and New York City
personal income tax will not be subject to New York State or City personal
income tax on dividends paid by the New York Portfolio to the extent that they
are derived from interest on obligations of the State of New York and its
political subdivisions which is exempt from federal income tax. However,
dividends derived from interest on debt obligations of other states will, and of
the United States may, be treated as taxable ordinary income for purposes of New
York State and New York City personal income tax.
For New York State and City personal income tax purposes, long term capital
gain distributions are taxable as long term capital gains regardless of the
length of time shareholders have owned their shares (although net capital gain
income is taxed at the same rates as ordinary income). Short term capital
gains and any other taxable income distributions are taxable as ordinary income.
To the extent that investors are subject to state or local taxes outside of
New York City or outside of the State of New York, exempt-interest and other
dividends earned by an investment in the New York Portfolio may represent
taxable income.
Exempt-interest dividends are not subject to the New York State or New York
City alternative minimum taxes.
Neither the New York State nor the New York City personal income tax is imposed
on any portion of Social Security or Railroad Retirement benefits.
Interest on indebtedness incurred or continued to purchase or to carry shares
of the New York Portfolio generally is not deductible for federal, New York
State or New York City personal income tax purposes.
Exempt-interest and other dividends may be subject to New York State franchise
taxes and to the New York City General Corporation Tax, if received by a
corporation subject to those taxes.
SPECIAL FACTORS AFFECTING THE NEW YORK PORTFOLIO. Because the New York
Portfolio invests in New York municipal obligations, its yield and price
stability is more susceptible to factors adversely affecting issuers of New
York municipal obligations than a comparable municipal bond fund that does not
emphasize these issuers to this degree. The State of New York and New York City
have experienced long term economic problems which may adversely affect their
creditworthiness. The fiscal stability of the State is related, at least in
part, to the fiscal stability of its localities and authorities. State
agencies, authorities and localities have issued large amounts of bonds and
notes, guaranteed or supported by the State. New York State, New York City and
other State entities have experienced serious financial difficulties in the
past, which jeopardized their credit standing and impaired their borrowing
abilities and contributed to high interest rates on, and lower market prices
for, debt obligations issued by them. A recurrence of such financial
difficulties or a failure of certain financial recovery programs could result
in defaults or declines in the market values of various Municipal Bonds in
which the New York Portfolio may invest. A default or other financial crisis
relating to New York State or City or a New York State or City agency, or a
State municipality, could have an adverse effect on the market value and
marketability of outstanding New York Municipal Bonds held by the New York
Portfolio and on the interest income of the New York Portfolio. Because the
State, New York City, the State's other political subdivisions and New York's
authorities, all of which borrow money, are, or are perceived in the market
place to be, financially interdependent, any financial difficulty experienced
by one can adversely affect the market value and marketability of obligations
issued by others.
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<PAGE> 86
APPENDIX C - THE PENNSYLVANIA PORTFOLIO
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT. Distributions paid by the
Pennsylvania Portfolio of the Fund to shareholders will not be subject to the
Pennsylvania personal income tax or to the Philadelphia School District
investment net income tax to the extent that the distributions are attributable
to interest received by the Fund from its investments in (i) obligations issued
by the Commonwealth of Pennsylvania, any public authority, commission, board or
agency created by the Commonwealth of Pennsylvania or any public authority
created by such political subdivision (collectively, "Pennsylvania Obligations")
and (ii) obligations of the United States, the interest and gains from which are
statutorily free from state taxation in the Commonwealth or the United States
(collectively, "U.S. Obligations"). Distributions by the Fund to a Pennsylvania
resident that are attributable to most other sources will not be exempt from the
Pennsylvania personal income tax or (for residents of Philadelphia) to the
Philadelphia School District investment net income tax.
Shares of the Pennsylvania Portfolio which are held by individual shareholders
subject to the Pennsylvania county personal property tax will be exempt from
such tax to the extent that the investments of the Pennsylvania Portfolio
consist of Pennsylvania Obligations and U.S. Obligations (collectively
"Exempt Obligations") that are statutorily free from taxation in Pennsylvania.
Shares of the Pennsylvania Portfolio that are held by individual shareholders
subject to personal property taxes imposed by the City of Pittsburgh or the
School District of Pittsburgh will be exempt from such taxes to the extent that
the investments of the Pennsylvania Portfolio consist of Exempt Obligations.
Distributions paid by the Fund which are excludable as exempt income for
federal tax purposesare not subject to the Pennsylvania corporate net income
tax. An additional deduction from Pennsylvania taxable income is permitted for
the amount of distributions paid by the Fund attributable to interest received
by the Fund from its investments in Pennsylvania Obligations and U.S.
Obligations to the extent included in federal taxable income, but such a
deduction is reduced by any interest on indebtedness incurred to carry the
securities and other expenses incurred inthe production of such interest
income, including expenses deducted on the federal income tax return that would
not have been allowed under the Internal Revenue Code if the interest were
exempt from federal income tax. Distributions by the Fund attributable to most
other sources may be subject to the Pennsylvania corporate net income tax. It
is the current position of the Pennsylvania Department of Revenue that Fund
shares are considered exempt assets (with a pro rata exclusion based on the
value of the Fund attributable to its investments in Pennsylvania Municipal
Obligations and U.S. Government Obligations) for purposes of determining a
corporation's capital stock value subject to the Commonwealth's capital stock
or franchise tax.
SPECIAL FACTORS AFFECTING PENNSYLVANIA PORTFOLIO. The Pennsylvania
Portfolio's yield and share price stability are tied in part to conditions
within the Commonwealth. Changes in economic conditions in or governmental
policies of the Commonwealth could have a significant impact on the performance
of Pennsylvania obligations held by the Pennsylvania Portfolio. The
availability, marketability and market value of Pennsylvania Municipal
Obligations may be affected by certain Pennsylvania circumstances which, if not
resolved, could adversely affect the various issuers' abilities to meet their
financial obligations. For example, the Commonwealth's continued dependence on
manufacturing, mining and steel has made the Commonwealth vulnerable to cyclical
industry fluctuations, foreign imports and environmental concerns. However,
growth in the service and trade sectors has helped diversify the Commonwealth's
economy and reduce its unemployment rate below the national average. Changes in
local economic conditions or local governmental policies within the
Commonwealth, which can vary substantially by region, could also have a
significant impact on the performance of municipal obligations held by the
Pennsylvania Portfolio. Recent financial problems of the City of Philadelphia,
for example, have adversely affected the ratings of its obligations. Legislation
providing for the establishment of the Pennsylvania Intergovernmental
Cooperation
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Authority ("PICA") to assist Philadelphia in remedying fiscal emergencies was
recently enacted. 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 City concerning its budgetary and fiscal affairs. At
this time, Philadelphia is operating under a five year fiscal plan approved by
PICA in 1992 and amended in May 1993. In July 1993, PICA issued $643.4 million
of Special Tax Revenue Bonds to refund certain general obligation bonds of the
city and to fund additional capital projects. Also, the Pennsylvania Portfolio
will invest in obligations that are secured by obligors other than the
Commonwealth or its political subdivisions (such as hospitals, universities,
corporate obligors and corporate credit and liquidity providers) and
obligations limited to specific revenue pledges (such as sewer authority
bonds), and the creditworthiness of these obligors may be wholly or partly
independent of the creditworthiness of the Commonwealth or its municipal
authorities.
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INVESTMENT ADVISER
Boston Security Counsellors, Inc.
100 Federal Street
Boston, MA 02110
DISTRIBUTOR
Advest, Inc.
One Commercial Plaza
280 Trumbull Street
Hanford, CT 06103
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
TRANSFER AGENT
Advest Transfer Services, Inc.
280 Trumbull Street
Hartford, CT 06103
INDEPENDENT ACCOUNTANTS
Price Waterhouse
160 Federal Street
Boston, MA 02110
CONTENTS
PAGE
----
Introduction............................................... 2
Summary of Expenses........................................ 2
Financial Highlights....................................... 3
Investment Objectives and Policies......................... 4
Risk Factors............................................... 6
Types of Municipal Obligations............................. 6
Other Investment Policies and Techniques................... 9
Purchase of Shares......................................... 12
Redemption of Shares....................................... 13
Shareholder Services....................................... 14
Dividends and Distributions; Taxes......................... 15
Investment Adviser......................................... 17
Distributor and Rule 12b-1 Plans........................... 18
Performance Information.................................... 19
The Fund and its Shares.................................... 19
Custodian; Transfer Agent and
Dividend Disbursing Agent............................... 20
Auditors................................................... 21
Legal Counsel.............................................. 21
Appendix A................................................. 22
Appendix B................................................. 25
Appendix C................................................. 26
THE ADVANTAGE FUNDS
THE
MUNICIPAL
BOND FUNDS
THE NATIONAL PORTFOLIO
THE NEW YORK PORTFOLIO
THE PENNSYLVANIA PORTFOLIO
PROSPECTUS
APRIL 18, 1994
<PAGE> 89
THE ADVANTAGE MUNICIPAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 18, 1994
THE NATIONAL PORTFOLIO
THE NEW YORK PORTFOLIO
THE PENNSYLVANIA PORTFOLIO
100 Federal Street
Boston, Massachusetts 02110
(617) 348-3100
This Statement of Additional Information is not a prospectus, but expands upon
and supplements the information contained in the Prospectus of The Advantage
Municipal Bond Fund (the "Fund"), dated April 18, 1994, as supplemented from
time to time, and should be read in conjunction with the Prospectus. The
Prospectus may be obtained from the Fund or an Advest, Inc. investment broker.
<PAGE> 90
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
I. DESCRIPTION OF MUNICIPAL OBLIGATIONS . . . . . . . . . . . . . . 1
II. INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . 4
A. Options and Futures Strategies . . . . . . . . . . . . . . . 4
B. Repurchase Agreements . . . . . . . . . . . . . . . . . . . 9
C. Lending of Portfolio Securities . . . . . . . . . . . . . . 10
D. Forward Commitments . . . . . . . . . . . . . . . . . . . . 11
E. Floating or Variable Rate Instruments . . . . . . . . . . . 11
F. Zero Coupon Treasury Securities . . . . . . . . . . . . . . 12
G. Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . 13
H. Risks Associated With High Yield High Risk Investments . . . 15
I. Liquidity of Municipal Lease Obligations . . . . . . . . . . 15
III. INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . 15
IV. TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . 19
V. INVESTMENT ADVISER . . . . . . . . . . . . . . . . . . . . . . . 21
VI. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT . . . . . . . . . . 22
VII. DISTRIBUTION AGREEMENT AND RULE 12B-1 PLANS . . . . . . . . . . 23
VIII. SPECIAL REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . 24
IX. PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . 24
X. NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . 25
XI. TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
XII. PERFORMANCE INFORMATION
A. Total Return . . . . . . . . . . . . . . . . . . . . . . . . 29
B. Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
C. Tax-Equivalent Yield . . . . . . . . . . . . . . . . . . . . 31
D. Non-Standardized Total Return . . . . . . . . . . . . . . . 31
E. Other Information Concerning Fund Performance . . . . . . . 32
XIII. DESCRIPTION OF THE FUND . . . . . . . . . . . . . . . . . . . . 39
XIV. ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . 39
XV. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
-i-
<PAGE> 91
I. DESCRIPTION OF MUNICIPAL OBLIGATIONS
The following discussion supplements the description in the Prospectus of the
portfolio investments of the Fund and its three Portfolios -- the National
Portfolio, the New York Portfolio and the Pennsylvania Portfolio (each, a
Portfolio and together, the "Portfolios").
MUNICIPAL OBLIGATIONS
"Municipal Obligations" are debt obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities to obtain
funds for various public and private purposes. Such obligations include bonds
as well as municipal lease obligations, tax-exempt commercial paper, project
notes and municipal notes such as tax, revenue and bond anticipation notes of
short maturity, generally less than three years.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. The taxes that can be levied for
the payment of debt service may be limited or unlimited as to rate and amount.
In contrast, the principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Revenue bonds are not backed by a pledge of the issuer's general taxing power.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water, sewer and solid waste disposal systems;
highways, bridges and tunnels; port, airport and parking facilities;
transportation systems; housing facilities; colleges and universities and
hospitals. Although the principal security behind these bonds varies widely,
many provide additional security in the form of a debt service reserve fund
whose monies may be used to make principal and interest payments on the
issuer's obligations. Housing finance authorities have a wide range of
security including partially or fully insured, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. In addition to a debt service reserve fund, some authorities provide
further security in the form of a state's ability
<PAGE> 92
(without legal obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are normally secured by annual lease rental payments from the
state or locality to the authority sufficient to cover debt service on the
authority's obligations. Such payments are usually subject to annual
appropriations by the state or locality.
Industrial development and pollution control bonds, although nominally issued
by municipal authorities, are in most cases revenue bonds and are generally not
secured by the taxing power of the municipality but are usually secured by the
revenues of the authority derived from payments by the industrial user or
users.
Each Portfolio may on occasion acquire revenue bonds which carry warrants or
similar rights to convert to or purchase equity securities. Such warrants or
rights may be held indefinitely, but if exercised, each Portfolio anticipates
that it would, under normal circumstances, dispose of any equity securities so
acquired within a reasonably short period of time.
Some municipal bonds are additionally secured by insurance, bank credit
agreements, escrow accounts, or other credit enhancements. In such situations,
a Portfolio may rely in whole or in part upon the creditworthiness of a party
rather than the issuing municipality.
While many municipal bonds pay a fixed rate of interest semi-annually in cash,
there are exceptions. Some bonds pay no periodic cash interest, but rather
make a single payment at maturity representing both principal and interest.
Bonds may be issued or subsequently offered with interest coupons materially
greater or less than those prevailing, with price adjustments reflecting such
deviation.
Most municipal bonds have a fixed final maturity date. However, it is common
for the issuer to reserve the right to call the bond earlier than that date.
Also, some bonds may have "put" or "demand" features that allow early
redemption by the bondholder.
The obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Act, and laws, if any,
which may be enacted by Congress or state bankruptcy laws extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. There is also the possibility that as a
result of litigation or other conditions the power or ability of an issuer to
pay principal when due and/or interest on its Municipal Obligations may be
materially affected.
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Municipal Obligations that are not rated or are in the medium and lower rating
categories of recognized rating agencies are subject to greater credit risks
than securities in higher rating categories. These risks include, without
limitation, the possibility of default by or bankruptcy of either the issuers
of such Municipal Obligations or the underlying sources of funds for debt
service of such Municipal Obligations. In this connection there have been
recent instances of such defaults and bankruptcies which were not foreseen by
the financial and investment communities. Medium and lower quality Municipal
Obligations have varying degrees of speculative characteristic. While certain
of such Municipal Obligations have some protective characteristics, these
characteristics can be expected to be partially offset or outweighed by large
uncertainties or major risk exposures to adverse conditions. With respect to
Municipal Obligations which are not rated by a major rating agency, the Fund
will be more reliant on the judgment, analysis and experience of the Fund's
investment adviser than would be the case if such Municipal Obligations were
rated. In evaluating the creditworthiness of an issue, whether rated or
unrated, the investment adviser will normally take into consideration, among
other things, the financial resources of the issuer (or, as appropriate, of the
underlying source of funds for debt service), its sensitivity to economic
conditions and trends, any operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters. The investment adviser will attempt to reduce the risks of
investing in medium or lower rated or unrated Municipal Obligations through
active portfolio management, diversification, credit analysis and attention to
current developments and trends in the economy and the financial markets. The
Fund will also take such action as it considers appropriate in the event of
anticipated financial difficulties, default or bankruptcy of either the issuer
of any such obligation or of the underlying source of funds for debt service.
Such action may include retaining the services of various persons and firms
(including affiliates of the investment adviser) to evaluate or protect any
real estate, facilities or other assets securing any such obligation or
acquired by the Fund as a result of any such event. The Fund anticipates that
real estate consulting and management services may be required with respect to
properties securing various Municipal Obligations in its Portfolios or
subsequently acquired by a Portfolio.
Medium or lower rated and unrated Municipal Obligations are frequently traded
in markets where the number of potential purchasers and sellers is limited.
Each Portfolio does not intend to purchase a Municipal Obligation if such
purchase at the time thereof would cause more than 15% of its net assets, taken
at current market value, to be invested in illiquid Municipal Obligations and
other assets for which there is no readily available market.
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The yields on Municipal Obligations are dependent on a variety of factors,
including the purpose of the issue and source of funds for repayment, general
money market conditions, general conditions of the Municipal Obligations
market, size of a particular offering, the maturity of the obligation and
rating of the issue. The ratings of Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P") represent their opinions
as to the quality of the Municipal Obligations which they undertake to rate.
It should be emphasized, however, that ratings are general and 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. In addition, the market price of Municipal Obligations will
normally fluctuate with changes in interest rates, and therefore the net asset
value of a Portfolio's shares will be affected by such changes. For a
description of the ratings assigned by S&P and Moody's, see Appendix A to the
Prospectus.
Subsequent to its purchase by a Portfolio, an issue of industrial revenue bonds
may cease to be rated or its rating may be reduced below the minimum grade in
which the Portfolios have represented in the Prospectus they will invest.
Neither event requires a Portfolio to eliminate such obligation from its
holdings, but the Fund's investment adviser will consider such an event in its
determination of whether the particular Portfolio should continue to hold the
obligation. To the extent that the ratings accorded by S&P or Moody's for
Municipal Obligations or temporary investments may change as a result of
changes in such organizations, or changes in their rating systems, the adviser
will attempt to use comparable ratings as standards in making portfolio
investments for the Portfolios.
II. INVESTMENT POLICIES AND TECHNIQUES
The Prospectus describes the investment objective of each of the Portfolios and
summarizes certain investment policies and techniques they will employ. The
following discussion supplements the description of the Portfolios' investment
policies and techniques in the Prospectus.
A. OPTIONS AND FUTURES STRATEGIES
Boston Security Counsellors, Inc. ("BSC"), the Fund's investment adviser, may
at times seek to hedge against a decline in the value of securities held by a
Portfolio or against an increase in the price of securities which it plans to
purchase for a Portfolio through the writing and purchase of options and the
purchase and sale of financial futures contracts and related options. Expenses
and losses incurred as a result of such
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hedging strategies will reduce the current return of a Portfolio employing
these hedging strategies. In addition, BSC may seek to increase the current
return of a Portfolio by writing covered call options or secured put options.
The ability of the Portfolios to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. It is impossible to predict the amount of trading interest that
may exist in various types of options or futures. Therefore, no assurance can
be given that the Portfolios will be able to use these instruments effectively
for the purposes stated below. Although the Portfolios will only engage in
options and futures transactions for limited purposes, such transactions will
involve certain risks which are described below under "Risks of Options and
Futures Strategies." The Portfolios will not engage in options and futures
transactions for speculative purposes.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. Each Portfolio may purchase a
put option to protect against a decline in the market value of a security held
by the Portfolio. This protection is provided during the life of the put
option since the Portfolio, as holder of the put, is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. For the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium paid for the option
and transaction costs. By using put options in this manner, any profit which
the Portfolio purchasing the put option might otherwise have realized on the
underlying security will be reduced by the premium paid for the put option and
by other transaction costs.
A Portfolio may purchase a call option to protect against an increase in the
price of a security that it intends to purchase. This protection is provided
during the life of the call option since the Portfolio, as holder of the call,
is able to buy the underlying security at the exercise price regardless of any
increase in the underlying security's market price. For the purchase of a call
option to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs of the option. By using call options in this manner, any profit which
the Portfolio purchasing the call option might have realized had it bought the
underlying security at the time it purchased the call option will be reduced by
the premium paid for the call option and by transaction costs.
The Portfolios do not intend to purchase put or call options if, as a result of
any such transaction, the aggregate cost of options held by a Portfolio at the
time of such transaction would
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exceed 5% of the total assets of such Portfolio.
WRITING COVERED OPTIONS ON SECURITIES. Each Portfolio may write covered call
options and covered put options on optionable securities of the types in which
it is permitted to invest from time to time as BSC determines is appropriate in
seeking to attain its objectives. Call options written by a Portfolio give the
holder the right to buy the underlying security from the Portfolio at a stated
exercise price; put options written by a Portfolio give the holder the right to
sell an underlying security to the Portfolio at a stated price.
A Portfolio may only write call options on a covered basis or for cross-hedging
purposes and will write only covered put options. A call option is covered if
a Portfolio owns or has the right to acquire the underlying securities subject
to the call option (or comparable securities satisfying the cover requirements
of securities exchanges) at all times during the option period. A call option
is for cross-hedging purposes if it is not covered, but is designed to provide
a hedge against price movements of a security which the Portfolio owns or has
the right to acquire. In the case of a call written for cross-hedging purposes
or a put option, the Portfolio will maintain in a segregated account at its
custodian bank, cash or short-term U.S. Government Securities with a value
equal to or greater than the Portfolio's obligation under the option. The
Portfolios may also write combinations of covered puts and covered calls on the
same underlying security.
A Portfolio will receive a premium from writing an option which increases the
Portfolio's return in the event the option expires unexercised or is terminated
at a profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option, and the volatility of the market
price of the underlying security. By writing a call option, a Portfolio
forgoes the 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 Portfolio will assume the risk that it may be required to purchase
the underlying security for an exercise price higher than the security's then
current market price, resulting in a capital loss if the purchase price exceeds
the market price plus the amount of the premium which the Portfolio received
for writing the option.
A Portfolio may terminate an option which it has written prior to its
expiration by entering into a closing transaction in which it purchases an
option having the same terms as the option written. The Portfolio will realize
a profit (or loss) on such a transaction if the cost of the transaction is less
(or more) than the premium received from the writing of the option. Because
increases in the market price of a call option will generally
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reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option may be offset in whole or in
part by unrealized appreciation of the underlying security owned by the
Portfolio.
PURCHASE AND SALE OF INTEREST RATE FUTURES CONTRACTS. Each Portfolio may
purchase and sell interest rate futures contracts on U.S. Treasury bills, notes
and bonds for the purpose of hedging its security holdings against the adverse
effects of anticipated movements in market interest rates.
A Portfolio may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the securities held by a Portfolio will fall, thus
reducing the Portfolio's net asset value. This interest rate risk can be
reduced without employing futures as a hedge by selling such securities and
either reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. However, this strategy entails increased transaction
costs in the form of dealer spreads and brokerage commissions and would
typically reduce the Portfolio's average yield as a result of the shortening of
maturities.
The sale of interest rate futures contracts provides another means of hedging
against rising interest rates. As rates increase, the value of a Portfolio's
short position in the futures contracts will also tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Portfolio's investments which are being hedged. While the Portfolio will incur
commission expenses in selling and closing out futures positions (which is done
by taking an opposite position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
A Portfolio may purchase interest rate futures contracts in anticipation of a
decline in interest rates when it is not fully invested. As the Portfolio
becomes more fully invested, the Portfolio intends that an equivalent amount of
futures contracts will be closed out.
OPTIONS ON FUTURES CONTRACTS. Each Portfolio may purchase and write call and
put options on interest rate futures contracts. A Portfolio may use such
options on futures contracts in connection with its hedging strategies in lieu
of purchasing and writing options directly on the underlying securities or
purchasing or selling the underlying futures contract. For example, a
Portfolio may purchase put options or write call options on interest rate
futures, rather than selling futures contracts, in anticipation of a rise in
interest rates. Alternatively, a Portfolio may purchase call options or write
put options on
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interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of debt securities which the Portfolio intends
to purchase.
A Portfolio engaging in transactions in interest rate futures and related
options on such futures will be required to deposit as "initial margin" an
amount of cash and short-term U.S. Government Securities. The current initial
margin requirement per contract is approximately 2% of the contract amount.
Thereafter, subsequent payments (referred to as "variation margin") are made to
and from the broker to reflect changes in the value of the futures contract.
Brokers may establish deposit requirements higher than exchange minimums.
LIMITATIONS. A Portfolio will not purchase or sell futures contracts or
options on futures contracts if, as a result, the sum of the initial margin
deposits on its existing futures contracts and related options positions and
premiums paid for options on futures contracts or stock indices would exceed 5%
of such Portfolio's total assets unless the transaction meets certain "bona
fide hedging" criteria. In addition, with respect to each futures contract
purchased or long position in an option, the Portfolio may set aside in a
segregated account at its custodian bank an amount of cash or short-term U.S.
Government Securities equal to the total market value of such contracts less
the initial margin deposited therefor.
A Portfolio will sell futures contracts only to offset expected declines in the
value of portfolio securities, and the value of such futures contracts will not
exceed the total market value of those securities (plus such additional amount
as may be necessary because of differences in the volatility factor of the
portfolio securities vis a vis the futures contracts).
RISKS OF OPTIONS AND FUTURES STRATEGIES. The effective use of options and
futures strategies by a Portfolio depends, among other things, on the
Portfolio's ability to terminate options and futures positions at times when
its investment adviser deems it desirable to do so. Although a Portfolio will
not enter into an option or futures position unless the investment adviser
believes that a liquid market exists for such option or future, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. The Portfolios generally expect
that their options and futures transactions will be conducted on recognized
exchanges. In certain instances, however, a Portfolio may purchase and sell
options in the over-the-counter market. The staff of the Securities and
Exchange Commission considers over-the-counter options and the securities
underlying them to be illiquid. A Portfolio's ability to terminate option
positions established in the over-the-counter market may be more limited than
in the case of exchange-traded options and may also involve the risk that
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securities dealers participating in such transactions would fail to meet their
obligations to the Portfolio.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of the hedge. The successful use of these
strategies also depends on the ability of the investment adviser to forecast
correctly interest rate movements and general stock market price movements.
The risk increases as the composition of the security holdings of the Portfolio
using these strategies diverges from the composition of the relevant option or
futures contract.
B. REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which a Portfolio acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency or instrumentality thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally the next business day). The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on
the underlying instrument. In these transactions, the instruments acquired by
a Portfolio (including accrued interest) must have a total value in excess of
the value of the repurchase agreement and will be held by the Portfolio's
custodian bank until repurchased. The Portfolios' investment adviser will use
standards set by each Portfolio's Trustees in reviewing the creditworthiness of
parties to repurchase agreements with the Portfolios. In addition, no more
than an aggregate of 15% of any Portfolio's net assets, at the time of
investment, will be invested in illiquid investments including repurchase
agreements having maturities longer than seven days.
The use of repurchase agreements by a Portfolio involves certain risks. For
example, if the seller under a repurchase agreement defaults on its obligation
to repurchase the underlying instrument at a time when the value of the
instrument has declined, the Portfolio may incur a loss upon its disposition.
If the seller becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a bankruptcy court may determine that the
underlying instrument is collateral for a loan by the Portfolio and therefore
is subject to sale by the trustee in bankruptcy. Finally, a Portfolio's right
to liquidate its collateral in the event of a default could involve certain
costs, losses or delays and, to the extent that proceeds from any sale upon
default of the obligation to repurchase are less than the repurchase price, the
Portfolio could suffer a loss.
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As an alternative to using repurchase agreements, the Portfolios may from
time-to-time invest up to 5% of their assets in money market investment
companies sponsored by a third party for short-term liquidity purposes. Such
investments are subject to a non-fundamental investment limitation described
in this Statement of Additional Information.
C. LENDING OF PORTFOLIO SECURITIES
A Portfolio may lend its securities to broker-dealers and other financial
institutions in an amount up to one-third of the value of its total assets,
provided that such loans are callable at any time by the Portfolio and are at
all times secured by collateral held by the Portfolio at least equal to the
market value, determined daily, of the loaned securities. A Portfolio loaning
securities will continue to receive any income on the loaned securities, and at
the same time will earn interest on cash collateral (which will be invested in
short-term debt obligations) or a securities lending fee in the case of
collateral in the form of U.S. Government Securities. A loan may be terminated
at any time by either the Portfolio loaning the securities or the borrower.
Upon termination of a loan, the borrower will be required to return the
securities to the Portfolio, and any gain or loss in the market price during
the period of the loan would accrue to the Portfolio. If the borrower fails to
maintain the requisite amount of collateral, the loan will automatically
terminate, and the Portfolio may use the collateral to replace the loaned
securities while holding the borrower liable for any excess of the replacement
cost over the amount of the collateral.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Portfolios will follow the policy of calling the loan, in whole
or in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Portfolio's investment in
the securities which are the subject of the loan. The Portfolios may pay
reasonable finders, administrative and custody fees in connection with loans of
their portfolio securities.
As with any extension of credit, there are risks of delay in recovery of the
loaned securities and in some cases loss of rights in the collateral should the
borrower of the securities fail financially. However, loans of securities will
only be made to firms considered by the Portfolios' investment adviser to be
creditworthy under guidelines adopted by the Trustees.
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D. FORWARD COMMITMENTS
Each Portfolio may enter into forward commitments to purchase securities. An
amount of cash or short-term U.S. Government Securities equal to the
Portfolio's commitment may be deposited in a segregated account at the
Portfolio's custodian bank to secure the Portfolio's obligation. Although a
Portfolio will generally enter into forward commitments to purchase securities
with the intention of actually acquiring and holding the securities (or for
delivery pursuant to options contracts it has entered into), the Portfolio may
dispose of a security prior to settlement if BSC deems it advisable to do so.
The Portfolio entering into the forward commitment may realize short-term gains
or losses in connection with such sales.
E. FLOATING OR VARIABLE RATE INSTRUMENTS
Each Portfolio may purchase floating or variable rate instruments, which
normally provide that the holder can demand payment of the obligation on short
notice at par with accrued interest, which bonds are frequently secured by
letters of credit or other credit support arrangements provided by banks.
Floating or variable rate instruments provide for adjustments in the interest
rate at specified intervals (weekly, monthly, semiannually, etc.). The revised
rates are usually set at the issuer's discretion in which case the investor
normally enjoys the right to "put" the security back to the issuer or the
stockholder's agent. Rate revisions may alternatively be determined by formula
or in some other contractual fashion. To the extent that such letters of
credit or other arrangements constitute an unconditional guarantee of the
issuer's obligations, the banks may be treated as the issuer of a security for
the purposes of complying with the diversification requirements set forth in
Section 5(b) of the Investment Company Act of 1940 and Rule 5b-2 thereunder. A
Portfolio would anticipate using these bonds as cash equivalents pending longer
term investment of its funds. Other longer term fixed-rate bonds, with a right
of the holder to request redemption at certain times (often annually after the
lapse of an intermediate term), may also be purchased by the Portfolio. These
bonds are more defensive than conventional long-term bonds (protecting to some
degree against a rise in interest rates), while providing greater opportunity
than comparable intermediate term bonds since the Portfolio may retain the bond
if interest rates decline. By acquiring these kinds of bonds the Portfolio
obtains the contractual right to require the issuer of the security or some
other person (other than a broker or dealer) to purchase the security at an
agreed upon price, which right is contained in the obligation itself rather
than in a separate agreement with the seller or some other person. Since this
right is assignable with the security which is readily marketable and valued in
the customary manner, the Portfolio will not assign any separate
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value to such right.
F. ZERO COUPON TREASURY SECURITIES
Each Portfolio may invest a portion of its total assets in "zero coupon"
Treasury securities. Such securities consist of Treasury bills or U.S.
Treasury bonds or notes stripped of their interest components. A zero coupon
security pays no interest to its holder during its life. An investor acquires
a zero coupon security at a price which is generally an amount based upon its
present value, and which, depending upon the time remaining until maturity, may
be significantly less than its face value (sometimes referred to as a "deep
discount" price). Upon maturity of the zero coupon security, the investor
receives the face value of the security.
Currently the only U.S. Treasury security actually issued without coupons is
the Treasury bill. However, Treasury bonds or notes can be purchased which
have been stripped of their interest components through the U.S. Treasury's
STRIPS program which permits the beneficial ownership of the interest and
principal components to be recorded directly in the Treasury's book-entry
system. Each Portfolio may also purchase custodial receipts evidencing
beneficial ownership of direct interests in component parts of U.S. Treasury
bonds or notes held by a bank in a custodian or trust account.
Stripped interests in U.S. Treasury securities that are not issued through the
U.S. Treasury's STRIPS program are not considered to be U.S. Government
Securities.
Zero coupon securities (including both U.S. Treasury bills issued without
coupons and U.S. Treasury bonds or notes stripped of their interest components)
do not entitle the holder to periodic payments of interest prior to maturity.
Accordingly, such securities usually trade at a deep discount from their face
or par value and will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturity which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate the reinvestment risk and lock in a
rate of return to maturity. Current federal tax law requires that a holder
(such as a Portfolio) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year even though
during the year no interest payment on the security is actually received in
cash.
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G. PORTFOLIO TURNOVER
Securities will generally not be purchased for short-term trading profits but
for the purpose of receiving the income generated by the securities. However,
the rate of portfolio turnover is not a limiting factor and a Portfolio's
holdings of securities will be changed if the Portfolios' investment adviser
deems it advisable. The rate of portfolio turnover during the period ended
December 31, 1993 for the Portfolios is set forth in the Prospectus.
A high rate of portfolio turnover involves a correspondingly greater amount of
brokerage commissions (or dealer mark-ups) and other costs which will be borne
directly by a Portfolio and thus reduce the yield to its shareholders. It may
also result in the realization of larger amounts of short-term capital gains
which are taxable to shareholders as ordinary income.
H. RISKS ASSOCIATED WITH HIGH YIELD HIGH RISK INVESTMENTS
Up to 10% of the assets of a Portfolio may be invested in high risk high yield
Municipal Obligations. High yield bonds are commonly known as "junk bonds." A
Portfolio's investment in such Municipal Obligations is subject to the risk
factors outlined below.
YOUTH AND GROWTH OF THE HIGH YIELD BOND MARKET. The high yield bond
market is relatively new and its early growth paralleled a long economic
expansion. During 1989 and 1990, the high yield bond market experienced a
substantial loss of market value and liquidity and although some of this loss
has since been recovered, the high yield bond market continues to be subject to
great volatility. Any economic downturn or increase in interest rates in the
future is likely to have a negative effect on the high yield bond market and on
the value of the high yield bonds held by a Portfolio, as well as on the
ability of the bonds' issuers to repay principal and interest. Issuers of high
yield bonds may be of low creditworthiness and the high yield bonds may be
subordinated to the claims of banks and other senior lenders. During periods
of economic downturn or rising interest rates the issuers of high yield bonds
may have greater potential for insolvency and a higher incidence of high yield
bond defaults may be experienced.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. Changes in the
economy and interest rates affect high yield securities differently from other
securities. The prices of high yield bonds have been found to be less
sensitive to interest rate changes than higher-rated investments, but more
sensitive to adverse economic changes or individual issuer developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress which would adversely
affect their ability to service
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their principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. If the issuer of a bond owned by a
Portfolio defaults, the Portfolio may incur additional expenses in seeking
recovery. In addition, periods of economic uncertainty and changes can be
expected to result in increased volatility of market prices of high yield bonds
and the Portfolio's asset value. Yields on high yield bonds will fluctuate
over time. Furthermore, in the case of high yield bonds structured as zero
coupon or pay-in-kind securities, their market prices are affected to a greater
extent by interest rate changes and thereby tend to be more volatile than
market prices of securities which pay interest periodically and in cash.
PAYMENT EXPECTATIONS. High yield bonds present risks based on payment
expectations. For example, high yield bonds may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest
rate market, a Portfolio would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely,
a high yield bond's value will decrease in a rising interest rate market thus
reducing the value of the assets of the Portfolio holding that bond. If a
Portfolio experiences unexpected net redemptions of Portfolio shares, it may be
forced to sell its high yield bonds to pay for the redemptions, without regard
to the investment merits of the bonds, thereby decreasing the asset base upon
which the Portfolio's expenses can be spread and possibly reducing the
Portfolio's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and
there may be a negative impact on a Portfolio's ability to accurately value
high yield bonds and on the Portfolio's ability to dispose of the bonds.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of high yield bonds, especially
in a thinly traded market. To the extent a Portfolio owns or may acquire
illiquid or restricted high yield bonds, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity
difficulties, and judgment will play a greater role in valuation because there
is less reliable, objective data available.
TAXATION. Special tax considerations are associated with investing in
high yield bonds structured as zero coupon or pay-in-kind securities. A
Portfolio will report the interest on these securities as income annually even
though it receives no cash with respect to the security until the security's
maturity or payment date. The Portfolio may be required to sell some of its
assets to distribute such income to shareholders so as to continue to be
treated as a pass-through entity for federal income tax purposes. These
actions are likely to reduce the
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Portfolio's assets and may thereby increase its expense ratio and decrease its
rate of return.
CREDIT RATINGS. Certain risks are associated with using credit
ratings of recognized rating agencies as a method for evaluating high yield
bonds. Credit ratings evaluate the safety of principal and interest payments,
but not the market value risk of high yield bonds. Since credit rating
agencies may fail to timely change the credit ratings to reflect subsequent
events, the Fund's investment adviser must continuously monitor the issuers of
high yield bonds in a Portfolio to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments, and to attempt to assure the bonds' liquidity so that the Portfolio
can meet redemption requests. To the extent that a Portfolio invests in high
yield bonds, the achievement of the Portfolio's investment objective may be
more dependent on the investment adviser's own credit analysis than is the case
for higher quality bonds. A Portfolio may retain a portfolio security whose
rating has been changed after the security is acquired if the investment
adviser deems it advisable to do so.
I. LIQUIDITY OF MUNICIPAL LEASE OBLIGATIONS.
The Fund's investment adviser, under the direction of the Board of Trustees,
will determine the liquidity of municipal lease obligations based upon whether
the lease can be terminated by the lessee, the lessee's general credit
strength, the potential recovery from a sale of the leased property upon
termination of the lease, the likelihood that the lessee will continue to
appropriate funding for the leased property, any credit enhancement or legal
recourse provided upon an event of non-appropriation or other termination of
the lease, and whether the security can be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Portfolio
has valued the security for purposes of calculating the Portfolio's net asset
value.
III. INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT POLICIES. Each Portfolio has adopted certain
fundamental investment policies. These fundamental investment policies cannot
be changed by a Portfolio unless the change is approved by the lesser of (i)
67% or more of the voting securities of the Portfolio present at a meeting, if
the holders of more than 50% of the outstanding voting securities of the
Portfolio are present or represented by proxy at the meeting, or (ii) more than
50% of all outstanding voting securities of the Portfolio. These policies are
identical for each of the Portfolios and provide that a Portfolio will not:
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<PAGE> 106
1. Borrow money, except from a bank and as a temporary measure
for extraordinary or emergency purposes, and provided the Portfolio maintains
asset coverage of 300% for all borrowings;
2. Purchase securities of any one issuer (except U.S. Government
securities) if, as a result, more than 5% of the Portfolio's total assets would
be invested in that issuer or the Portfolio would own or hold more than 10% of
the outstanding voting securities of the issuer, provided, however, that up to
25% of the Portfolio's total assets may be invested without regard to these
limitations;
3. Underwrite the securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, a
Portfolio may be deemed to be an underwriter;
4. Concentrate its assets in the securities of issuers all of
which conduct their principal business activities in the same industry (this
restriction does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities);
5. Make any investment in real estate, commodities or commodity
contracts, except that a Portfolio may: (a) purchase or sell readily
marketable securities which are secured by interests in real estate or issued
by companies which deal in real estate, including real estate investment and
mortgage investment trusts; and (b) engage in financial futures contracts and
related options as described previously herein, in the Prospectus and in
accordance with regulations of the Commodity Futures Trading Commission;
6. Make loans, except that a Portfolio may (a) invest in
repurchase agreements, and (b) loan its portfolio securities in amounts up to
one-third of the market or other fair value of its total assets;
7. Issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, provided that the deposit or
payment by a Portfolio of initial or maintenance margin in connection with
futures contracts and related options is not considered the issuance of senior
securities; and
8. A Portfolio may, notwithstanding any other investment policy
or restriction, invest all of its assets in the securities of a single
investment company or series or class thereof with substantially the same
fundamental investment objectives, policies and restrictions as the Fund.
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<PAGE> 107
NON-FUNDAMENTAL INVESTMENT POLICIES. In addition to the fundamental investment
policies described above, the Portfolios have adopted certain non-fundamental
policies which may be changed at any time by the Board of Trustees without a
vote of shareholders. These non-fundamental limitations are identical for each
of the Portfolios and provide that a Portfolio may not:
1. Borrow money in excess of 5% of its total assets (taken at market
value).
2. Pledge, mortgage or hypothecate in excess of 5% of its total
assets. The deposit or payment by the Portfolio of initial or maintenance
margin in connection with futures contracts and related options is not
considered a pledge or hypothecation of assets.
3. Purchase more than 10% of the voting securities of any one issuer,
except Government securities.
4. Invest more than 15% of its net assets in illiquid securities,
including repurchase agreements maturing in more than 7 days, that cannot be
disposed of within the normal course of business at approximately the amount at
which the Portfolio has valued the securities.
5. Purchase securities of any issuer with a record of less than 3
years of continuous operation, including by predecessors, except U.S.
Government securities and obligations issued or guaranteed by any foreign
government or its agencies or instrumentalities, if such purchase would cause
the investments of the Portfolio in all such issuers to exceed 5% of the total
assets of the Portfolio taken at market value.
6. Purchase securities on margin, except the Portfolio may obtain
such short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by the Portfolio of initial or
maintenance margin in connection with futures contracts or related options is
not considered the purchase of a security on margin.
7. Write put and call options unless the options are covered and the
Portfolio invests through premium payments no more than 5% of its total assets
in options transactions other than options on futures contracts.
8. Purchase and sell futures contracts and options on futures
contracts unless the sum of margin deposits on all futures contracts held by
the Portfolio (other than bona fide hedging positions) and premiums paid on
related options held by the Portfolio does not exceed more than 5% of the
Portfolio's assets. (In the case of an option that is in-the-money at the
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<PAGE> 108
time of purchase, the in-the-money amount may be excluded in computing the 5%.)
9. Invest in securities of any issuer if any officer or trustee of
the Fund or any officer or director of the Fund's investment adviser owns more
than 1/2 of 1% of the outstanding securities of the issuer and such officers,
directors and trustees own in the aggregate more than 5% of the securities of
such issuer.
10. Invest in interests in oil, gas or other mineral exploration or
development programs (although it may invest in issuers which own or invest in
such interests).
11. Purchase securities of any investment company except by purchase
in the open market where no commission or profit to a sponsor or dealer results
from such purchase or except when such purchase, though not made in the open
market, is part of a plan of merger, consolidation, reorganization or
acquisition of assets; in any event, the Portfolio may not purchase more than
3% of the outstanding voting securities of another investment company, may not
invest more than 5% of its total assets in another single investment company
and may not invest more than 10% of its total assets in other investment
companies in the aggregate.
12. Purchase warrants if as a result warrants taken at the lower of
cost or market value would represent more than 5% of the value of the
Portfolio's net assets or if warrants that are not listed on the New York or
American Stock Exchanges or on an exchange with comparable listing requirements
taken at the lower of cost or market value would represent more than 2% of the
value of the Portfolio's net assets. (For this purpose, warrants attached to
securities will be deemed to have no value.)
13. Make short sales, unless, by virtue of its ownership of other
securities, the Portfolio has the right to obtain securities equivalent in kind
and amount to the securities sold and, if the right is conditional, the sale is
made upon the same conditions, except in connection with arbitrage
transactions.
14. Purchase securities which are not publicly traded and which a
Portfolio is restricted from selling to the public without registration under
the Securities Act of 1933 if by reason thereof the value of its aggregate
investment in such classes will exceed 10% of its total assets (not including
for these purposes securities sold pursuant to Rule 144A under the Securities
Act of 1933).
15. Invest in interests of real estate limited partnerships.
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In applying the various investment policies and restrictions discussed
in this Statement of Additional Information and in the Prospectus, each state
and each political subdivision, agency or instrumentality of such state, and
each multi-state agency of which a state is a member is considered a separate
"issuer". Non-government users of facilities financed by industrial
development or pollution control bonds are also considered separate issuers
from the sponsoring governmental entity.
I. TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund are listed below. As described
below, certain of the executive officers of the Fund are affiliates of
organizations that provide services to the Fund, namely Boston Security
Counsellors, Inc. ("BSC"), the Fund's investment adviser, Advest, Inc.
("Advest"), the Fund's distributor, and Advest Transfer Services, Inc. ("ATS"),
the Fund's transfer agent, or are affiliates of The Advest Group, Inc. ("AGI"),
which corporation owns all of the outstanding shares of BSC, Advest and ATS.
Each Trustee also serves as a trustee of Scottish Widows International Fund, a
mutual fund for which BSC serves as investment adviser, Advest serves as
distributor and ATS serves as the transfer agent.
<TABLE>
<CAPTION>
Position
Held With Principal Occupation
Name and Address the Fund During Past Five Years
- ---------------- -------- ----------------------
<S> <C> <C>
Robert L. Thomas* President President of BSC since
Boston Security and December 1988; Executive
Counsellors, Inc. Trustee Vice President of Advest;
100 Federal Street Director of AGI and Advest.
Boston, MA 02110
Geoffrey Nunes Trustee Senior Vice President and
94 Brattle Street General Counsel of Millipore
Cambridge, MA 02138 Corporation, Bedford,
Massachusetts since 1975;
Director of Reebok International,
Ltd.
Richard C. Farr Trustee Chairman and Chief Executive
40 Colony Road Officer of Farr Investment Co.
West Hartford, CT since 1980; Chairman of the Board
of Directors of Bituminous Coal
Corp., Inc.; Director of Darling
and Co., Inc., Seal, Inc., Bouton
Corp., Lincoln Logs, Ltd., Hunter
</TABLE>
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<PAGE> 110
<TABLE>
<S> <C> <C>
Environ. Services, Inc., Northwest Direct Marketing Inc. and
The United Way (San Francisco).
Linda G. Sprague Trustee Professor of Operations
University of New Hampshire Management at the Whittemore
Durham, NH 03824 School of Business and Economics,
University of New Hampshire;
Director of Executive Programs
for the Whittemore School of
Business from 1981-86; Professor
of Operations Management at IMDE
(International Management
Development Institute in
Lausanne, Switzerland), 1985;
Director of the Corporate
Broadcasting Network; Management
Advisor to Societe Internationale
de Chirurgie Orthopedique et de
Traumotologie.
Allen Weintraub* Trustee Chief Executive Officer and
280 Trumbull Street Director of AGI and Advest.
Hartford, CT 06103
Martin M. Lilienthal Vice- Senior Vice President,
280 Trumbull Street President Treasurer and Chief Financial
Hartford, CT 06103 and Officer of AGI and Advest;
Treasurer Treasurer of The Advantage Family
of Funds; Director of Advest and
ATS.
David A. Horowitz Secretary Assistant Secretary and
280 Trumbull Street Assistant General Counsel of
Hartford, CT 06103 AGI and Advest since October,
1987; Attorney in Private
Practice prior to October 1987.
Margaret D. Patel Vice Senior Vice President of Boston
Boston Security President Security Counsellors, Inc. (since
Counsellors, Inc. 1988), President and Portfolio
100 Federal Street Manager at Fixed Income Asset
Boston, MA 02110 Management, Inc. (1986-1988);
Portfolio manager at American
Capital and Dreyfus Corporation
(prior to 1988).
</TABLE>
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<PAGE> 111
<TABLE>
<S> <C> <C>
Donna McAdam Vice Vice President and Chief
Boston Security President Operating Officer of BSC since
Counsellors, Inc. and April 1987; Consultant with
100 Federal Street Assistant AGI, 1986-1987.
Boston, MA 02110 Secretary
</TABLE>
______________________
*A Trustee who is an "interested person" of the Fund as defined in the
Investment Company Act of 1940.
During the period ended December 31, 1993, Messrs. Farr and Nunes and Dr.
Sprague each received a fee of $500 for serving as a trustee to the Fund, in
addition to reimbursement of their expenses.
Although nominee holders of shares of the Portfolios may at times be the record
holders of 5% or more of the outstanding shares of one or more of the
Portfolios, to the knowledge of the Fund no person owns beneficially 5% or more
of the shares of any Portfolio as of the date hereof. As of the date hereof,
the Trustees and officers of the Fund as a group owned less than 1% of the
outstanding shares of each of the Portfolios.
II. INVESTMENT ADVISER
Boston Security Counsellors, Inc. ("BSC") serves as investment adviser to the
Fund and its Portfolios pursuant to a written investment advisory agreement.
BSC is a Massachusetts corporation organized in 1982, and is a registered
investment adviser under the Investment Advisers Act of 1940. Robert L.
Thomas, Trustee and President of the Fund, is President, Chief Executive
Officer and a Director of BSC. Martin M. Lilienthal, Vice President and
Treasurer of the Fund, is Treasurer and Director of BSC. Margaret D. Patel,
Vice President of the Fund, is Senior Vice President of BSC. Donna McAdam,
Vice President and Assistant Secretary of the Fund, is Vice President and Chief
Operating Officer of BSC. As of December 31, 1993, BSC managed approximately
$588 million in mutual fund assets for approximately 44,000 shareholders.
Certain services provided by BSC under the investment advisory agreement are
described in the Prospectus. In addition to those services, BSC provides the
Fund and its Portfolios with office space for managing their affairs, with the
services of required executive personnel, and with certain clerical services
and facilities. These services are provided without reimbursement by the Fund
for any costs incurred. As compensation for its services, each Portfolio pays
BSC a fee based upon the Portfolio's average daily net asset value. This fee
is computed
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<PAGE> 112
daily and paid monthly. The rate at which the fee is paid is described in the
Prospectus. BSC waived all advisory fees due from the Portfolios during the
period ended December 31, 1993 and voluntarily reimbursed some of the
Portfolios' expenses. The amount of advisory fees that would have been
received by BSC absent this waiver and the amount of the Portfolios' expenses
voluntarily reimbursed by BSC during the period ended December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
Advisory Fees Expenses Reimbursed
(before waiver) by BSC
--------------- -------------------
<S> <C> <C>
National Portfolio $42,690 $55,135
New York Portfolio 19,210 45,637
Pennsylvania Portfolio 17,980 44,485
</TABLE>
Each Portfolio pays the expenses for its own legal and auditing services, taxes
and governmental registrations, reports and fees, certain insurance premiums,
the cost of share certificates, fees and disbursements of its custodian bank
and transfer agent, brokerage, interest, and all other costs and expenses
properly payable by such Portfolio and not borne by BSC. The Fund also pays
all costs of shareholder notices and reports and prospectuses and statements of
additional information used in complying with laws regulating the issue and
sale of securities (including the cost of typesetting and printing prospectuses
for current shareholders). However, the investment advisory agreement with BSC
provides that if the total expenses of a Portfolio in any fiscal year exceed
the permissible limits applicable to the Portfolio in any state in which shares
of the Portfolio are then qualified for sale, the compensation due BSC for such
fiscal year shall be reduced by the amount of such excess by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during such fiscal year of the Portfolio, subject to
readjustment during the Portfolio's fiscal year. Currently, the only state
expense limitation provision applicable to the National Portfolio limits such
Portfolio's expenses to 2 1/2% of the first $30 million of average net assets,
2% of the next $70 million of average net assets and 1 1/2% of any remaining
average net assets. Currently, no state expense limitation applies to the New
York or Pennsylvania Portfolio. Each Portfolio also pays taxes, brokerage
costs, interest expenses, extraordinary expenses and expenses incurred pursuant
to the Fund's distribution plan.
III. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Advest Transfer Services, Inc. ("ATS"), a subsidiary of AGI and an affiliate of
Advest, Inc. and BSC, serves as the Fund's transfer and dividend disbursing
agent and performs shareholder
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<PAGE> 113
service activities. The address of ATS is 280 Trumbull Street, Hartford,
Connecticut 06103.
The services of ATS are provided pursuant to a Transfer Agency and Service
Agreement with the Fund. Pursuant to such Agreement, ATS will receive from the
Fund an annual fee of $8.00 for each shareholder account in the Fund. ATS also
receives reimbursement under the Agreement for certain out-of-pocket expenses
incurred in rendering such services. These fees have been approved by the
Trustees of the Fund. For the period ended December 31, 1993, ATS received the
following amount of transfer agency fees and reimbursement for out-of-pocket
expenses from each of the Portfolios:
<TABLE>
<CAPTION>
Transfer Out-of-Pocket
Agency Fees Expenses Reimbursed
----------- -------------------
<S> <C> <C>
National Portfolio $4,372 $420
New York Portfolio 2,806 294
Pennsylvania Portfolio 3,386 294
</TABLE>
IV. DISTRIBUTION AGREEMENT AND RULE 12B-1 PLANS
As described in the Prospectus, the Fund has entered into a distribution
agreement with Advest under which Advest has agreed to act as exclusive
distribution agent for shares of the Portfolios. Under the distribution
agreement, Advest will receive the contingent deferred sales load imposed with
respect to certain redemptions of shares of the Portfolios. Advest is also
entitled to such commissions and maintenance and other fees as may be
authorized and provided under the Fund's Distribution and Service Plans.
Each Portfolio has adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940. A description of the Plans is
set forth in the Prospectus. During the fiscal year ended December 31, 1993,
the Portfolios paid the following amounts to Advest pursuant to the
Distribution and Service Plans.
<TABLE>
<CAPTION>
Distribution Service
Fees Fees Total
------------ ------- -------
<S> <C> <C> <C>
The National Portfolio $37,946 $ 9,486 $47,432
The New York Portfolio 17,074 4,269 21,343
The Pennsylvania Portfolio 15,982 3,996 19,978
------- ------- -------
TOTALS: $71,002 $17,751 $88,753
======= ======= =======
</TABLE>
During the fiscal year ended December 31, 1993 Advest collected $1,767, $802
and $152 respectively in contingent deferred sales
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<PAGE> 114
loads on redemptions of shares from the National, New York and Pennsylvania
Portfolios.
During the fiscal year ended December 31, 1993, the amounts collected pursuant
to the Distribution and Service Plans were used by Advest as follows:
<TABLE>
<CAPTION>
National New York Pennsylvania
Portfolio Portfolio Portfolio Total
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Sales Commissions $346,084 $157,145 $147,058 $ 650,287
Trail Commissions 0 0 0 0
Marketing Expenses 99,466 44,430 41,665 185,561
Retail Branch Costs 148,578 67,598 63,194 279,370
Allocated Overhead Costs 31,737 14,965 13,740 60,442
-------- -------- -------- ----------
TOTALS: $625,865 $284,138 $265,657 $1,175,660
</TABLE>
V. SPECIAL REDEMPTIONS
A Portfolio will pay in cash all redemptions during any 90-day period, in
amounts up to the lesser of $250,000 or 1% of the Portfolio's net assets at the
beginning of the period. Redemptions in excess of this limit may be paid, in
whole or in part, in securities or in cash, as the Trustees deem advisable;
however, payment will be made wholly in cash unless the Trustees believe that
economic or market conditions exist which would make the practice detrimental
to the best interests of the Fund and its Portfolios. If redemptions are paid
in securities, the securities will be valued as set forth under "Net Asset
Value" herein and a redeeming shareholder would normally incur brokerage
expenses if he or she converted the securities into cash.
VI. PORTFOLIO TRANSACTIONS
BSC, the investment adviser to the Fund and its Portfolios, is responsible for
decisions to buy and sell securities for the Portfolios and for the placement
of their portfolio business and negotiation of commissions, if any, paid on
these transactions. Fixed income securities in which the Portfolios invest are
traded in the over-the-counter market. These securities are generally traded
on a net basis with dealers acting as principal for their own accounts without
a stated commission, although prices of the securities usually include a profit
to the dealers. In over-the-counter transactions, orders are placed directly
with a principal market maker unless BSC believes that a better price and
execution can be obtained through other methods. Brokerage commissions are
paid on listed securities, options, futures contracts and options thereon. BSC
is responsible for effecting portfolio transactions and will do so in a manner
deemed fair and reasonable to the Portfolio for which the transaction is
effected and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an
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<PAGE> 115
efficient manner at the most favorable price. In selecting broker-dealers and
negotiating commissions, BSC considers the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to brokers who provide research or statistical materials or other services to
the Fund or BSC. BSC is of the opinion that, because material must be analyzed
and reviewed by its staff, its receipt and use does not tend to reduce expenses
but may benefit the Fund and its Portfolios by supplementing BSC's research.
The Fund may, from time to time, place brokerage transactions with Advest,
which is an affiliate of BSC. The negotiated commission paid to Advest on any
such transactions will be comparable to that payable to a non-affiliated broker
in a similar transaction and it will be fair and reasonable as determined
pursuant to procedures adopted by the Trustees to comply with Rule 17e-1 under
the Investment Company Act of 1940. The Fund may not effect portfolio
transactions conducted on a principal basis with Advest.
BSC effects portfolio transactions for other investment companies and accounts.
Research services furnished by firms through which the Portfolios effect their
securities transactions may be used by BSC in servicing all of its accounts;
not all of these services may be used by BSC in connection with the Fund and
its Portfolios. In recognition of the value of such research services, BSC may
pay a brokerage commission to a broker that provides such service in excess of
that which another broker might have charged for effecting the same
transaction. In the opinion of BSC, it is generally not possible to measure
the benefits from research services to each of the accounts (including the
Portfolios).
BSC will attempt to allocate portfolio transactions equitably among the
Portfolios and other accounts whenever concurrent decisions are made to
purchase or sell securities by the Portfolios and other accounts. In making
such allocations, the main factors to be considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Funds and the others. In the
opinion of BSC, however, the results of such procedures will, on the whole, be
in the best interests of each of the clients.
During the fiscal year ended December 31, 1993, the Fund paid no brokerage
commissions.
VII. NET ASSET VALUE
The Portfolios calculate their net asset value on each business day except
those holidays on which the New York Stock Exchange is closed
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<PAGE> 116
(currently New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas). The net asset
value per share of each Portfolio is determined as of the close of regular
trading on the New York Stock Exchange (currently 4:00 p.m., New York time) and
is computed by dividing the value of all securities and other assets of the
Portfolio less all liabilities by the number of shares of that Portfolio
outstanding, and adjusting to the nearest cent per share.
All of the Fund's securities, except money market instruments and short-term
municipal obligations with remaining maturities of 60 days or less, are valued
at market value by BSC or by pricing services approved by the Trustees, which
use information with respect to bond and note transactions, quotations from
bond dealers, market transactions in comparable securities and various
relationships between securities. Money market instruments and short-term
municipal obligations with remaining maturities of 60 days or less are valued
by the amortized cost method. Open futures contracts are valued at the most
recent settlement price, unless such price does not reflect the fair value of
the contract in which case such positions will be valued by, or under the
direction of the Trustees. Options on futures contracts listed or admitted to
trading on a national exchange are valued at their last sale price on such
exchange or, if no sale is made on that day, at the mean between the bid and
the asked price. Other securities and assets for which market quotations are
not readily available are valued in good faith at fair value as determined by
or under the direction of the Trustees. Such fair value may be determined by
various methods, including using information furnished by pricing services
which determine calculations for such securities using methods based, among
other things, upon market transactions for comparable securities and various
relationships between securities which are generally recognized as relevant.
VIII. TAXATION
The Portfolios intend to qualify each year as regulated investment companies
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to so qualify, a Portfolio must, among other things, (i)
derive at least 90% of its gross income from dividends, interest, payments with
respect to certain securities loans, gains from the sale of securities or
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies; (ii) derive less than 30% of its
gross income from gains from the sale or other disposition of securities held
for less than three months; (iii) distribute at least 90% of its dividend,
interest and certain other taxable income each year; and (iv) at the end of
each fiscal quarter maintain at least 50% of the value of its total assets in
cash, government securities, securities of other regulated investment
companies, and other securities of issuers which represent, with respect to
each
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<PAGE> 117
issuer, no more than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and with no more than 25% of its
assets invested in the securities (other than those of the government or other
regulated investment companies) of any one issuer or of two or more issuers
which the Portfolio controls and which are engaged in the same, similar or
related trades and businesses. As a regulated investment company, a Portfolio
will not be subject to federal income tax on income paid to its shareholders in
the form of dividends or capital gains distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of each
Portfolio's "required distribution" over actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Portfolio's
ordinary income for the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending on October 31 plus undistributed
amounts from prior years. The Portfolios each intend to make distributions
sufficient to avoid imposition of the excise tax. For a distribution to
qualify as such with respect to a calendar year under the foregoing rules, it
must be declared by a Portfolio during October, November or December and paid
by the Portfolio before the following February 1. Such distributions will be
taxable in the year they are declared, rather than the year in which they are
received.
Under current federal tax law, a Portfolio will receive net investment income
in the form of interest by virtue of holding Treasury bills, notes and bonds,
and will recognize interest attributable to it from holding zero coupon
Treasury securities. Current federal tax law requires that a holder of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the Portfolio receives no interest
payment in cash on the security during the year. To qualify as a regulated
investment company, each Portfolio must pay out substantially all of its net
investment income each year. Accordingly, a Portfolio may be required to pay
out as an income distribution each year an amount which is greater than the
total amount of interest the Portfolio received in the form of cash. Such
distributions will be made from the cash assets of the Portfolio or by
liquidation of portfolio securities, if necessary. If a distribution requires
the liquidation of portfolio securities, BSC will select which securities to
sell. A Portfolio may realize a gain or loss from such sales. In the event a
Portfolio realizes net capital gains from such transactions, shareholders may
receive a larger capital gain distribution than they would in the absence of
such transactions.
The 30% limit on gains from the sale of securities held for less than three
months and the diversification requirements applicable to a Portfolio's assets
may limit the extent to which the Portfolio will be able to engage in
transactions in options, futures contracts, or options on futures contracts.
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<PAGE> 118
Shareholders of a Portfolio will be subject to federal income taxes on certain
distributions made by a Portfolio whether received in cash or additional shares
of a Portfolio. However, interest earned on Municipal Obligations is not
includable by shareholders in their respective gross incomes for regular
federal income tax purposes. However, interest earned by Portfolios on certain
Municipal Obligations will be treated as a tax preference item under the
federal alternative minimum tax. The receipt of exempt-interest dividends may
affect the taxability of social security and railroad retirement benefits.
Distributions of net investment income derived from certain investments (such
as certificates of deposit, commercial paper and U.S. Government Securities)
and short-term capital gains, if any, will be taxable to the shareholders as
ordinary income. Distributions of long-term capital gains, if any, will be
taxable to the shareholders as long-term capital gains, without regard to how
long a shareholder has held shares of the Portfolio. A loss on the sale of
shares held by the Portfolio for 6 months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain dividend
paid to the shareholder with respect to such shares. Corporate shareholders
should not anticipate that dividends and distributions by the Portfolios will
qualify for the dividends received deduction, since dividends paid by the
Portfolios are not expected to be derived from dividend income.
Redemptions and exchanges of Portfolio shares are taxable events and,
accordingly, shareholders may realize gains and losses on these transactions.
If shares have been held for more than one year, gain or loss realized will be
long-term capital gain or loss unless the shareholder is a dealer in
securities. Furthermore, no loss will be allowed on the sale of Portfolio
shares to the extent the shareholder acquired other Portfolio shares of the
same Portfolio within 30 days prior to or 30 days after the sale of the loss
shares.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury regulations currently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative action.
Dividends and distributions also may be subject to state and local taxes.
Dividends paid by the Portfolios from income attributable to interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states.
Each Portfolio will advise shareholders of the proportion of its dividends
consisting of such governmental interest. Shareholders should consult their
tax advisers regarding the possible exclusion of this portion of their
dividends for state and local tax purposes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state or local taxes.
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The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolios, including the
possibility that distributions may be subject to a 30% United States
withholding tax (or a reduced rate of withholding provided by treaty).
IX. PERFORMANCE INFORMATION
A. TOTAL RETURN
From time to time, quotations of a Portfolio's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following
manner:
"Total return" is computed by finding the average annual compounded rates of
return over the designated periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1+T) = ERV
(n)
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period assuming a
hypothetical $1,000 payment made at the beginning of the designated
period
The calculation set forth above is based on the further assumptions that: (i)
all dividends and distributions of a Portfolio during the period were
reinvested at the net asset value on the reinvestment dates; (ii) all recurring
expenses that were charged to all shareholder accounts during the applicable
period were deducted; (iii) the Fund's maximum contingent deferred sales charge
of 4.0% was deducted. A Portfolio may also quote total return without
reflecting the deduction of the maximum sales charge, as described below under
the heading "Non-Standardized Total Return."
Total returns quoted in advertising reflect all aspects of a Portfolio's
return, including the effect of reinvesting dividends and capital gain
distributions, and any change in the Portfolio's net asset value per share
(NAV) over the period. Average annual returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in a
Portfolio over a stated
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period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had
been constant over the period. For example, a cumulative return of 100% over
ten years would produce an average annual return of 7.18%, which is the steady
annual return rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that a Portfolio's
performance is not constant over time, but changes from year to year, and that
average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Portfolio.
The total return for each Portfolio, so calculated, for the period ended
December 31, 1993 was 0.83% for the National Portfolio, 0.43% for the New York
Portfolio and 1.00% for the Pennsylvania Portfolio.
B. YIELD
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming a semiannual compounding of income.
Yield is computed by dividing the net investment income per share earned during
the period by the maximum offering price per share on the last day of the
period, according to the following formula:
(6)
Yield = 2[(a-b +1) -1]
---
cd
Where:
a = dividends and interest earned during the period, including the
amortization of market premium or accretion of market discount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, each Portfolio computes the yield to maturity of each obligation
held by the Portfolio based on the market value of the obligation (including
actual accrued interest) at the close of the last business day of the month,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360
and the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the subsequent month that the obligation is in the portfolio.
Solely for the purpose of computing yield, the Portfolios recognize dividend
income by accruing 1/360 of the stated dividend rate of a security each day
that a security is in the portfolio.
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Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter.
All accrued expenses are taken into account as follows. Accrued expenses
include all recurring expenses that are charged to all shareholder accounts in
proportion to the length of the base period, including but not limited to
expenses under the Portfolio's distribution plans.
The yield for each Portfolio, so calculated, for the one month period ended
December 31, 1993 was 5.19% for the National Portfolio, 5.04% for the New York
Portfolio and 4.78% for the Pennsylvania Portfolio.
C. TAX-EQUIVALENT YIELD
Tax-equivalent yield is the net annualized taxable yield needed to produce a
specified tax-exempt yield at a given tax rate based on a specified 30-day (or
one month period assuming semiannual compounding of income. Tax-equivalent
yield is calculated by dividing that portion of a Portfolio's yield (as
computed in the yield description in B above) which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Portfolio that is not tax-exempt.
The tax-equivalent yield of each Portfolio, so calculated, for the one month
period ended December 31, 1993 was 7.52% for the National Portfolio, 7.30% for
the New York Portfolio and 6.92% for the Pennsylvania Portfolio based on an
assumed tax rate of 31.0%.
D. NON-STANDARDIZED TOTAL RETURN
In addition to the performance information described above, the Portfolios may
provide total return information for designated periods, such as for the most
recent rolling six months or most recent rolling twelve months. A Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change
in value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a series of
redemptions over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted with or without
taking into account a Portfolio's maximum contingent deferred sales charge of
4.0% of the purchase price. Excluding a Portfolio's sales charge from a total
return
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<PAGE> 122
calculation produces a higher total return figure. Total returns and other
performance information may be quoted numerically or in a table, graph or
similar illustration.
E. OTHER INFORMATION CONCERNING FUND PERFORMANCE
A Portfolio may quote its performance in various ways, using various types of
comparisons to market indices, other funds or investment alternatives, or to
general increases in the cost of living. All performance information supplied
by the Portfolios in advertising is historical and is not intended to indicate
future returns. Each Portfolio's share prices and total returns fluctuate in
response to market conditions and other factors, and the value of a Portfolio's
shares when redeemed may be more or less than their original cost.
A Portfolio may quote a distribution rate calculated by annualizing the latest
dividend paid and dividing by the net asset value per share as of the
applicable date. A distribution rate reflects only dividends paid out of net
investment income. Except as indicated, it does not reflect realized long- or
short-term capital gains or losses, or unrealized gains or losses.
The Portfolios may compare their performance over various periods to various
indices, including the performance record of the Standard & Poor's 500
Composite Stock Price Index (S&P), the Dow Jones Industrial Average (DJIA), the
NASDAQ Industrial Index and the cost of living (measured by the Consumer Price
Index, or CPI) over the same period. Comparisons may also be made to yields on
certificates of deposit, treasury instruments or money market instruments. The
comparisons to the S&P and DJIA show how such Portfolio's total return compared
to the record of a broad average of common stock prices (S&P) and a narrower
set of stocks of major industrial companies (DJIA). A Portfolio may have the
ability to invest in securities not included in either index, and its
investment portfolio may or may not be similar in composition to the indices.
Figures for the S&P and DJIA are based on the prices of unmanaged groups of
stocks, and unlike the Portfolio's returns, their returns do not include the
effect of paying brokerage commissions and other costs of investing.
The Portfolios may also compare their performance to the Bond Buyer Revenue
Bond Index. The Bond Buyer Revenue Bond Index is an unmanaged list of
tax-exempt, 30-year revenue bonds frequently used as a general measure of the
performance of tax-exempt securities. The average quality of bonds included in
the index may differ from the average quality of those bonds in which the Fund
customarily invests. The index does not include bonds in certain of the lower
rating classifications in which the Fund may invest. The index represents the
average of estimates of what 25 current coupon bonds would yield if each bond
were sold at par value. Total return performance figures for the index reflect
mathematically derived changes of market prices and reinvestment of interest
payments, as computed by BSC. Because
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<PAGE> 123
the Fund is a managed portfolio investing primarily in tax exempt securities,
the securities it owns will not match those in the index.
Comparisons may be made on the basis of a hypothetical initial investment in a
Portfolio (such as $10,000), and reflect the aggregate cost of reinvested
dividends and capital gain distributions for the period covered (that is, their
cash value at the time they were reinvested). Such comparisons may also
reflect the change in value of such an investment assuming distributions are
not reinvested. Tax consequences of different investments may not be factored
into the figures presented.
A Portfolio's performance may be compared in advertising to the performance of
other mutual funds in general or to the performance of particular types of
mutual funds, especially those with similar objectives.
Other groupings of funds prepared by Lipper and other organizations may also be
used for comparison to one or more of the Portfolios. Although Lipper
Analytical Services, Inc. ("Lipper") and other organizations such as Investment
Company Data, Inc. ("ICD"), CDA Investment Technologies, Inc. ("CDA") and
Morningstar Investors, Inc. include funds within various classifications based
upon similarities in their investment objectives and policies, investors should
be aware that these may differ significantly among funds within a grouping.
Ibbotson Associates of Chicago (Ibbotson), IL and others provide historical
returns of the capital markets in the United States. A Portfolio may compare
its performance to the long-term performance of the U.S. capital markets in
order to demonstrate general long-term risk versus reward investment scenarios.
Performance comparisons could also include the value of a hypothetical
investment in common stocks, long-term bonds or treasuries. A Portfolio may
discuss the performance of financial markets and indices over various time
periods.
The capital markets tracked by Ibbotson are common stocks, small capitalization
stocks, long-term corporate bonds, intermediate-term government bonds,
long-term government bonds, Treasury Bills, and the U.S. rate of inflation.
These capital markets are based on the returns of several different indices.
For common stocks the S&P is used. Unlike an investment in a common stock
mutual fund, an investment in bonds that are held to maturity provides a fixed
and stated rate of return. Bonds have a senior priority in liquidation or
bankruptcy to common stocks and interest on bonds is generally paid from assets
of the corporation before any distributions to common shareholders. Bonds
rated in the two highest rating categories are considered high quality and
present minimal risks of default. See Appendix A to the Prospectus for a more
complete explanation of ratings of Municipal Bonds. An additional advantage of
investing in government bonds is that they are securities backed by the credit
and taxing power of the United States government and, therefore, present
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<PAGE> 124
virtually no risk of default. Although government securities fluctuate in
price, they are highly liquid and may be purchased and sold with relatively
small transaction costs (direct purchase of Treasury securities can be made
with no transaction costs). Long-term corporate bond returns are based on the
performance of the Salomon Brothers Long-Term-High-Grade Corporate Bond Index
which includes nearly all Aaa- and Aa- rated bonds. Returns on
intermediate-term government bonds are based on a one-bond portfolio
constructed each year, containing a bond which is the shortest non-callable
bond available with a maturity not less than 5 years. This bond is held for
the calendar year and returns are recorded. Returns on long-term government
bonds are based on a one-bond portfolio constructed each year, containing a
bond that meets several criteria, including having a term of approximately 20
years. The bond is held for the calendar year and returns are recorded.
Returns on U.S. Treasury Bills are based on a one-bill portfolio constructed
each month, containing the shortest-term bill having not less than one month to
maturity. The total return on the bill is the month-end price divided by the
previous month-end price, minus one. Data up to 1976 is from the U.S.
Government Bond file at the University of Chicago's Center for Research in
Security Prices; the Wall Street Journal is the source thereafter. Inflation
rates are based on the CPI. Ibbotson calculates total returns in the same
manner as the Portfolios.
Other widely used indices that a Fund may use for comparison purposes include
the Shearson Lehman Bond Index, The Shearson Lehman GNMA Single Family Index
and the Shearson Lehman Government/Corporate Bond Index.
A Portfolio may also discuss in advertising the relative performance of various
types of investment instruments, such as stocks, treasury securities and bonds,
over various time periods and covering various holding periods. Such
comparisons may compare these investment categories to each other or to changes
in the CPI.
The Fund seeks a high level of current income exempt from federal income taxes
and to conserve principal by investing primarily in diversified investments in
high and upper medium grade quality municipal bonds.
There are many benefits to investing in municipal bonds. These include:
- - With the elimination of many tax exemptions and shelters in the last few
years, tax-exempt municipal securities provide one of the few remaining ways to
earn tax-advantaged income.
- - By investing in municipal securities, the assets of the Advantage Municipal
Bond Fund will help support many projects designed to improve America's
infrastructure; projects ranging from pollution control to highway
improvements.
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<PAGE> 125
- - Investing in municipal securities may allow many investors to earn more on an
after-tax basis than they would have realized by investing in taxable
securities. Also, the benefits of tax-free investing continues to grow with
your tax bracket (see chart below).
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<PAGE> 126
EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES
The table below shows the effect of the tax status of tax exempt securities on
the effective yield received by their individual holders under the federal
income tax laws in effect for 1994. It gives the approximate yield a taxable
security must earn at various income levels to produce after-tax yields
equivalent to those of tax-exempt securities yielding from 3.0% to 8.0%.
<TABLE>
<CAPTION>
Taxable Income* Marginal federal Tax-exempt yield
income tax 3% 4% 5% 6% 7% 8%
Joint Single bracket**
Equivalent taxable yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 38,000 $ 0 - 22,750 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4%
38,001 91,850 22,751 55,100 28.0 4.2 5.6 6.9 8.3 9.7 11.1
91,851 140,000 *** 55,101 115,000 *** 31.0 4.3 5.8 7.2 8.7 10.1 11.6
140,000 250,000 *** 115,001 250,000 *** 36.0 4.7 6.3 7.8 9.4 10.9 12.5
over 250,000 *** over 250,000 *** 39.6 5.0 6.6 8.3 9.9 11.6 13.2
</TABLE>
* This amount represents taxable income as defined in the Internal
Revenue Code of 1986, as amended (the "Code").
** These rates are the current marginal federal income tax rates on
taxable income for 1994 under the Code.
*** The amount of taxable income in this bracket may be affected by the
phase-out of personal exemptions and the limitation on itemized
deductions under the Code.
The above chart is for illustrative purposes only; there can be no guarantee
that the Portfolios will achieve any particular tax exempt yield. Yield
fluctuates. A portion of the Portfolio's income may be treated as a preference
item for some investors for the purposes of the Federal alternative minimum
tax. The chart does not take into account the effect of any state taxes or
social security taxes. Capital gains, if any, generally are subject to
Federal, state and local taxes.
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<PAGE> 127
THE ADVANTAGE OF TAX EXEMPT COMPOUNDING
<TABLE>
<CAPTION>
Period Taxed Untaxed
- ------ ----- -------
<S> <C> <C>
Five Years $127,555 $141,763
Ten Years $162,704 $200,966
Fifteen Years $207,537 $284,895
Twenty Years $264,725 $403,874
</TABLE>
This example assumes a $100,000 initial investment is made at the beginning of
the year; taxes are paid at the end of the year; the investor is in the 31%
federal income tax bracket for 1993; there is a 7% return from each investment;
dividends and interest compound monthly; there is no fluctuation in the value
of the principal. Yields are for illustrative purposes only and are not
necessarily reflective of yields of any particular Fund. Of course, each
Portfolio's dividends and share price will fluctuate with market conditions.
A Portfolio may also discuss in advertising the highest, lowest and median or
average returns of various types of investments over various holding periods.
These comparisons tend to show that while certain types of investments may
exhibit a wide range of returns over short periods of time and subject the
short-term investor to the risk of substantial loss, the range of returns over
longer holding periods narrows and returns tend to be more stable and positive.
A Portfolio may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, the
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 loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares had been purchased at those intervals. In evaluating
such a plan, investors should consider their ability to continue purchasing
shares through periods of low price levels.
The Portfolios may be available for purchase through retirement plans or other
programs offering deferral of or exemption from income taxes, which may produce
superior after-tax returns over time. For example, a $1,000 investment earning
a taxable return of 10% annually would have an after-tax value of $2,004 after
ten years, assuming tax was deducted from the return each year at a 28% rate.
An equivalent tax-deferred investment would have an after-tax value of $2,147
after ten years, assuming tax was deducted at a 28% rate from the deferred
earnings at the end of the ten year period.
Advertisements and sales literature concerning the Portfolios may refer to
various measures of the tax burden on American workers. Two such measurers are
the "tax freedom day" and the "tax bite in the 8-hour day." "Tax freedom day"
is the theoretical day in a year on which a typical taxpayer would have paid
off all of his or her federal taxes (or combined federal, state and local
taxes, depending on the example given) for that year, assuming that the
taxpayer earns income equally throughout the year and applies all of his or her
income to the payment of taxes until all taxes that will be owed on that year's
income have been paid. Calculations of "tax freedom day" necessarily assume an
overall effective tax rate to apply to all Americans even though individual tax
rates will differ.
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<PAGE> 128
The "tax bite" is an alternative way to express the tax burden calculated with
similar assumptions. It is defined as the portion of each 8- hour workday
needed for a worker to earn enough money to meet his or her federal (or
combined federal, state and local) tax obligations. The "tax bite" might be
used to compare taxes against other personal expenditures, such as housing,
food, clothing and transportation, to provide a measure of taxes as a "cost"
that must be paid in the same way as other living expenses.
Evaluations of Portfolio performance made by independent sources may also be
used in advertisements concerning the Fund and its Portfolios, including
reprints of, or selections from, editorials or articles about the Fund and its
Portfolios. Sources for Portfolio performance information and articles about
the Fund may include the following.
BANXQUOTE
BARRON'S
BUSINESS WEEK
CDA INVESTMENT TECHNOLOGIES, INC.
CHANGING TIMES. THE KIPLINGER MAGAZINE
CONSUMER DIGEST
FINANCIAL WORLD
FORBES
FORTUNE
IBC/DONOGHUES'S MONEY FUND REPORT
IBBOTSON ASSOCIATES, INC.
INVESTMENT COMPANY DATA, INC.
INVESTOR'S DAILY
LIPPER ANALYTICAL SERVICES,
INC.'S MUTUAL FUND PERFORMANCE ANALYSIS
MONEY
MUTUAL FUND VALUES
THE NEW YORK TIMES
PERSONAL INVESTING NEWS
PERSONAL INVESTOR
SUCCESS
USA TODAY
U.S. NEWS AND WORLD REPORT
WALL STREET JOURNAL
WIESENBERGER INVESTMENT COMPANIES SERVICES
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<PAGE> 129
WORKING WOMAN
X. DESCRIPTION OF THE FUND
The Fund is an open-end diversified series management investment company
established as an unincorporated business trust under the laws of The
Commonwealth of Massachusetts pursuant to a Declaration of Trust dated February
25, 1993.
The Trustees of the Fund have authority to issue an unlimited number of shares
of beneficial interest in each Portfolio without par value. Each share in a
particular Portfolio represents an equal proportionate interest in that
Portfolio with each other share of that Portfolio and is entitled to such
dividends and distributions as are declared by the Fund's Trustees. Upon any
liquidation of a Portfolio, shareholders of that Portfolio are entitled to
share pro rata in the net assets of that Portfolio available for distribution.
Shareholders in one of the Portfolios have no interest in, or rights upon
liquidation of, any of the other Portfolios.
The Fund will normally not hold annual meetings of shareholders to elect
Trustees. If less than a majority of the Trustees of the Fund holding office
have been elected by shareholders, a special meeting of shareholders of the
Fund will be called to elect Trustees. Under the Declaration of Trust of the
Fund and the Investment Company Act of 1940, the record holders of not less
than two-thirds of the outstanding shares of the Fund may remove a Fund Trustee
by votes cast in person or by proxy at a meeting called for the purpose or by a
written declaration filed with the Fund's custodian bank. Except as described
above, the Trustees will continue to hold office and may appoint successor
Trustees.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration of Trust of the Fund disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Fund
or the Trustees. The Declaration of Trust of the Fund provides for
indemnification out of the Fund's property for all loss and expense of any
shareholder held personally liable for obligations of the Fund. Thus, the risk
of a shareholder of the Fund incurring a financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. The likelihood of such circumstances
is remote.
XI. ADDITIONAL INFORMATION
Further information concerning the Fund and its Portfolios and their shares may
be found in the Registration Statement, of which the Prospectus and this
Statement of Additional Information constitute a part, on file with the
Securities and Exchange Commission.
XII. FINANCIAL STATEMENTS
Price Waterhouse are the Fund's independent accountants. The Report of
Independent Accountants and financial statements included in the Fund's Annual
Report for the period ended December 31, 1993 are incorporated into this
Statement of Additional Information by reference.
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<PAGE> 130
THE ADVANTAGE MUNICIPAL BOND FUND
DECEMBER 31, 1994
MESSAGE FROM THE PRESIDENT OF THE ADVANTAGE MUNICIPAL BOND FUND
TO OUR SHAREHOLDERS:
The year just ended was the first full year for the Advantage
Municipal Bond Fund, with its National, New York and Pennsylvania Portfolios.
If we had been told at the beginning of the year that the Consumer Price Index
(CPI) would rise by only 2.7% for the year and the Producer Price Index by
considerably less; that the strengthening economy would dramatically lift tax
receipts for state and local governments; and that wage settlements would
remain modest, we would have concluded that 1994 would be a very good year for
municipal bonds. In fact, in last year's letter to you I wrote: "We don't
think the kind of economic recovery we are having will generate a meaningful
pickup in inflation for some time ... we believe there are structural reasons
for thinking the 1990s will be a decade of modest growth and equally modest
inflation." As it turned out, 1994 proved to be the worst market for bonds in
the last 70 years -- a rout created by the Federal Reserve's unparalleled six
interest rate increases during the year.
Investors who were relatively new to the bond market reflected their
uneasiness by reducing the level of purchases of all bond funds as 1994
progressed. In fact, during the final quarter of 1994, many municipal bond
funds experienced redemptions from investors who were discouraged by price
declines and interest rate uncertainty. These redemptions helped to obscure the
substantial drop in newly issued municipal bonds in 1994 as is discussed in
greater detail on the following pages.
We would like to remind our shareholders that none of our Portfolios
have had any investments in so-called exotic derivative issues, and we have not
invested in this sector since the Fund's inception in July 1993. We do not feel
these securities can advance our investment goal of producing a high level of
tax-free current income. Further, none of our Portfolios have held issues which
were directly negatively affected by the December 1994 bankruptcy of Orange
County, California.
To date, we have seen no reason to change our views of last year. In
fact in recent comments, Federal Reserve Chairman Greenspan has suggested that
our means of measuring inflation are suspect and that CPI figures may
overstate the actual rate. Our conclusion is that currently municipal bond
yields offer great value to investors. We have structured the Fund's
Portfolios to participate fully in the price recovery we anticipate in 1995.
Further, we are optimistic our assessment of the long-term outlook for
bonds will prove correct in 1995. While aftershocks from the derivatives
scandals or a further preemptive move by the Fed could influence the near
term, we believe total returns for 1995 will be positive as more and more
investors are attracted to the values offered by municipal bonds.
We appreciate your support. We would be delighted to hear from you if
you have questions or concerns that you would like to discuss with us.
Sincerely,
/s/ Robert L. Thomas
----------------
Robert L. Thomas, President
1
<PAGE> 131
THE ADVANTAGE MUNICIPAL BOND FUND
DECEMBER 31, 1994
MESSAGE FROM MARGARET D. PATEL, THE PORTFOLIO MANAGER OF THE ADVANTAGE
MUNICIPAL BOND FUND
Interest rates on municipal bonds moved substantially higher during
1994 as a result of the Federal Reserve causing interest rates to rise by
increasing the Federal Funds rate from 3% at the beginning of 1994 to 5.5% at
year end.
These increases in short-term rates spilled over into the markets for
longer-term securities including Treasury and corporate bonds, as well as the
municipal bond market. To illustrate, the yield for Treasury bonds due in 30
years rose from 6.24% on December 31, 1993 to 7.88% on December 30, 1994.
Municipal bonds followed this trend toward higher rates very closely: good
quality long-term revenue bonds, as measured by The Bond Buyer newspaper, rose
from 5.52% at year end 1993 to 6.97% at the end of December 1994.
Bond prices move in the opposite direction from interest rates.
Therefore, as yields rose, bond prices declined. The decline in bond prices
was reflected in the net asset values of the National, New York, and
Pennsylvania Portfolios of the Advantage Municipal Bond Fund. The total rate
of return of each Portfolio, which measures the change in share price plus
income received in 1994, is shown on the facing page.
There were no material changes in the composition of the individual
portfolios during this tumultuous year. We feel that our emphasis on tax-free
yields from good quality longer-term issues (primarily revenue bonds)
represent attractive relative value for our shareholders.
NATIONAL PORTFOLIO:
As the economy continues to advance in 1995, we expect all states to
participate in improving employment and economic growth. Those regions with a
strong base in manufacturing and export industries probably should continue to
grow faster than the national average.
In general, employment levels for almost all states are equal to or
greater than their pre-recession peaks. The New England and Mid-Atlantic
regions and California suffered greater setbacks during the recession than did
the rest of the country. They are now making a subdued, but steady comeback.
The State of California's economy apparently hit bottom in 1994, after
experiencing declining employment levels in 1992 and 1993 because of defense
cutbacks, anti-business regulation, high taxes and falling real estate prices.
We have had minimal holdings in California due to the long-term financial and
social challenges it faces.
NEW YORK PORTFOLIO:
New York State suffered more than the nation as a whole during the
economic downturn early in the 1990s. Its economic rebound since then has been
more muted. Total employment is still well below its pre-recession peak, and
population growth has been minimal since 1980.
Going forward, it is probable that the number of new issues in 1995
will not exceed 1994's depressed levels. The volume of newly issued bonds in
New York declined sharply by 39% in 1994 to $18.8 billion from $30.8 billion
in 1993. This smaller new issue calendar, combined with an improving economy,
and income higher than the US national average should provide a favorable
backdrop for New York municipal investors.
FIGURE 1
Ms. Patel joined Boston Security Counsellors as a Senior Vice
President in 1988. She has managed the Advantage Government Securities Fund
since then and the Advantage Municipal Bond Fund since July 1993. She also
managed the Advantage High Yield Bond Fund from June 1989 through November
1993. Before joining BSC, Ms. Patel was President of Fixed Income Asset
Management, Inc., a registered investment adviser.
Her experience also includes years with American Capital Asset
Management, Inc., and work as Assistant Treasurer/Investments for the United
Mine Workers of America Health and Retirement Funds. Earlier she managed fixed
income portfolios for Maryland State Retirement Systems, and was with Dreyfus
Management, Inc., the US government and The Brookings Institution.
She holds a BA from the University of Pittsburgh and pursued graduate
studies in Economics at George Washington University. She is a member of the
New York Society of Security Analysts.
2
<PAGE> 132
ADVANTAGE MUNICIPAL BOND FUND
Value of $10,000 investment from inception
(7/1/93 to 12/31/94)
FIGURE 2
FIGURE 3
FIGURE 4
Past performance is not perceptive to future performances.
ADVANTAGE MUNICIPAL BOND FUND
DECEMBER 31, 1994 ANNUAL REPORT
Graph currently depicted on page 3 of the annual report
Value of $10,000 investment from inception
(7/1/93 to 12/31/94)
Lehman
National New York Pennsylvania Municipal
Portfolio Portlio Portfolio Bond index
--------- -------- ------------ ----------
Inception 7/1/93 10,000 10,000 10,000 10,000
9/30/93 10,356 10,284 10,381 10,338
12/31/93 10,483 10,443 10,501 10,484
3/31/94 9,615 9,490 9,557 9,908
6/30/94 9,729 9,549 9,698 10,017
9/30/94 9,769 9,597 9,756 10,088
12/31/94 value
with CDSL 9,138 9,040 9,193 9,942
12/31/94 value
without CDSL 9,398 9,297 9,455 9,942
AVERAGE ANNUAL TOTAL RETURN*
FOR PERIOD 7/1/93 (INCEPTION) TO 12/31/94
<TABLE>
<CAPTION>
WITHOUT CDSL WITH MAXIMUM CDSL
------------ -----------------
SINCE SINCE
1-YEAR INCEPTION 1-YEAR INCEPTION
<S> <C> <C> <C> <C>
National Portfolio -10.35% -4.05% -13.74% -5.83%
New York Portfolio -10.97% -4.74% -14.34% -6.51%
Pennsylvania Portfolio -9.96% -3.67% -13.37% -5.46%
</TABLE>
* Please refer to the inside front cover for further information.
PENNSYLVANIA PORTFOLIO:
Like New York State, Pennsylvania experienced a sharper than average
economic contraction in 1990, with unemployment since then improving but
remaining above the national average. Population growth has been slower than
the national average, and thus has helped to slow the general pace of economic
expansion. The average per capita income is slightly above the average in the
US.
The volume of newly issued Pennsylvania municipal bonds dropped by a
significant 39% in 1994, to $8.8 billion from $14.5 billion in 1993. Due to
the state's conservative financing practices and a generally improving state
economy, it is unlikely that new volume in 1995 should exceed 1994's depressed
level. Thus the Pennsylvania municipal bond market should offer a relatively
conservative and stable one for municipal investors.
Looking ahead to 1995, we are optimistic that the municipal bond
market will be more favorable to investors than in 1994. For many investors,
after taking the effect of taxes into consideration, yields on municipal bonds
are very attractive compared to the rates for taxable bonds. Even investors
who consider themselves to be in the middle income range may be surprised to
see that the tax-free yields of municipal bonds are often higher than the
after-tax income of taxable bonds.
We expect municipals to perform well compared to taxable sectors
because of the likelihood that the new supply of municipal bonds available to
investors probably will not increase in 1995 over 1994's depressed level. The
total new issuance of long-term municipals in 1994 was just under $163
billion, which represented a 44% drop in volume from 1993's $292 billion
amount. In fact, many municipal bond analysts estimate that in 1995 and for
several years beyond, total issuance of new bonds will probably amount to
around $130-150 billion per annum. However, annual debt retirements should
also equal $130-150 billion annually. Thus it is unlikely that the availability
of new bonds should increase.
This development contrasts sharply with the large escalation in supply
of outstanding municipal debt over the past decade: From 1984 to 1994, bonds
outstanding more than doubled, as new issue supply outpaced bond maturities
and retirements.
We have maintained our Portfolios fully invested in longer maturity
issues due to the possibility of shortages of certain types of municipals over
the near term. This strategy, we believe, is the best way over the long-term
to maximize tax-free income for our shareholders, despite occasional market
setbacks such as was registered by municipals in 1994. [ ]
3
<PAGE> 133
THE ADVANTAGE MUNICIPAL BOND FUND
THE NATIONAL PORTFOLIO
DECEMBER 31, 1994
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
RATINGS (B)
-----------
PRINCIPAL STANDARD MARKET
TAX-EXEMPT BONDS (97.37% OF NET ASSETS) AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUE BONDS 87.17%
CONSTRUCTION 1.85%
Inglewood California Redevelopment Agency
6.125% 07/01/23 $ 600,000 -- BBB $ 508,416
---------
EDUCATION 8.92%
Medical University of South Carolina 7.500% 01/01/08 600,000 Baa(1) -- 601,230
Pennsylvania State Higher Education 6.000% 07/01/19 925,000 Aa A+ 826,256
Philadelphia Pennsylvania Hospital & Higher Education
6.250% 07/01/18 600,000 Baa(1) BBB+ 491,712
Rio California School District 6.045% 09/01/28 (C) 1,140,000 Aaa AAA 525,426
----------
2,444,624
----------
ELECTRIC/POWER 12.38%
Massachusetts Municipal Wholesale Electric Co. 6.000% 07/01/18 700,000 Baa(1) BBB+ 625,016
North Carolina Eastern Municipal Power 5.750% 01/01/19 830,000 A A- 686,949
Puerto Rico Electric Power Authority Series T 6.125% 07/01/08 700,000 Baa(1) A- 663,432
Sam Rayburn Texas Municipal Power Agency 6.125% 10/01/13 1,005,000 Baa BBB 858,049
San Diego California Industrial Development 5.900% 09/01/18 650,000 Aa (3) A+ 561,178
----------
3,394,624
----------
HOSPITAL 15.99%
Cumberland County Pennsylvania Carlisle Hospital 6.800% 11/15/23 1,000,000 Baa BBB- 856,580
Erie County Ohio Providence Hospital 6.000% 01/01/13 405,000 -- A- 341,678
Oklahoma City Hillcrest Health Center 6.400% 07/01/20 575,000 -- A- 492,068
Richardson Texas Medical Center 6.500% 12/01/12 330,000 Baa BBB- 284,971
Savannah Georgia Chandler Hospital 7.000% 01/01/23 700,000 Baa BBB+ 631,519
Tarrant County Texas Fort Worth Osteopathic 7.000% 05/15/28 500,000 Baa BBB 439,915
Tomball Texas Hospital Authority 6.125% 07/01/23 1,000,000 Baa -- 782,460
Union County Pennsylvania Hospital Authority Series A 5.875% 07/01/23 700,000 -- A- 554,701
----------
4,383,892
----------
HOUSING 0.75%
Tulsa County Oklahoma Breckenridge Apartments 6.450% 10/01/34 220,000 -- AA 204,635
----------
LONG-TERM CARE 7.69%
Massachusetts Industrial Finance Agency Berkshire
Retirement Community 6.500% 07/01/09 1,000,000 -- -- 908,460
Montgomery County Pennsylvania IDA Health Care Facilities
8.500% 12/01/23 300,000 -- -- 272,700
Tennessee State Veterans Home Board Humboldt
Project 6.750% 02/01/21 1,000,000 -- A+ 927,480
----------
2,108,640
----------
POLLUTION CONTROL 18.15%
Dickinson County Michigan Pollution Control 5.850% 10/01/18 1,500,000 Baa(1) BBB 1,251,810
Franklin County New York Solid Waste Management Authority
6.250% 06/01/15 700,000 -- BBB 592,550
</TABLE>
The Accompanying notes are an integral part of these financial statements.
4
<PAGE> 134
THE ADVANTAGE MUNICIPAL BOND FUND
THE NATIONAL PORTFOLIO
DECEMBER 31, 1994
STATEMENT OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
RATINGS (B)
-----------
PRINCIPAL STANDARD MARKET
REVENUE BONDS (continued) AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -------
<S> <C> <C> <C> <C>
POLLUTION CONTROL (continued)
Lawrenceburg Indiana Industrial Pollution Control 5.900% 11/01/19 1,000,000 Baa(2) BBB 817,030
Massachusetts Industrial Development Pollution Control
5.875% 08/01/08 980,000 Baa(2) BBB 858,696
Montgomery County Maryland Pollution Control 5.375% 02/15/24 400,000 A A+ 323,844
Northampton County Pennsylvania Pollution Control 7.550% 06/01/17 1,200,000 -- -- 1,133,304
-----------
4,977,234
-----------
TRANSPORTATION 5.86%
Dallas Fort Worth International Airport 6.250% 11/01/13 900,000 Ba (1) BB 761,859
Puerto Rico Highway Authority 5.500% 07/01/17 1,000,000 Baa(1) A 845,250
-----------
1,607,109
-----------
WATER & SEWER 3.26%
Massachusetts State Water Resource Authority 5.750% 12/01/21 1,050,000 A A- 895,230
-----------
MISCELLANEOUS 12.32%
Harrisburg Pennsylvania Resource Recovery Series A
5.875% 09/01/21 1,250,000 Baa A 1,069,125
Rhode Island Depositors Economic Protection Corp. Series A
5.75% 08/01/21 1,400,000 Baa(1) A- 1,169,658
St. Louis Missouri Municipal Finance Corp. 6.143%
07/15/14 (C) 2,500,000 Aa (3) AA- 615,725
Savannah Georgia Economic Development Authority Series A
6.178% 12/01/21 (C) 1,500,000 AAA -- 223,815
Savannah Georgia Economic Development Authority Series C
4.746% 12/01/21 (C) 2,000,000 AAA -- 298,420
-----------
3,376,743
-----------
TOTAL REVENUE BONDS (COST $27,297,648) 23,901,147
-----------
GENERAL OBLIGATION BONDS 10.20%
State & County 10.20%
District of Columbia Series E 5.875% 06/01/08 500,000 Baa A 430,135
Guam Government Series A 5.400% 11/15/18 1,200,000 -- BBB+ 950,820
New York City Series B 7.000% 06/01/12 500,000 Baa(1) A- 495,980
Puerto Rico Commonwealth 6.450% 07/01/17 500,000 Baa(1) A 484,445
Puerto Rico Commonwealth 5.500% 07/01/13 500,000 Baa(1) A 435,025
-----------
TOTAL GENERAL OBLIGATION BONDS (Cost $3,174,265) 2,796,405
-----------
TOTAL INVESTMENTS (Cost $30,471,913; 97.37% of net assets) $26,697,552(A)
===========
</TABLE>
NOTES TO STATEMENT OF INVESTMENTS
A. The aggregate cost of investments for federal income tax purposes was
$30,471,913 as of December 31, 1994, resulting in gross unrealized
appreciation and depreciation of $5,852 and $3,780,213, respectively, or
net unrealized depreciation of $3,774,361.
B. Unaudited. The ratings shown are believed to be the most recent ratings
available at December 31, 1994. Securities are generally rated at the
time of issuance. The rating agencies may revise their ratings from time
to time. As a result there can be no assurance that the same ratings would
be assigned if the securities were rated at December 31, 1994. The Fund's
adviser independently evaluates the Fund's portfolio securities and in
making investment decisions does not rely solely on the ratings of
agencies.
C. Zero coupon bond; interest rate listed is effective rate based on
acquisition cost.
D. As of December 31, 1994, the Fund had a capital loss carryover of
approximately $511,000 which may be available to offset future realized
capital gains, to the extent provided by regulations. This carryover will
expire December 31, 2002.
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 135
THE ADVANTAGE MUNICIPAL BOND FUND
THE NEW YORK PORTFOLIO
DECEMBER 31, 1994
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
RATINGS (B)
-----------
PRINCIPAL STANDARD MARKET
TAX-EXEMPT BONDS (97.31% OF NET ASSETS) AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUE BONDS 81.47%
CONSTRUCTION 7.00%
Grand Central New York Business Improvement -- Capital
Improvements 5.250% 01/01/22 $ 500,000 A (1) A $ 393,520
New York State UDC -- Correctional Facilities 5.375% 01/01/23 700,000 Baa(1) BBB 540,225
Triborough Bridge & Tunnel NY Convention Center
5.172% 01/01/12 (C) 360,000 Baa(1) BBB 106,744
----------
1,040,489
----------
EDUCATION 14.94%
New York Dorm Authority Court Facilities 5.700% 05/15/22 650,000 Baa(1) BBB+ 534,742
New York Dorm Authority City University Series A 5.750% 07/01/18 525,000 Baa(1) BBB 442,465
New York Dorm Authority State University Series A 5.875% 05/15/17 610,000 Baa(1) BBB+ 532,341
New York Dorm Authority State University Series B 6.000% 05/15/17 500,000 Baa(1) BBB+ 439,275
New York Urban Development Syracuse University 5.500% 01/01/14 330,000 Baa(1) BBB 272,428
----------
2,221,251
----------
ELECTRIC/POWER 8.12%
New York State Power Authority 5.250% 01/01/18 525,000 Aa AA- 427,408
Puerto Rico Electric Power Series N 5.060% 07/01/17 (C) 500,000 Baa(1) A- 106,955
Puerto Rico Electric Power Authority 6.000% 07/01/14 500,000 Baa(1) A- 458,665
Puerto Rico Telephone Authority Series N 5.500% 01/01/13 250,000 A A+ 214,710
----------
1,207,738
----------
HOSPITAL 20.52%
New York City Health & Hospital 6.300% 02/15/20 300,000 Baa BBB 265,359
New York Dorm Authority Department of Health 5.600% 07/01/23 425,000 Baa(1) BBB 343,578
New York Dorm Authority Department of Health 5.500% 07/01/14 325,000 Baa(1) BBB 270,868
New York Med Care St. Lukes Hospital 5.600% 08/15/13 1,000,000 Aa AAA 882,000
New York Med Care Facilities Mental Health Services Series D
6.150% 02/15/15 600,000 Aaa AAA 563,160
New York State Med Care 5.500% 08/15/24 875,000 Aa AAA 725,970
----------
3,050,935
----------
HOUSING 6.39%
Housing New York Corporation 5.500% 11/01/20 500,000 A (1) AA 418,725
New York Housing Finance Agency 5.875% 09/15/14 250,000 Baa(1) BBB 216,810
United Nations Development Corp. Series A 6.000% 07/01/26 350,000 A -- 314,660
----------
950,195
----------
LONG-TERM CARE 4.47%
Tompkins County New York Lifecare Community 7.875% 06/01/24 700,000 -- -- 664,412
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 136
THE ADVANTAGE MUNICIPAL BOND FUND
THE NEW YORK PORTFOLIO
DECEMBER 31, 1994
STATEMENT OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
RATINGS (B)
-----------
PRINCIPAL STANDARD MARKET
REVENUE BONDS (continued) AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -------
<S> <C> <C> <C> <C>
POLLUTION CONTROL 3.50%
Franklin County New York Solid Waste Management Authority
6.250% 06/01/15 300,000 -- BBB 253,950
Ulster County New York Resource Recovery Agency
6.000% 03/01/14 300,000 Baa BBB 266,571
-----------
520,521
-----------
TRANSPORTATION 11.36%
Metropolitan Transit Authority Service Contract Series O
5.750% 07/01/07 250,000 Baa(1) BBB 226,392
Metropolitan Transit Authority Service Contract Series P
5.750% 07/01/15 550,000 Baa(1) BBB 463,177
New York City Transit Authority Livingston Plaza 5.250% 01/01/20 385,000 Aaa AAA 315,731
New York State Thruway Series A 5.750% 01/01/19 500,000 A (1) A 430,435
Triborough Bridge & Tunnel General Purpose Series X
6.625% 01/01/12 250,000 Aa A+ 252,665
-----------
1,688,400
-----------
WATER & SEWER 1.22%
New York City Municipal Water Finance Authority 6.000% 06/15/17 200,000 A A- 181,070
-----------
MISCELLANEOUS 3.95%
New York Local Assistance Series B 5.500% 04/01/21 700,000 A A 587,020
-----------
TOTAL REVENUE BONDS (cost $13,811,888) 12,112,031
-----------
GENERAL OBLIGATION BONDS 15.84%
State & County 15.84%
Guam Government Series A 5.400% 11/15/18 400,000 -- BBB+ 316,940
New York City Series E 5.750% 05/15/13 600,000 Baa(1) A- 507,252
New York City Series A 6.250% 08/01/20 1,400,000 Baa(1) A- 1,249,948
New York City Series A 6.250% 08/01/21 315,000 Baa(1) A- 280,785
-----------
TOTAL GENERAL OBLIGATION BONDS (Cost $2,630,332) 2,354,925
-----------
TOTAL INVESTMENTS (Cost $16,442,220; 97.31% of net assets) $14,466,956(A)
===========
</TABLE>
NOTES TO STATEMENT OF INVESTMENTS
A. The aggregate cost of investments for federal income tax purposes was
$16,442,220, as of December 31, 1994, resulting in gross unrealized
appreciation and depreciation of $6,465 and $1,981,729, respectively, or
net unrealized depreciation of $1,975,264.
B. Unaudited. The ratings shown are believed to be the most recent ratings
available at December 31, 1994. Securities are generally rated at the
time of issuance. The rating agencies may revise their ratings from time
to time. As a result there can be no assurance that the same ratings would
be assigned if the securities were rated at December 31, 1994. The Fund's
adviser independently evaluates the Fund's portfolio securities and in
making investment decisions does not rely solely on the ratings of
agencies.
C. Zero coupon bond; interest rate listed is effective rate based on
acquisition cost.
D. As of December 31, 1994, the Fund had a capital loss carryover of
approximately $168,000 which may be available to offset future realized
capital gains, to the extent provided by regulations. This carryover will
expire December 31, 2002.
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 137
THE ADVANTAGE MUNICIPAL BOND FUND
THE PENNSYLVANIA PORFOLIO
DECEMBER 31, 1994
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
RATINGS (B)
-----------
PRINCIPAL STANDARD MARKET
TAX-EXEMPT BONDS (97.18% OF NET ASSETS) AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUE BONDS 88.01%
CONSTRUCTION 2.53%
Pittsburgh Pennsylvania Urban Redevelopment Series A
5.500% 10/01/10 $ 400,000 A (1) A $ 348,104
----------
EDUCATION 14.15%
Pennsylvania State Higher Education 6.000% 07/01/19 625,000 Aa A+ 558,281
Pennsylvania State Higher Education Series I 5.500% 06/15/11 180,000 Aaa AAA 160,641
Philadelphia Hospital & Education Facilities Graduate Health System
6.250% 07/01/18 300,000 Baa BBB+ 245,856
Philadelphia Hospital & Higher Education Facilities Community
College 6.125% 05/01/14 700,000 Aaa AAA 658,105
Pittsburgh Pennsylvania School District Series D 5.500% 09/01/16 250,000 Aaa AAA 215,190
Southern Fulton Pennsylvania School District 6.030% 09/15/16 (C) 460,000 Aaa AAA 106,554
----------
1,944,627
----------
ELECTRIC 1.03%
Puerto Rico Electric Power Authority Series T 6.125% 07/01/08 150,000 Baa (1) A- 142,164
----------
HOSPITAL 19.27%
Allegheny County Hospital Auth. Magee Woman's Hospital 5.168%
10/01/15 (C) 1,000,000 Aaa AAA 251,060
Blair County Hospital Auth. Altoona Hospital 5.500% 07/01/08 470,000 Aaa AAA 428,607
Cumberland County Pennsylvania Carlisle Hospital
6.800% 11/15/23 500,000 Baa BBB- 428,290
Dauphin County Pennsylvania General Authority 5.500% 07/01/23 500,000 Aaa AAA 414,310
Philadelphia Hospital & Higher Education 6.600% 07/01/10 500,000 -- BBB 443,730
Sayre Pennsylvania Health Care Facilities 6.375% 07/01/22 160,000 Aaa AAA 152,158
Sewickley Valley Pennsylvania Hospital Authority 5.750% 10/15/16 350,000 A A 291,575
Union County Pennsylvania Hospital Authority Series A
5.875% 07/01/23 300,000 -- A- 237,729
----------
2,647,459
----------
HOUSING 10.03%
Pennsylvania Housing Finance Agency Series C 5.800% 07/01/22 800,000 Aaa AAA 687,856
Pennsylvania Housing Finance Agency Single Family Series 38
6.125% 10/01/24 500,000 Aa AA 449,515
Pennsylvania Housing Finance Agency 5.750% 07/01/14 275,000 Aaa AAA 241,387
----------
1,378,758
----------
INDUSTRIAL DEVELOPMENT 4.22%
Butler County Pennsylvania IDA Sherwood Oaks Project
5.750% 06/01/11 400,000 -- A- 328,660
Luzerne County Pennsylvania IDA Gas & Water 6.050% 01/01/19 300,000 Baa (3) BBB- 251,046
----------
579,706
----------
LONG-TERM CARE 1.39%
Montgomery County Pennsylvania IDA Health Care Facilities
8.500% 12/01/23 210,000 -- -- 190,890
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 138
THE ADVANTAGE MUNICIPAL BOND FUND
THE PENNSYLVANIA PORFOLIO
DECEMBER 31, 1994
STATEMENT OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
RATINGS (B)
-----------
PRINCIPAL STANDARD MARKET
REVENUE BONDS (continued) AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -------
<S> <C> <C> <C> <C>
POLLUTION CONTROL 11.58%
Beaver County Pennsylvania IDA Pollution Control
J. Ray McDermott Project 6.800% 02/01/09 835,000 Baa(3) BBB- 835,802
Northampton County Pennsylvania Pollution Control
7.550% 06/01/17 800,000 -- -- 755,536
-----------
1,591,338
-----------
TRANSPORTATION 1.90%
Pennsylvania State Turnpike Commission 5.500% 12/01/17 300,000 Aaa AAA 260,964
-----------
WATER & SEWER 5.87%
Center Township Pennsylvania Sewer Authority Series A
5.500% 04/15/16 300,000 Aaa AAA 265,026
Philadelphia Pennsylvania Water & Waste Water 5.750% 06/15/13 275,000 Baa BBB 234,388
Smithfield Pennsylvania Guaranteed Sewer Revenue 6.200% 01/15/18 350,000 -- -- 307,307
-----------
806,721
MISCELLANEOUS 16.04% -----------
Dauphin County Pennsylvania General Authority 5.485% 10/01/20 (C) 940,000 Aaa AAA 164,932
Harrisburg Pennslyvania Resource Recovery Series A 5.875% 09/01/21 1,000,000 Baa A 855,300
Pennsylvania State Finance Authority 6.600% 11/01/09 400,000 -- A 390,004
Philadelphia Pennsylvania Gas Works 6.375% 07/01/14 250,000 Baa BBB 233,768
Philadelphia Pennsylvania Municipal Authority Series A
5.625% 11/15/18 650,000 Aaa AAA 560,410
-----------
2,204,414
-----------
TOTAL REVENUE BONDS (Cost $13,657,535) 12,095,145
-----------
GENERAL OBLIGATION BONDS 9.17%
State & County 9.17%
Dauphin County Pennsylvania General Authority Series CCC
5.800% 06/01/26 400,000 -- A 354,888
Greene County Pennsylvania 6.000% 06/01/10 100,000 -- BBB- 90,659
Kennett Pennsylvania Consolidated School District 5.650% 02/15/13 250,000 Aaa AAA 224,132
Montour Pennsylvania School District Series B 5.950% 01/01/19 (C) 1,190,000 Aaa AAA 236,132
Westmoreland County Pennsylvania 5.250% 08/01/09 400,000 Aaa AAA 355,088
-----------
TOTAL GENERAL OBLIGATION BONDS (Cost $1,434,720) 1,260,899
-----------
TOTAL INVESTMENTS (Cost $15,092,255; 97.18% of net assets) $13,356,044(A)
===========
</TABLE>
NOTES TO STATEMENT OF INVESTMENTS
A. The aggregate cost of investments for federal income tax purposes was
$15,092,255 as of December 31, 1994, resulting in gross unrealized
appreciation and depreciation of $0 and $1,736,211, respectively, or net
unrealized depreciation of $1,736,211.
B. Unaudited. The ratings shown are believed to be the most recent ratings
available at December 31, 1994. Securities are generally rated at the time
of issuance. The rating agencies may revise their ratings from time to
time. As a result there can be no assurance that the same ratings would be
assigned if the securities were rated at December 31, 1994. The Fund's
adviser independently evaluates the Fund's portfolio securities and in
making investment decisions does not rely solely on the ratings of
agencies.
C. Zero coupon bond; interest rate listed is effective rate based on
acquisition cost.
D. As of December 31, 1994, the Fund had a capital loss carryover of
approximately $146,000 which may be available to offset future realized
capital gains, to the extent provided by regulations. This carryover will
expire December 31, 2002.
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 139
THE ADVANTAGE MUNICIPAL BOND
DECEMBER 31, 1994
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
THE THE THE
NATIONAL NEW YORK PENNSYLVANIA
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
ASSETS
Investment securities at identified cost................................. $30,471,913 $16,442,220 $15,092,255
=========== =========== ===========
Investment securities at market value.................................... $26,697,552 $14,466,956 $13,356,044
Cash..................................................................... 199,249 68,348 126,308
Receivables:
Interest............................................................... 593,231 342,488 264,744
Fund shares sold....................................................... 74,920 13,567 21,877
Deferred organization expenses, net...................................... 31,704 26,749 30,734
Other assets............................................................. 11,574 2,646 3,793
----------- ----------- -----------
TOTAL ASSETS........................................................... 27,608,230 14,920,754 13,803,500
----------- ----------- -----------
LIABILITIES
Payables:
Fund shares repurchased................................................ 134,272 31,713 27,226
Due to affiliates...................................................... 21,458 153 4,774
Transfer agent fees.................................................... 1,258 621 817
Other accrued liabilities.............................................. 32,791 20,715 27,494
----------- ----------- -----------
TOTAL LIABILITIES...................................................... 189,779 53,202 60,311
----------- ----------- -----------
NET ASSETS............................................................... $27,418,451 $14,867,552 $13,743,189
=========== =========== ===========
Net assets consist of:
Paid-in capital........................................................ $31,672,329 $17,011,006 $15,625,695
Accumulated undistributed net investment income........................ 31,837 43 42
Accumulated net realized loss.......................................... (511,354) (168,233) (146,337)
Net unrealized depreciation............................................ (3,774,361) (1,975,264) (1,736,211)
----------- ----------- -----------
NET ASSETS............................................................... $27,418,451 $14,867,552 $13,743,189
=========== =========== ===========
Shares of beneficial interest outstanding without
par value, unlimited authorized...................................... 3,167,133 1,733,759 1,572,792
=========== =========== ===========
NET ASSET VALUE PER SHARE................................................ $ 8.66 $ 8.58 $ 8.74
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 140
THE ADVANTAGE MUNICIPAL BOND FUND
FOR THE YEAR ENDED DECEMBER 31, 1994
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE THE THE
NATIONAL NEW YORK PENNSYLVANIA
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest................................................................. $ 1,817,572 $ 823,018 $ 813,849
----------- ----------- -----------
Total investment income................................................ 1,817,572 823,018 813,849
----------- ----------- -----------
EXPENSES
Distribution and service fees............................................ 140,148 68,530 65,802
Investment advisory fee.................................................. 126,131 61,697 59,523
Custodian................................................................ 32,808 14,594 21,265
Registration fees........................................................ 25,861 2,611 4,020
Audit.................................................................... 13,771 13,771 13,771
Transfer agent........................................................... 11,540 4,768 7,122
Insurance................................................................ 11,113 5,369 4,934
Amortization of deferred organization expenses........................... 9,070 7,654 8,789
Legal.................................................................... 7,484 7,338 7,374
Printing................................................................. 7,467 2,351 5,075
Trustees' fee............................................................ 2,110 1,110 1,110
Other.................................................................... 3,569 1,635 2,055
Reimbursement/waiver from investment adviser and affiliates.............. (151,721) (120,648) (93,389)
----------- ----------- -----------
TOTAL EXPENSES......................................................... 239,351 70,780 107,451
----------- ----------- -----------
NET INVESTMENT INCOME.................................................. 1,578,221 752,238 706,398
----------- ----------- -----------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss from sale of investments............................... (511,354) (168,233) (146,337)
Net unrealized depreciation on investments............................... (4,172,270) (2,151,020) (1,925,009)
----------- ----------- -----------
NET LOSS ON INVESTMENTS.................................................. (4,683,624) (2,319,253) (2,071,346)
----------- ----------- -----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $(3,105,403) $(1,567,015) $(1,364,948)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 141
THE ADVANTAGE MUNICIPAL BOND FUND
FOR THE PERIODS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
THE NATIONAL PORTFOLIO
----------------------
YEAR PERIOD
ENDED ENDED
12/31/94 12/31/93
-------- --------
<S> <C> <C>
FROM OPERATIONS
Net investment income........................................................ $ 1,578,221 $ 448,932
Net realized gain (loss)..................................................... (511,354) 10,018
Net unrealized appreciation (depreciation)................................... (4,172,270) 397,909
----------- -----------
Net increase (decrease) in net assets resulting
from operations............................................................ (3,105,403) 856,859
----------- -----------
FROM DIVIDENDS TO SHAREHOLDERS
Net investment income........................................................ (1,569,645) (448,932)
Net realized gains........................................................... -- (10,018)
Distributions in excess of net investment income............................. -- (17,494)
----------- -----------
Decrease in net assets from dividends to shareholders........................ (1,569,645) (476,444)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares................................................ 10,980,451 24,563,798
Net asset value of shares issued from
reinvestment of dividends.................................................. 834,037 270,961
Cost of shares repurchased................................................... (4,871,924) (164,239)
Increase in net assets derived from ----------- -----------
share transactions......................................................... 6,942,564 24,670,520
----------- -----------
NET INCREASE IN NET ASSETS..................................................... 2,267,516 25,050,935
NET ASSETS
Beginning of period.......................................................... 25,150,935 100,000
----------- -----------
End of period................................................................ $27,418,451 $25,150,935
=========== ===========
Undistributed net investment income included in net assets
at end of period ............................................................ $ 31,837 $ 1,551
=========== ===========
SHARE TRANSACTIONS
Shares sold.................................................................. 1,158,622 2,440,958
Shares issued in reinvestment of dividends................................... 90,432 26,718
Shares redeemed.............................................................. (543,479) (16,118)
----------- -----------
NET INCREASE IN SHARES......................................................... 705,575 2,451,558
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 142
THE NEW YORK PORTFOLIO THE PENNSYLVANIA PORTFOLIO
---------------------- --------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
$ 752,238 $ 201,723 $ 706,398 $ 185,009
(168,233) -- (146,337) --
(2,151,020) 175,756 (1,925,009) 188,798
----------- ----------- ----------- -----------
(1,567,015) 377,479 (1,364,948) 373,807
----------- ----------- ----------- -----------
(752,249) (201,723) (706,398) 185,009
-- -- -- --
(7,595) (4,215) (7,839) (4,528)
----------- ----------- ----------- -----------
(759,844) (205,938) (714,237) (189,537)
----------- ----------- ----------- -----------
5,969,315 11,561,356 5,227,894 10,596,572
463,940 124,718 463,359 121,276
(1,074,043) (22,416) (765,562) (5,435)
----------- ----------- ----------- -----------
5,359,212 11,663,658 4,925,691 10,712,413
----------- ----------- ----------- -----------
3,032,353 11,835,199 2,846,506 10,896,683
11,835,199 0 10,896,683 0
----------- ----------- ----------- -----------
$14,867,552 $11,835,199 $13,743,189 $10,896,683
=========== =========== =========== ===========
$ 43 $ 11 $ 42 $ 0
=========== =========== =========== ===========
641,772 1,150,709 546,624 1,051,661
51,104 12,366 50,285 11,946
(120,006) (2,186) (87,186) (538)
----------- ----------- ----------- -----------
572,870 1,160,889 509,723 1,063,069
=========== =========== =========== ===========
13
<PAGE> 143
THE ADVANTAGE MUNICIPAL BOND FUND
DECEMBER 31, 1994
FINANCIAL HIGHLIGHTS
Selected data for each share outstanding throughout the indicated periods, by
Portfolio, are as follows:
<TABLE>
<CAPTION>
NET DIVIDENDS FROM
ASSET VALUE NET NET REALIZED ------------------------------------------
PERIOD ---------- INVEST- AND TOTAL FROM NET NET
ENDED BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED
DEC. 31 OF PERIOD INCOME GAIN OPERATIONS INCOME GAIN OTHER(4)
- -------- ------------ --------- ------------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
THE NATIONAL PORTFOLIO
1994 $10.22 $0.53 ($1.57) ($1.04) ($0.52) -- --
1993 10.00 0.24 0.23 0.47 (0.24) -- (0.01)
THE NEW YORK PORTFOLIO
1994 10.19 0.51 (1.61) (1.10) (0.51) -- --
1993 10.00 0.24 0.20 0.44 (0.24) -- (0.01)
THE PENNSYLVANIA PORTFOLIO
1994 10.25 0.51 (1.51) (1.00) (0.51) -- --
1993 10.00 0.24 0.26 0.50 (0.24) -- (0.01)
<CAPTION>
NET NET RATIO OF RATIO OF NET
ASSET VALUE ASSETS OPERATING INVESTMENTS
PERIOD ----------- AT END OF EXPENSES TO INCOME IN PORTFOLIO
ENDED TOTAL END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 DISTRIBUTIONS PERIOD RETURN(3) (THOUSANDS) ASSETS ASSETS RATE
- -------- ------------- -------- ---------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
THE NATIONAL PORTFOLIO
1994 ($0.52) $ 8.66 (10.35%) $27,418 0.85%(2) 5.63% 21.38%
1993 (0.25) 10.22 4.83 25,151 0.71 (1)(2) 4.71(1) 15.12(1)
THE NEW YORK PORTFOLIO
1994 (0.51) 8.58 (10.97) 14,868 0.52 (2) 5.48 12.96
1993 (0.25) 10.19 4.43 11,835 0.36 (1)(2) 4.70(1) 0.00
THE PENNSYLVANIA PORTFOLIO
1994 (0.51) 8.74 (9.96) 13,743 0.81 (2) 5.35 17.67
1993 (0.25) 10.25 5.00 10,897 0.38 (1)(2) 4.61(1) 0.00
</TABLE>
(1) Annualized
(2) Had Boston Security Counsellors not elected to waive its investment
advisory fee and to reimburse expenses, the ratio of expenses to average
net assets, on an annualized basis would have been:
<TABLE>
<CAPTION>
Periods Ended
12/31/94 12/31/93
-------- --------
<S> <C> <C>
The National Portfolio 1.39% 1.73%
The New York Portfolio 1.40% 1.87%
The Pennsylvania Portfolio 1.52% 1.94%
</TABLE>
(3) Total return does not reflect the Fund's contingent deferred sales load
maximum 4%. This charge goes into effect only if shares of the Fund are
redeemed within 4 years of purchase. Total returns for 1993 represent
actual, not annualized percentages.
(4) Other dividends represent distributions in excess of net investment income
due to differences in book and tax income.
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 144
THE ADVANTAGE MUNICIPAL BOND FUND
DECEMBER 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The Advantage Municipal Bond Fund (the "Fund") was organized as a
Massachusetts business trust on February 25, 1993 and commenced operations
on July 1, 1993. The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end diversified management investment company.
The Fund consists of three separate series portfolios, the National, New
York and Pennsylvania Portfolios (the "Portfolios"), each of which issues
shares evidencing interests in the respective Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Portfolios in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
SECURITY VALUATION
Market values for the Portfolios' investments are
determined as follows:
a. Municipal bonds are valued on the basis of valuations furnished by a
pricing service approved by the trustees, which uses information with
respect to bond and note transactions, quotations from bond dealers,
market transactions in comparable securities and various relationships
between securities in determining value.
b. Money market instruments and short-term municipal obligations with an
initial maturity or remaining maturity of 60 days or less are valued at
amortized cost, provided that it approximates market value.
c. Other securities for which market quotations are not readily available
and other assets are valued at their fair value as determined by or
under the direction of the Trustees. Such fair value may be determined
by various methods, including utilizing information furnished by
pricing services which determine calculations for such securities using
methods based, among other things, upon market transactions for
comparable securities and various relationships between securities
which are generally recognized as relevant.
SECURITY TRANSACTIONS AND RELATED INCOME
Security transactions are accounted for on the date that the securities are
purchased or sold. Interest income is recorded on the accrual basis and
includes accretion of discount and amortization of premium using the yield
to maturity method. Dividend income is recorded on the ex-dividend date. The
Portfolios use the identified cost basis in computing gains or losses on
sales of investment securities.
INCOME TAX
For federal income tax purposes, each Portfolio intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986 (the "Code"), as amended, by distributing substantially
all of its taxable and tax-exempt income to its shareholders and otherwise
complying with the requirements for regulated investment companies. It is
also the intention of each Portfolio to distribute an amount sufficient to
avoid imposition of any excise tax under Section 4982 of the Code.
Accordingly, no provision for federal income taxes or excise taxes has been
made.
DIVIDENDS TO SHAREHOLDERS
The Portfolios declare dividends daily and pay monthly distributions from
net investment income. Dividends paid by the Portfolios from net interest
earned on tax-exempt municipal bonds are not includable by shareholders as
gross income for federal income tax purposes. Distributions from realized
capital gains, if any, are paid at least annually and will be taxable to
shareholders.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment for deductibility of organization expenses. The
Portfolios have reclassified these permanent differences to increase
undistributed net investment income and decrease paid-in capital by
$21,710, $7,638 and $7,881 for the National, New York and Pennsylvania
Portfolios, respectively, for the year ended December 31, 1994.
15
<PAGE> 145
THE ADVANTAGE MUNICIPAL BOND FUND
DECEMBER 31, 1994
NOTES TO FINANCIAL STATEMENTS (continued)
GENERAL AND ORGANIZATION EXPENSES
General expenses of the Fund which do not specifically relate to an
individual Portfolio are allocated among the Portfolios in proportion to
their net assets or as deemed appropriate by the treasurer. Custodian
fees have been reduced by credits allowed by the custodian.
Costs incurred by the Fund in connection with its organization and its
original registration, amounting to $127,562, have been capitalized and
are being amortized on a straight-line basis over a 60 month period.
Advest Group, Inc. ("AGI") has agreed that if any of the initial shares
of the Fund (10,000 shares originally purchased by AGI) are redeemed
during such amortization period, the redemption proceeds will be reduced
by the amount of the then unamortized organization expenses in the same
ratio as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.
3. INVESTMENT ADVISORY, DISTRIBUTION AND TRANSFER AGENT AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Boston
Security Counsellors, Inc. ("BSC"), a wholly owned subsidiary of AGI.
For its services as Investment Adviser, BSC receives from each Portfolio
an advisory fee equal on an annual basis to .45% of its average daily
net assets. BSC waived its fee through June 30, 1994. Also, BSC and its
affiliates have voluntarily agreed to waive or reimburse expenses to the
extent necessary to limit total operating expenses of each Portfolio to
no greater than .70% of average daily net assets through June 30, 1994
and to no greater than 1.00% there-after. For the New York Portfolio,
BSC and its affiliates reimbursed an additional $45,822 for the year
ended December 31, 1994.
The Fund has entered into a Distribution Agreement with Advest, Inc., a
wholly owned subsidiary of AGI, and has adopted a distribution and
service plan pursuant to Rule 12b-1 under the Investment Company Act of
1940. Each Portfolio will pay an annual combined distribution and
service fee of .50% of its average daily net assets. Advest also
receives the proceeds of any contingent deferred sale charges on certain
redemptions of shares. During the year ended December 31, 1994, Advest
received gross distribution fees of $274,480 and contingent deferred
sales charges of $107,989.
The Fund has entered into a transfer agency and service agreement with
Advest Transfer Services, Inc. ("ATS"), a wholly owned subsidiary of
AGI. As the Fund's transfer agent, ATS performs dividend-disbursing
functions and provides various services in connection with the purchase
and redemption of Fund shares. For those services, the Fund pays ATS
fees based on the type and number of accounts in the Fund and the number
of transactions made by shareholders. The Portfolios were charged
$23,430 for the year ended December 31, 1994.
4. RELATED PARTY TRANSACTIONS
As of December 31, 1994, AGI held 10,000 shares of The Advantage
Municipal Bond Fund - the National Portfolio.
Unaffiliated trustees of the Fund receive a fee of $500 for each
Trustees' meeting attended.
5. PURCHASES, SALES AND MATURITIES OF INVESTMENTS
For the year ended December 31, 1994, purchases, sales and maturities
(excluding short-term securities) of investments for each Portfolio
are as follows:
<TABLE>
<CAPTION>
SALES AND
PURCHASES MATURITIES
--------- ----------
<S> <C> <C>
National Portfolio $12,806,966 $5,863,422
New York Portfolio 7,187,563 1,685,490
Pennsylvania Portfolio 7,292,058 2,259,405
</TABLE>
6. CONCENTRATION OF CREDIT
The New York and Pennsylvania Portfolios primarily invest in
debt obligations issued by municipalities in their respective
states. In addition, the Portfolios are concentrated in various
industries as disclosed in the Statements of Investments. The
ability of the issuers of the debt securities to meet their
obligations may be affected by economic or political developments
in the specific industry or state.
16
<PAGE> 146
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF THE ADVANTAGE MUNICIPAL BOND FUND:
In our opinion, the accompanying statements of assets and liabilities,
including the statements of investments, (except for bond ratings), and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The National Portfolio, The New York Portfolio and The Pennsylvania Portfolio
(constituting The Advantage Municipal Bond Fund, hereafter referred to as the
"Fund") at December 31, 1994, and the results of each of their operations, the
changes in each of their net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1994 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 15, 1995
17
<PAGE> 147
<TABLE>
<S> <C>
CONTENTS
Message from the President 1
Municipal Bond Fund Review 2
Statements of Investments 4
Statements of Assets and Liabilities 10
Statements of Operations 11
Statements of Changes in Net Assets 12
Financial Highlights 14
Notes to Financial Statements 15
Report of Independent Accountants 17
</TABLE>
TRUSTEES
Richard C. Farr
Geoffrey Nunes
Linda G. Sprague
Robert L. Thomas
Allen Weintraub
OFFICERS
Robert L. Thomas, President
Martin M. Lilienthal, Vice President and Treasurer
David A. Horowitz, Secretary
Margaret B. Patel, Vice President
Donna McAdam,
Vice President and Assistant Secretary
HEADQUARTERS
100 Federal Street
Boston, MA 02110
(617) 348-3100
INVESTMENT ADVISER
BOSTON SECURITY COUNSELLORS, INC.
100 Federal Street
Boston, MA 02110
(800) 523-5903
TRANSFER AGENT
ATS, INC.
280 Trumbull Street
Hartford, CT 06103
(800) 544-9268
DISTRIBUTOR
ADVEST, INC.*
Corporate Headquarters
280 Trumbull Street
Hartford, CT 06103
(800) 241-2039
*Member: New York, American & other principal
stock exchanges.
Member: SIPC.
This publication, when not used for the general information of the shareholders
of The Advantage Municipal Bond Fund, must be preceded or accompanied by a
current prospectus for the Fund that includes management fees, charges and
expenses. Please read the prospectus carefully before investing in any of the
Portfolios of the Fund.
As a valued shareholder in the Advantage Municipal Bond Fund, you are
encouraged to write or call your Account Executive regarding any questions you
have.
Total returns for the period ended 12/31/94 that appear throughout this
report (except where noted) do not reflect the Fund's contingent deferred sales
load (CDSL), maximum 4%. This charge goes into effect only if shares of the Fund
are redeemed within four years of purchase. The sales charge on redemptions
declines to 1% after three years and 0% after four years. Total returns include
change in share price and reinvestment of dividends and distributions. Past
performance is no guarantee of future results. Share prices and returns will
vary and there may be a gain or loss when shares are sold.
Charts on page 3 illustrate the growth in value of a $10,000 investment in
various Portfolios, assuming that you had reinvested all your capital gains
distributions and income dividends. No adjustment has been made in these
illustrations for any income taxes payable by shareholders on income dividends
and capital gains distributions. These results should not be considered as
representative of the dividend income or capital gain or loss which may be
realized from an investment made in the Fund today.
The charts compare performance of the Portfolios to the Lehman Municipal Bond
Index. This Index is an unmanaged index of 25,000 revenue and general
obligation non-zero coupon issues with maturities greater than one year and
with ratings by Moody's of Baa or better.
PERCENTAGE OF INCOME EARNED BY STATE
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
NATIONAL NEW YORK PENNSYLVANIA
(UNAUDITED) PORTFOLIO PORTFOLIO PORTFOLIO
- ----------- --------- --------- ---------
<S> <C> <C> <C>
Pennsylvania 20.52% 92.58%
New York 3.76 88.42%
Puerto Rico & Guam 15.65 11.58 7.42
Texas 16.83
Massachusetts 10.79
Georgia 4.27
California 4.10
Oklahoma 3.43
Indiana 2.86
North Carolina 2.63
Missouri 2.42
South Carolina 2.39
Michigan 2.34
Rhode Island 1.71
District of Columbia 1.62
Maryland 1.52
Ohio 1.34
Tennessee 1.28
Illinois 0.54
-------- ------- -------
TOTAL 100.00% 100.00% 100.00%
======== ======= =======
TAX TREATMENT OF
PER SHARE DISTRIBUTIONS
MADE (UNAUDITED):
- -----------------
Tax-Exempt $0.52208 $0.5100 $0.5052
======== ======= =======
</TABLE>
NOTE: Dividends to shareholders are not subject to state income tax in an
amount equal to the percent of income earned in that state. In addition, income
from Puerto Rico and Guam is not subject to federal or state income tax.
PLEASE CONSULT YOUR TAX ADVISER FOR FURTHER INFORMATION.
<PAGE> 148
================================================================================
THE ADVANTAGE
MUNICIPAL BOND FUND
1993 ANNUAL REPORT
<PAGE> 149
CONTENTS
<TABLE>
<S> <C>
Message from the President 1
Municipal Bond Fund Review 2
Statements of Investments 4
Statements of Assets and Liabilities 10
Statements of Operations 11
Statements of Changes in Net Assets 12
Financial Highlights 13
Notes to Financial Statements 14
Report of Independent Accountants 16
</TABLE>
Total returns for the period ended 12/31/93 that appear throughout this report
(except where noted) do not reflect the Fund's contingent deferred sales load
(CDSL), maximum 4%. This charge goes into effect only if shares of the Fund are
redeemed within four years of purchase. The sales charge on redemptions declines
to 1% after three years and 0% after four years. Total returns include change in
share price and reinvestment of dividends and distributions. Past performance is
no guarantee of future results. Share prices and returns will vary and there may
be a gain or loss when shares are sold.
Charts on page 3 illustrate the growth in value of a $10,000 investment in
various Portfolios, assuming that you had reinvested all your capital gains
distributions and income dividends. No adjustment has been made in these
illustrations for any income taxes payable by shareholders on income dividends
and capital gains distributions. These results should not be considered as
representative of the dividend income or capital gain or loss which may be
realized from an investment made in the Fund today.
The charts compare performance of the Portfolios to the Lehman Municipal Bond
Index. This Index is an unmanaged index of 25,000 revenue and general obligation
non-zero coupon issues with maturities greater than one year and with ratings by
Moody's of Baa or better.
Investors wishing more complete information, including charges and expenses, on
the Advantage Government Securities Fund referred to in this report, should
contact Advest, Inc., the Distributor of this Fund at 280 Trumbull Street,
Hartford, CT 06103, (203) 241-2030, or (800) 243-8115, x2030. Please read the
prospectus carefully before investing.
<PAGE> 150
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
DECEMBER 31, 1993
MESSAGE FROM MARGARET D. PATEL, THE PORTFOLIO MANAGER OF THE ADVANTAGE MUNICIPAL
BOND FUND
- --------------------------------------------------------------------------------
The Advantage Municipal Bond Fund was established on July 1, 1993 and consists
of three separate portfolios: The National Portfolio, investing in issues from a
variety of states exempt from federal taxes; The New York Portfolio,
concentrating on New York tax-exempt issues; and The Pennsylvania Portfolio,
investing in holdings exempt from that state's taxes.
All three Portfolios had gains in net asset value from inception to December
31, 1993, reflecting the slight decline in municipal bond yields resulting in
bond price increases in the second half of 1993. To illustrate, the Bond Buyer
index of 25 good quality revenue bonds yielded 5.75% to maturity in early July,
and dropped to 5.52% by year-end 1993. As bond yields decline, prices rise.
Rates fell because of expectations of continued low inflation, thus providing a
positive backdrop for fixed income investors. In addition, the very heavy
new-issue supply was well absorbed by year end, causing supply and demand to be
in better balance.
Your Fund's total returns reflect the fact that the Adviser has agreed to
waive its management fee and limit total expenses for the first year of each
Portfolio's operations. Each Portfolio attempts to maintain a stable dividend
policy limiting fluctuations in dividends from one month to the next. This
policy has not had a material effect on the management of the Portfolios or on
their net asset values.
NATIONAL PORTFOLIO:
The National Portfolio remained fully invested in 1993 with minimal cash
equivalent holdings. At year end, over 90% of the Portfolio's assets were in
investment grade bonds
================================================================================
2
<PAGE> 151
================================================================================
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADVANTAGE MUNICIPAL BOND FUND
Value of $10,000 investment from inception
(7/1/93 to 12/31/93)
<TABLE>
<CAPTION>
7/1/93 9/30/93 12/31/93
------ ------- --------
<S> <C> <C> <C>
National Portfolio $10,000 $10,483 $10,083
Lehmann Municipal Bond Index $10,000 $10,483 $10,484
</TABLE>
<TABLE>
<CAPTION>
7/1/93 9/30/93 12/31/93
------ ------- --------
<S> <C> <C> <C>
New York Portfolio $10,000 $10,443 $10,043
Lehmann Municipal Bond Index $10,000 $10,443 $10,484
</TABLE>
<TABLE>
<CAPTION>
7/1/93 9/30/93 12/31/93
------ ------- --------
<S> <C> <C> <C>
Pennsylvania Portfolio $10,000 $10,501 $10,101
Lehmann Municipal Bond Index $10,000 $10,501 $10,484
</TABLE>
Past performance is not predictive of future performance.
AVERAGE ANNUAL TOTAL RETURN*
for Period 7/1/93 (inception) to 12/31/93
<TABLE>
<CAPTION>
WITH
WITHOUT MAXIMUM
CDSL CDSL
------- -------
<S> <C> <C>
National Portfolio 4.83% 0.83%
New York Portfolio 4.43% 0.43%
Pennsylvania Portfolio 5.00% 1.00%
</TABLE>
Total return figures are not annualized.
* Please refer to the inside front cover for further information.
with an average maturity of 21.70 years, reflecting the higher yields available
from long-term issues. Holdings were widely diversified with bonds representing
13 states and three additional political sub divisions. Major sectors
represented include health care, education, electric/power, transportation and
general obligation bonds.
NEW YORK PORTFOLIO:
The New York Portfolio at the end of 1993 was comprised primarily of issues in
New York State and included obligations of the Commonwealth of Puerto Rico and
Guam, both of which are exempt from New York taxes. As of December 31, 1993, the
Portfolio held 32 different issues and 26 of those were in New York State. The
average maturity of the Portfolio was 21.84 years, because in the second half of
1993 longer maturity bonds had relatively attractive yields compared to shorter
maturity issues. Major sectors in the Portfolio included health care, education,
transportation and general obligation bonds. The average quality of the
Portfolio was Baa as rated by Moody's, and no holdings were less than investment
grade.
PENNSYLVANIA PORTFOLIO:
The Pennsylvania Portfolio was widely diversified among issues exempt from
Pennsylvania taxes with 35 holdings at December 31, 1993. The average quality
rating of the Portfolio as measured by Moody's was A. The average maturity in
the Portfolio was 19.77 years, reflecting the additional yield advantage of
longer term bonds over shorter issues. The Portfolio's largest holdings were in
health care, education, and general obligation bonds.
The outlook for the municipal bond market appears favorable. Continued low
inflation should cause stable bond prices. The very large new-issue calendar of
1993 should decline in 1994, and demand from individuals should remain strong as
higher tax rates make municipal bonds attractive compared to taxable fixed
income issues.
================================================================================
3
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================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
THE NATIONAL PORTFOLIO
DECEMBER 31, 1993
STATEMENT OF INVESTMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS(B)
-----------
PRINCIPAL STANDARD MARKET
AMOUNT MOODY'S & POOR'S VALUE
---------- ------- -------- ----------
<S> <C> <C> <C> <C>
TAX-EXEMPT BONDS (96.71% OF NET ASSETS)
REVENUE BONDS 88.10%
CONSTRUCTION 4.19%
Inglewood California Redevelopment Agency
6.125% 07/01/23 $ 600,000 -- BBB $ 601,500
New York State Urban Development 6.500% 01/01/21 400,000 Baa1 BBB 452,500
----------
1,054,000
----------
EDUCATION 15.38%
Medical University of South Carolina 7.500% 01/01/08 600,000 Baa1 -- 663,000
Pennsylvania State Higher Education 6.000% 07/01/19 925,000 Aa A+ 948,125
Philadelphia Pennsylvania Hospital & Higher Education
6.250% 07/01/18 600,000 Baa1 BBB+ 607,500
Puerto Rico Public Building Authority 5.750% 07/01/15 500,000 Baa1 A 511,875
Rio California School District 6.145% 09/01/28(C) 1,140,000 Aaa AAA 646,950
Western Illinois University Auxiliary Facilities 5.250% 04/01/16 500,000 A -- 491,875
----------
3,869,325
----------
ELECTRIC/POWER 10.85%
Massachusetts Municipal Wholesale Electric Co. 6.000% 07/01/08 700,000 Baa1 BBB+ 716,625
North Carolina Eastern Municipal Power 5.750% 01/01/19 830,000 A A- 830,000
San Diego California Industrial Development 5.900% 09/01/18 650,000 Aa3 A+ 677,625
Sam Rayburn Texas Municipal Power Agency 6.125% 10/01/13 505,000 Baa BBB 504,369
----------
2,728,619
----------
HOSPITAL 21.91%
Erie County Ohio Providence Hospital 6.000% 01/01/13 405,000 -- A- 415,631
New York City Health & Hospital 6.300% 02/15/20 600,000 Baa BBB 632,250
Oklahoma City Hillcrest Health Center 6.400% 07/01/20 575,000 -- A- 599,437
Richardson Texas Medical Center 6.500% 12/01/12 350,000 Baa BBB- 360,938
Savannah Georgia Chandler Hospital 7.000% 01/01/23 700,000 Baa BBB+ 747,250
Tarrant County Texas Fort Worth Osteopathic 7.000% 05/15/28 500,000 Baa BBB 522,500
Titus County Texas Hospital 5.875% 08/15/06 700,000 Baa BBB- 687,750
Tomball Texas Hospital Authority 6.125% 07/01/23 860,000 Baa -- 842,800
Union County Pennsylvania Hospital Authority 5.875% 07/01/23 700,000 -- A- 702,625
----------
5,511,181
----------
HOUSING 2.12%
Tulsa County Oklahoma Breckenridge Apartments 6.450% 10/01/34 500,000 -- AA 533,125
----------
LONG-TERM CARE 1.19%
Montgomery County Pennsylvania IDA Health Care Facilities
8.500% 12/01/23 300,000 -- -- 298,125
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
4
<PAGE> 153
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
THE NATIONAL PORTFOLIO
DECEMBER 31, 1993
STATEMENT OF INVESTMENTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS(B)
----------
PRINCIPAL STANDARD MARKET
AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -----------
<S> <C> <C> <C> <C>
REVENUE BONDS (continued)
POLLUTION CONTROL 8.09%
Franklin County New York Solid Waste Management Authority
6.250% 06/01/15 700,000 -- BBB 731,500
Lawrenceburg Indiana Industrial Pollution Control 5.900% 11/01/19 800,000 Baa2 BBB 808,000
Massachusetts State Industrial Development Pollution Control
5.875% 08/01/08 480,000 Baa2 BBB 496,200
-----------
2,035,700
-----------
TRANSPORTATION 9.97%
Dallas Fort Worth International Airport 6.250% 11/01/13 900,000 Ba1 BB 904,500
Puerto Rico Highway Authority 5.500% 07/01/17 1,600,000 Baa1 A 1,602,000
-----------
2,506,500
-----------
WATER & SEWER 4.17%
Massachusetts State Water Resource Authority 5.750% 12/01/21 1,050,000 A A- 1,050,000
-----------
MISCELLANEOUS 10.23%
Pennsylvania State Finance Authority 6.600% 11/01/09 600,000 -- A- 655,500
Philadelphia Pennsylvania Gas Works 6.375% 07/01/14 600,000 Baa BBB 639,000
St. Louis Missouri Municipal Finance Corp. 5.850% 07/15/14(C) 2,500,000 Aa3 AA- 721,875
Savannah Georgia Economic Development Authority Series A
6.182% 12/01/21(C) 1,500,000 AAA -- 238,125
Savannah Georgia Economic Development Authority Series C
4.532% 12/01/21(C) 2,000,000 AAA -- 317,500
-----------
2,572,000
-----------
TOTAL REVENUE BONDS (Cost $21,751,344) 22,158,575
-----------
GENERAL OBLIGATION BONDS 8.61%
STATE & COUNTY 8.61%
District of Columbia Series E 5.875% 06/01/08 500,000 Baa A 503,750
Guam Government Series A 5.400% 11/15/18 1,200,000 -- BBB+ 1,159,500
Puerto Rico 5.500% 07/01/13 500,000 Baa1 A 502,500
-----------
TOTAL GENERAL OBLIGATION BONDS (Cost $2,175,072) 2,165,750
-----------
TOTAL INVESTMENTS (Cost $23,926,416; 96.71% of net assets) $24,324,325(A)
===========
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS
A. The aggregate cost of investments for federal income tax purposes was
$23,926,416 as of December 31, 1993, resulting in gross unrealized
appreciation and depreciation of $432,699 and $34,790, respectively, or net
unrealized appreciation of $397,909.
B. The ratings shown are believed to be the most recent ratings available at
December 31, 1993. Securities are generally rated at the time of issuance.
The rating agencies may revise their ratings from time to time. As a result
there can be no assurance that the same ratings would be assigned if the
securities were rated at December 31, 1993. The Fund's adviser
independently evaluates the Fund's portfolio securities and in making
investment decisions does not rely solely on the ratings of agencies.
C. Zero coupon bond; interest rate listed is effective rate.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
5
<PAGE> 154
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
THE NEW YORK PORTFOLIO
DECEMBER 31, 1993
STATEMENT OF INVESTMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS(B)
----------
PRINCIPAL STANDARD MARKET
AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- ----------
<S> <C> <C> <C> <C>
TAX-EXEMPT BONDS (95.27% OF NET ASSETS)
REVENUE BONDS 78.54%
CONSTRUCTION 3.00%
New York State Urban Development 6.500% 01/01/21 $200,000 Baa1 BBB $ 226,250
Triborough Bridge & Tunnel NY Convention Center
4.800% 01/01/12(C) 360,000 Baa1 BBB 128,700
----------
354,950
----------
EDUCATION 20.39%
New York Dorm Authority Court Facilities 5.700% 05/15/22 500,000 Baa1 BBB+ 499,375
New York Dorm Authority State University Series B 6.000% 05/15/17 250,000 Baa1 BBB+ 257,812
New York Dorm Authority City University Series A 5.750% 07/01/18 525,000 Baa1 BBB 534,844
New York State Local Government Series D 6.750% 04/01/06 160,000 A A 183,000
New York Urban Development Syracuse University 5.500% 01/01/14 330,000 Baa1 BBB 323,812
Puerto Rico Public Building Authority 5.750% 07/01/15 600,000 Baa1 A 614,250
----------
2,413,093
----------
ELECTRIC/POWER 7.77%
New York State Power Authority 5.250% 01/01/18 525,000 Aa AA- 524,344
Puerto Rico Electric Power Series N 4.731% 07/01/17(C) 500,000 Baa1 A- 139,375
Puerto Rico Telephone Authority Series N 5.500% 01/01/13 250,000 A A+ 256,562
----------
920,281
----------
HOSPITAL 12.16%
New York City Health & Hospital 6.300% 02/15/20 300,000 Baa BBB 316,125
New York Dorm Authority Department of Health 5.600% 07/01/23 425,000 Baa1 BBB 423,406
New York Dorm Authority Department of Health 5.500% 07/01/14 325,000 Baa1 BBB 318,094
New York Med Care St. Lukes Hospital 5.600% 08/15/13 375,000 Aa AAA 381,563
----------
1,439,188
----------
HOUSING 5.24%
New York Housing Finance Agency 5.875% 09/15/14 250,000 Baa1 BBB 254,375
United Nations Development Corp. Series A 6.000% 07/01/26 350,000 A -- 365,750
----------
620,125
----------
POLLUTION CONTROL 5.23%
Franklin County New York Solid Waste 6.250% 06/01/15 300,000 -- BBB 313,500
Ulster County New York Resource Recovery Agency
6.000% 03/01/14 300,000 Baa BBB 305,250
----------
618,750
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
6
<PAGE> 155
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
THE NEW YORK PROTFOLIO
DECEMBER 31, 1993
STATEMENT OF INVESTMENTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION> RATINGS(B)
----------
PRINCIPAL STANDARD MARKET
AMOUNT MOODY'S & POOR'S VALUE
--------- ------- -------- -----------
<S> <C> <C> <C> <C>
REVENUE BONDS (continued)
TRANSPORTATION 19.59%
Metropolitan Transit Authority Service Contract Series O
5.750% 07/01/07 250,000 Baa1 BBB 254,375
Metropolitan Transit Authority Service Contract Series P
5.750% 07/01/15 250,000 Baa1 BBB 250,938
New York City Transit Authority Livingston Plaza 5.250% 01/01/20 385,000 Aaa AAA 376,819
New York State Thruway Series A 5.750% 01/01/19 500,000 A1 A 518,750
Puerto Rico Highway Authority 5.500% 07/01/17 625,000 Baa1 A 625,781
Triborough Bridge & Tunnel General Purpose Series X
6.625% 01/01/12 250,000 Aa A+ 292,500
-----------
2,319,163
-----------
WATER & SEWER 1.76%
New York City Municipal Water Finance Authority 6.000% 06/15/17 200,000 A A- 208,250
-----------
MISCELLANEOUS 3.40%
New York Local Assistance Series B 5.500% 04/01/21 400,000 A A 402,000
-----------
TOTAL REVENUE BONDS (Cost $9,132,612) 9,295,800
-----------
GENERAL OBLIGATION BONDS 16.73%
STATE & COUNTY 16.73%
Guam Government Series A 5.400% 11/15/18 400,000 -- BBB+ 386,500
New York City Series E 5.750% 05/15/13 600,000 Baa1 A- 600,750
New York City Series A 6.250% 08/01/20 400,000 Baa1 A- 414,500
New York City Series A 6.250% 08/01/21 315,000 Baa1 A- 326,419
Puerto Rico 5.500% 07/01/13 250,000 Baa1 A 251,250
-----------
TOTAL GENERAL OBLIGATION BONDS (Cost $1,966,851) 1,979,419
-----------
TOTAL INVESTMENTS (Cost $11,099,463; 95.27% of net assets) $11,275,219(A)
===========
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS
A. The aggregate cost of investments for federal income tax purpose was
$11,099,463 as of December 31, 1993, resulting in gross unrealized
appreciation and depreciation of $188,724 and $12,968, respectively, or net
unrealized appreciation of $175,756.
B. The ratings shown are believed to be the most recent ratings available at
December 31, 1993. Securities are generally rated at the time of issuance.
The rating agencies may revise their ratings from time to time. As a result
there can be no assurance that the same ratings would be assigned if the
securities were rated at December 31, 1993. The Fund's adviser
independently evaluates the Fund's securities and in making investment
decisions does not rely solely on the ratings of agencies.
C. Zero coupon bond; interest rate listed is effective rate.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
7
<PAGE> 156
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
THE PENNSYLVANIA PORTFOLIO
DECEMBER 31, 1993
STATEMENT OF INVESTMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS(B)
----------
PRINCIPAL STANDARD MARKET
AMOUNT MOODY'S & POOR'S VALUE
---------- ------- -------- -----------
<S> <C> <C> <C> <C>
TAX-EXEMPT BONDS (94.97% OF NET ASSETS)
REVENUE BONDS 75.76%
CONSTRUCTION 3.63%
Pittsburgh Pennsylvania Urban Redevelopment Series A
5.500% 10/01/10 $ 400,000 A1 A $ 396,000
----------
EDUCATION 16.23%
Pennsylvania State Higher Education 6.000% 07/01/09 475,000 Aa A+ 486,875
Pennsylvania State Higher Education Series I 5.500% 06/15/11 180,000 Aaa AAA 183,150
Philadelphia Hospital & Education Facilities Graduate Health System
6.250% 07/01/08 300,000 Baa BBB+ 303,750
Pittsburgh Pennsylvania School District Series D 5.500% 09/01/16 250,000 Aaa AAA 254,375
Puerto Rico Public Building Authority 5.750% 07/01/15 400,000 Baa1 BBB 409,500
Southern Fulton Pennsylvania School District 6.050% 09/15/16(C) 460,000 Aaa AAA 130,525
----------
1,768,175
----------
HOSPITAL 14.82%
Allegheny County Hospital Auth. Magee Woman's Hospital 5.013%
10/01/15(C) 1,000,000 Aaa AAA 298,750
Blair County Hospital Auth. Altoona Hospital 5.500% 07/01/08 470,000 Aaa AAA 491,150
Sayre Pennsylvania Health Care Facilities 6.375% 07/01/22 160,000 Aaa AAA 174,200
Sewickley Valley Pennsylvania Hospital Authority 5.750% 10/15/16 350,000 A A 349,125
Union County Pennsylvania Hospital Authority Series A
5.875% 07/01/23 300,000 -- A- 301,125
----------
1,614,350
----------
HOUSING 7.93%
Pennsylvania Housing Finance Agency 5.750% 07/01/14 275,000 Aaa AAA 279,125
Pennsylvania Housing Finance Agency Series C 5.800% 07/01/22 350,000 Aaa AAA 354,375
Puerto Rico Public Building Authority Series L 5.750% 07/01/16 225,000 Baa1 A 230,344
----------
863,844
----------
INDUSTRIAL DEVELOPMENT 5.07%
Butler County Pennsylvania IDA Sherwood Oaks Project
5.750% 06/01/11 400,000 -- A- 400,500
Luzerne County Pennsylvania IDA Gas & Water 6.050% 01/01/19 150,000 Baa3 BBB- 151,500
----------
522,000
----------
LONG-TERM CARE 1.91%
Montgomery County Pennsylvania IDA Health Care Facilities
8.500% 12/01/23 210,000 -- -- 208,687
----------
TRANSPORTATION 6.92%
Pennsylvania State Turnpike Commission 5.50% 12/01/17 300,000 Aaa AAA 303,000
Puerto Rico Highway Authority Series X 5.500% 07/01/19 250,000 Baa1 A 250,312
Puerto Rico Highway Authority Series W 5.500% 07/01/17 200,000 Baa1 A 200,250
----------
753,562
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
8
<PAGE> 157
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
THE PENNSYLVANIA PORTFOLIO
DECEMBER 31, 1993
STATEMENT OF INVESTMENTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS(B)
----------
PRINCIPAL STANDARD MARKET
AMOUNT MOODY'S & POOR'S VALUE
---------- ------- -------- -----------
<S> <C> <C> <C> <C>
REVENUE BONDS (continued)
WATER & SEWER 8.53%
Center Township Pennsylvania Sewer Authority Series A
5.500% 04/15/16 300,000 Aaa AAA 306,000
Philadelphia Pennsylvania Water & Waste Water 5.750% 06/15/13 275,000 Baa BBB 272,594
Smithfield Pennsylvania Guaranteed Sewer Revenue 6.200% 01/15/18 350,000 -- -- 351,313
-----------
929,907
-----------
MISCELLANEOUS 10.72%
Dauphin County Pennsylvania General Authority 5.232% 10/01/20(C) 940,000 Aaa AAA 210,325
Pennsylvania State Finance Authority 6.600% 11/01/09 400,000 -- A 437,000
Philadelphia Pennsylvania Gas Works 6.375% 07/01/14 250,000 Baa1 BBB 266,250
Philadelphia Pennsylvania Municipal Authority Series A
5.625% 11/15/18 250,000 Aaa AAA 255,000
-----------
1,168,575
-----------
TOTAL REVENUE BONDS (Cost $8,099,037) 8,255,100
-----------
GENERAL OBLIGATION BONDS 19.21%
STATE & COUNTY 19.21%
Dauphin County Pennsylvania General Authority Series BB
5.800% 06/01/26 400,000 -- A 405,000
Greene County Pennsylvania 6.000% 06/01/10 100,000 -- BBB- 102,750
Guam Government Series A 5.400% 11/15/18 400,000 -- BBB+ 386,500
Kennett Pennsylvania Consolidated School District 5.650% 02/15/13 250,000 Aaa AAA 253,750
Montour Pennsylvania School District Series B 5.950% 01/01/19(C) 1,190,000 Aaa AAA 293,038
Puerto Rico 5.500% 07/01/13 250,000 Baa1 A 251,250
Westmoreland County Pennsylvania 5.250% 08/01/09 400,000 Aaa AAA 401,000
-----------
TOTAL GENERAL OBLIGATION BONDS (Cost $2,060,553) 2,093,288
-----------
TOTAL INVESTMENTS (Cost $10,159,590; 94.97% of net assets) $10,348,388(A)
===========
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS
A. The aggregate cost of investments for federal income tax purposes was
$10,159,590 as of December 31, 1993, resulting in gross unrealized
appreciation and depreciation of $205,140 and $16,342, respectively, or net
unrealized appreciation of $188,798.
B. The ratings shown are believed to be the most recent ratings available at
December 31, 1993. Securities are generally rated at the time of issuance.
The rating agencies may revise their ratings from time to time. As a result
there can be no assurance that the same ratings would be assigned if the
securities were rated at December 31, 1993. The Fund's adviser
independently evaluates the Fund's portfolio securities and in making
investment decisions does not rely solely on the ratings of agencies.
C. Zero coupon bond; interest rate listed is effective rate.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
9
<PAGE> 158
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
DECEMBER 31, 1993
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE THE THE
NATIONAL NEW YORK PENNSYLVANIA
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
ASSETS
Investment securities at identified cost............ $23,926,416 $11,099,463 $10,159,590
=========== =========== ===========
Investment securities at market value............... $24,324,325 $11,275,219 $10,348,388
Cash................................................ 457,564 183,955 358,506
Receivables:
Interest.......................................... 479,927 240,685 176,869
Fund shares sold.................................. 179,086 119,561 199,012
Due from investment adviser....................... 14,184 10,093 10,978
Deferred organization expenses, net................. 40,774 34,403 39,523
Other assets........................................ 17,452 2,858 2,917
----------- ----------- -----------
TOTAL ASSETS...................................... 25,513,312 11,866,774 11,136,193
----------- ----------- -----------
LIABILITIES
Payables:
Investment securities purchased................... 299,125 -- 209,388
Fund shares repurchased........................... 13,746 -- --
Accrued distribution and service fees............. 10,329 4,778 4,394
Transfer agent fees............................... 1,240 1,355 354
Other accrued liabilities......................... 37,937 25,442 25,374
----------- ----------- -----------
TOTAL LIABILITIES................................. 362,377 31,575 239,510
----------- ----------- -----------
NET ASSETS.......................................... $25,150,935 $11,835,199 $10,896,683
=========== =========== ===========
NET ASSETS CONSIST OF:
Paid in capital................................... $24,751,475 $11,659,432 $10,707,885
Accumulated undistributed net investment income... 1,551 11 --
Net unrealized appreciation....................... 397,909 175,756 188,798
----------- ----------- -----------
NET ASSETS.......................................... $25,150,935 $11,835,199 $10,896,683
=========== =========== ===========
Shares of beneficial interest outstanding without
par value, unlimited authorized................... 2,461,558 1,160,889 1,063,069
=========== =========== ===========
NET ASSETS VALUE PER SHARE.......................... $10.22 $10.19 $10.25
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
10
<PAGE> 159
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, 1993
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE THE THE
NATIONAL NEW YORK PENNSYLVANIA
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest................................................ $516,186 $216,996 $200,353
-------- -------- --------
TOTAL INVESTMENT INCOME............................... 516,186 216,996 200,353
-------- -------- --------
EXPENSES
Distribution and service fees........................... 47,432 21,343 19,978
Investment advisory fee................................. 42,690 19,210 17,980
Registration fees....................................... 23,372 4,708 4,682
Custodian fee........................................... 17,494 10,261 10,865
Printing................................................ 7,583 4,044 3,538
Audit fees.............................................. 6,690 6,690 6,690
Insurance expense....................................... 6,350 3,659 2,691
Transfer agent fee...................................... 4,792 3,100 3,680
Amortization of deferred organization expense........... 4,572 3,859 4,431
Legal fees.............................................. 2,183 2,221 2,238
Trustees fee............................................ 1,019 820 820
Other................................................... 902 205 216
Reimbursement/waiver from investment adviser............ (97,825) (64,847) (62,465)
-------- -------- --------
TOTAL EXPENSES........................................ 67,254 15,273 15,344
-------- -------- --------
NET INVESTMENT INCOME................................. 448,932 201,723 185,009
-------- -------- --------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain from sale of investments.............. 10,018 -- --
Net unrealized appreciation on investments.............. 397,909 175,756 188,798
-------- -------- --------
NET GAIN ON INVESTMENTS................................. 407,927 175,756 188,798
-------- -------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS......................................... $856,859 $377,479 $373,807
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
11
<PAGE> 160
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, 1993
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE THE THE
NATIONAL NEW YORK PENNSYLVANIA
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------
<S> <C> <C> <C>
FROM OPERATIONS
Net investment income.............................................. $ 448,932 $ 201,723 $ 185,009
Net realized gain.................................................. 10,018 -- --
Net unrealized appreciation........................................ 397,909 175,756 188,798
----------- ----------- -----------
Net increase in net assets resulting from operations............... 856,859 377,479 373,807
----------- ----------- -----------
FROM DIVIDENDS TO SHAREHOLDERS
Net investment income.............................................. (448,932) (201,723) (185,009)
Net realized gains................................................. (10,018) -- --
Distributions in excess of net investment income................... (17,494) (4,215) (4,528)
----------- ----------- -----------
Decrease in net assets from dividends to shareholders.............. (476,444) (205,938) (189,537)
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares...................................... 24,563,798 11,561,356 10,596,527
Net asset value of shares issued from reinvestment of dividends.... 270,961 124,718 121,276
Cost of shares repurchased......................................... (164,239) (22,416) (5,435)
----------- ----------- -----------
Increase in net assets derived from share transactions............. 24,670,520 11,663,658 10,712,413
----------- ----------- -----------
NET INCREASE IN NET ASSETS........................................... 25,050,935 11,835,199 10,896,683
NET ASSETS
Beginning of period (Initial capitalization of 10,000 shares)...... 100,000 0 0
----------- ----------- -----------
End of period...................................................... $25,150,935 $11,835,199 $10,896,683
=========== =========== ===========
Undistributed net investment income included in net assets
at end of period................................................. $1,551 $11 --
=========== =========== ===========
SHARE TRANSACTIONS
Shares sold........................................................ 2,440,958 1,150,709 1,051,661
Shares issued in reinvestment of dividends......................... 26,718 12,366 11,946
Shares redeemed.................................................... (16,118) (2,186) (538)
NET INCREASE IN SHARES............................................... 2,451,558 1,160,889 1,063,069
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
12
<PAGE> 161
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for each share outstanding throughout the indicated periods, by
Portfolio, are as follows:
<TABLE>
<CAPTION>
NET DIVIDENDS FROM
ASSET VALUE NET NET REALIZED ------------------------------------
PERIOD ----------- INVEST- AND TOTAL FROM NET NET
ENDED BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL
DEC. 31 OF PERIOD INCOME GAIN OPERATIONS INCOME GAIN OTHER(4) DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THE NATIONAL PORTFOLIO
1993 $10.00 $0.24 $0.23 $0.47 ($0.24) -- (0.01) ($0.25)
THE NEW YORK PORTFOLIO
1993 10.00 0.24 0.20 0.44 (0.24) -- (0.01) (0.25)
THE PENNSYLVANIA PORTFOLIO
1993 10.00 0.24 0.26 0.50 (0.24) -- (0.01) (0.25)
NET NET RATIO OF RATIO OF NET
ASSET VALUE ASSETS OPERATING INVESTMENT
PERIOD ----------- AT END OF EXPENSES TO INCOME TO PORTFOLIO
ENDED END OF TOTAL PERIOD AVERAGE NET AVERAGE NET TURNOVER
DEC. 31 PERIOD RETURN(3) (THOUSANDS) ASSETS ASSETS RATE
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
THE NATIONAL PORTFOLIO
1993 $10.22 4.83% $25,151 0.71%(1)(2) 4.71%(1) 15.12%(1)
THE NEW YORK PORTFOLIO
1993 10.19 4.43 11,835 0.36 (1)(2) 4.70 (1) 0.00
THE PENNSYLVANIA PORTFOLIO
1993 10.25 5.00 10,897 0.38 (1)(2) 4.61 (1) 0.00
</TABLE>
(1) Annualized
(2) Had Boston Security Counsellors not elected to waive its investment
advisory fee and to reimburse expenses, the ratio of expenses to average net
assets, on an annualized basis would have been:
The National Portfolio 1.73%
The New York Portfolio 1.87%
The Pennsylvania Portfolio 1.94%
(3) Total return does not reflect the Fund's contingent deferred sales load
maximum 4%. This charge goes into effect only if shares of the fund are
redeemed within 4 years of purchase. Total returns for 1993 represent
actual, not annualized percentages.
(4) Other dividends represent distributions in excess of investment income due
to differences in book and tax income.
See footnote 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
================================================================================
13
<PAGE> 162
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
DECEMBER 31, 1993
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Advantage Municipal Bond Fund (the "Fund") was organized as a
Massachusetts business trust on February 25, 1993 and commenced operations on
July 1, 1993. the Fund is registered under the Investment Company Act of
1940, as amended, as an open-end diversified management investment company.
The Fund consists of three separate series portfolios, the National, New York
and Pennsylvania Portfolios (the "Portfolios"), each of which issued shares
evidencing interests in the respective Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Portfolios in the preparation of their financial statements. The policies
are in conformity with generally accepted accounting principles.
SECURITY VALUATION
Market values for the Portfolios' investments are determined as follows:
a. Municipal bonds are valued on the basis of valuations furnished by a
pricing service approved by the trustees, which uses information with
respect to bond and note transactions, quotations from bond dealers,
market transactions in comparable securities and various relationships
between securities in determining value.
b. Money market instruments and short-term municipal obligations with an
initial maturity or remaining maturity of 60 days or less are valued at
amortized cost, provided that it approximates market value.
c. Other securities for which market quotations are not readily available and
other assets are valued at their fair value as determined by or under the
direction of the Trustees. Such fair value may be determined by various
methods, including utilizing information furnished by pricing services
which determine calculations for such securities using methods based,
among other things, upon market transactions for comparable securities
and various relationships between securities which are generally
recognized as relevant.
SECURITY TRANSACTIONS AND RELATED INCOME
Security transactions are accounted for on the date that the securities are
purchased or sold. Interest income is recorded on the accrual basis and
includes accretion of discount and amortization of premium using the yield to
maturity method. Dividend income is recorded on the ex-dividend date. The
Portfolios use the identified cost basis in computing gains or losses on
sales of investment securities.
INCOME TAX
For federal income tax purposes, each Portfolio intends to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986 (the "Code"), as amended, by distributing substantially all of its
taxable and tax-exempt income to its shareholders or otherwise complying with
the requirements for regulated investment companies. It is also the
intention of each Portfolio to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Code. Accordingly, no
provision for federal income taxes or excise tax has been made.
DIVIDENDS TO SHAREHOLDERS
The Portfolios declare dividends daily and pay monthly distributions from net
investment income. Dividends paid by the Portfolios from net interest earned
on tax-exempt municipal bonds are not includable by shareholders as gross
income for federal income tax purposes. distributions from realized capital
gains, if any, are paid at least annually and will be taxable to
shareholders.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. these differences are primarily due to
differing treatment for deductibility of organization expenses. The
Portfolios have reclassified these permanent differences to increase
undistributed net investment income and decrease paid-in capital by $19,045,
$4,226 and $4,528 for the National, New York and Pennsylvania Portfolios,
respectively.
================================================================================
14
<PAGE> 163
================================================================================
THE ADVANTAGE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
DECEMBER 31, 1993
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
GENERAL AND ORGANIZATION EXPENSES
General expenses of the Fund which do not specifically relate to an
individual Portfolio are allocated among the Portfolios in proportion to
their net assets or as deemed appropriate by the treasurer. Custodian fees
have been reduced by credits allowed by the custodian.
Costs incurred by the Fund in connection with its organization and its
original registration, amounting to $127,562, have been capitalized and are
being amortized on a straight-line basis over a 60 month period. Advest
Group, Inc. ("AGI") has agreed that if any of the initial shares of the Fund
(10,000 shares originally purchased by AGI) are redeemed during such
amortization period, the redemption proceeds will be reduced by the amount of
the then unamortized organization expenses in the same ratio as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.
3. INVESTMENT ADVISORY, DISTRIBUTION AND TRANSFER AGENT AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Boston
Security Counsellors, Inc. ("BSC"), a wholly owned subsidiary of AGI. For
its services as Investment Advisor, BSC receives from each Portfolio an
advisory fee equal on an annual basis to .45% of its average daily net
assets. BSC has agreed to waive its fee during the first year of operations.
Also, BSC and its affiliates have voluntarily agreed to waive or reimburse
expenses to the extent necessary to limit total operating expenses of each
Portfolio to no greater than .70% of average daily net assets after
commencement of operations for one year. BSC and its affiliates waived
and/or reimbursed expenses of $225,137 for the period ended December 31,
1993.
The Fund has entered into a Distribution Agreement with Advest, Inc., a
wholly owned subsidiary of AGI, and has adopted a distribution and service
plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. Each
Portfolio will pay an annual combined distribution and service fee of .50% of
its average daily net assets. Advest also receives the proceeds of any
contingent deferred sale charges on certain redemptions of shares. During
the period ended December 31, 1993, Advest received gross distribution fees
of $88,753 and contingent deferred sales charges of $2,721.
The Fund has entered into a transfer agency and service agreement with Advest
Transfer Services, Inc. ("ATS"), a wholly owned subsidiary of AGI. As the
Fund's transfer agent, ATS performs dividend-disbursing functions and
provides various services in connection with the purchase and redemption of
Fund shares. For those services, the Fund pays ATS fees based on the type
and number of accounts in the Fund and the number of transactions made by
shareholders. The Portfolios were charged $11,572 for the period ended
December 31, 1993.
4. RELATED PARTY TRANSACTIONS
As of December 31, 1993, AGI held 10,000 shares of The Advantage Municipal
Bond Fund - the National Portfolio.
Unaffiliated trustees of the Fund receive an annual Trustee's fee of $500,
and an additional fee for each Trustees' meeting attended.
5. PURCHASES, SALES AND MATURITIES OF INVESTMENTS
For the period ended December 31, 1993, purchases, sales and maturities
(excluding short-term securities) of investments at market value for each
Portfolio are as follows:
<TABLE>
<CAPTION>
SALES AND
PURCHASES MATURITIES
----------- ----------
<S> <C> <C>
NATIONAL PORTFOLIO $25,411,857 $1,518,885
NEW YORK PORTFOLIO $11,099,463 --
PENNSYLVANIA PORTFOLIO $10,159,589 --
</TABLE>
6. CONCENTRATION OF CREDIT
The New York and Pennsylvania Portfolios primarily invest in debt
obligations issued by municipalities in their respective states. In
addition, the Portfolios are concentrated in various industries as disclosed
in the Statements of Investments. The ability of the issuers of the debt
securities to meet their obligations may be affected by economic or political
developments in the specific industry or state.
================================================================================
15
<PAGE> 164
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TO THE TRUSTEES AND SHAREHOLDERS OF THE ADVANTAGE MUNICIPAL BOND FUND:
In our opinion, the accompanying statements of assets and liabilities,
including the statements of investments, (except for bond ratings), and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The National Portfolio, The New York Portfolio and The Pennsylvania Portfolio
(constituting The Advantage Municipal Bond Fund, hereafter referred to as the
"Fund") at December 31, 1993, and the results of their operations, the changes
in their net assets and the financial highlights for the period July 1, 1993
(commencement of operations) through December 31, 1993, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit, which included confirmation of securities at December 31, 1993 by
correspondence with the custodian and brokers, (and the application of
alternative auditing procedures where confirmations from brokers were not
received), provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Boston, Massachusetts
February 16, 1994
================================================================================
16
<PAGE> 165
================================================================================
TRUSTEES
Richard C. Farr
Geoffrey Nunes
Linda G. Sprague
Robert L. Thomas
Allen Weintraub
OFFICERS
Robert L. Thomas, President
Martin M. Lilienthal, Vice President and Treasurer
David A. Horowitz, Secretary
Margaret B. Patel, Vice President
Donna McAdam, Vice President and Assistant Secretary
HEADQUARTERS
100 Federal Street
Boston, MA 02110
(617) 348-3100
INVESTMENT ADVISER
BOSTON SECURITY COUNSELLORS, INC.
100 Federal Street
Boston, MA 02110
(800) 523-5903
(617) 348-3100
TRANSFER AGENT
ATS, INC.
280 Trumbull Street
Hartford, CT 06103
(800) 544-9268
DISTRIBUTOR
ADVEST, INC.
Corporate Headquarters
280 Trumbull Street
Hartford, CT 06103
(800) 243-8115 x2030 (outside CT)
(203) 241-2030
- --------------------------------------------------------------------------------
This publication, when not used for the general information of the shareholders
of The Advantage Municipal Bond Fund, must be preceded or accompanied by a
current prospectus for the Fund that includes management fees, charges and
expenses. Please read the prospectus carefully before investing in any of the
Portfolios of the Fund.
<PAGE> 166
THE ADVANTAGE
MUNICIPAL BOND FUND [BULK RATE POSTAGE
PERMIT INSERTED HERE]
100 FEDERAL STREET, 29TH FLOOR
BOSTON, MA 02110
<PAGE> 167
PART C
ITEM 15. INDEMNIFICATION
The information set forth in Item 27 of Form N-1A filed as Post-Effective
Amendment No. 26 under the Securities Act of 1933 (File No. 2-92915) and
Amendment No. 27 to the Registration Statement under the Investment Company Act
of 1940 (File No. 811-4096) with the SEC on February 22, 1995, is incorporated
herein by reference. The Advantage Trust, solely on behalf of the Advantage
Fund, and The Advest Group, Inc. have agreed, jointly and severally, to
indemnify and hold harmless the Registrant, its trustees and officers, each
person who controls the MFS Fund within the meaning of applicable federal
securities laws, and MFS, its wholly-owned subsidiaries and the directors,
officers and employees of MFS and such subsidiaries, against any loss, claim
damage and expense, paid or incurred, arising out of (i) any untrue statement or
alleged untrue statement of material fact contained in the Notice of Special
Meeting or Proxy Statement and Prospectus contained in Part A hereof or in this
Registration Statement, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only with respect to untrue statements or omissions
in or from those sections thereof identified as being the responsibility of the
Advantage Fund; (ii) any breach of any representation, warranty or covenant of
the Advantage Trust or the Advantage Fund set forth in the Reorganization
Agreement contained in Part A hereof or set forth in any certificate provided by
the Advantage Trust in connection with the consummation of the transactions
contemplated by the Reorganization Agreement (including, without limitation, any
certificate provided by the Advantage Trust in support of the legal opinion
required pursuant to Section 8.6 of the Reorganization Agreement); (iii) the
failure of the Advantage Fund or its designee to timely file all federal, state
and other tax returns, forms and reports when due of the Advantage Fund with
respect to all periods up to and including the Closing Date (as defined in the
Reorganization Agreement) or to pay any taxes due by the Advantage Fund to any
taxing authority with respect to all such periods, including without limitation,
any failure to pay such taxes due in a timely manner; and (iv) non-compliance of
the Advantage Fund with any applicable federal or state securities laws or with
applicable provisions of the Internal Revenue Code of 1986, as amended, or with
the investment policies and restrictions contained in the Advantage Fund's
prospectus and statement of additional information, as in effect from time to
time.
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
1. Amended and Restated Declaration of Trust dated February 2, 1995. (7)
2. Amended and Restated By-Laws dated December 14, 1994. (7)
3. Not Applicable.
4. Form of Agreement and Plan of Reorganization between Registrant and the
Advantage Trust; filed herewith as Exhibit A to the MFS Fund Prospectus set
forth as Part A to the Registration Statement on Form N-14.
5. Form of Share Certificate for Class A, B, and C shares. (6)
6. Investment Advisory Agreement dated April 14, 1993. (5)
7. (a) Amended and Restated Distribution Agreement, dated January 1, 1995. (7)
(b) Form of Dealer Agreement between MFS Fund Distributors, Inc., and a dealer,
dated December 28, 1994 and form of Mutual Fund Agreement between MFS Fund
Distributors, Inc. and a bank or NASD affiliate, dated December 28, 1994. (7)
8. Form of Retirement Plan for Non-Interested Person Trustees, dated January 1,
1991. (4)
9. (a) Custodian Contract, dated June 15, 1988. (2)
(b) Amendments to Custodian Agreement, dated August 10, 1988 and October 1, 1989,
respectively. (1)
(c) Amendment to Custodian Agreement, dated December 11, 1991. (3)
10. (a) Form of Class A Distribution Plan. (5)
(b) Form of Class B Distribution Plan. (5)
(c) Form of Class C Distribution Plan. (6)
11. Opinion and Consent of Stephen E. Cavan, Senior Vice President and General
Counsel of Massachusetts Financial Services Company, as to the legality of
securities being issued; filed herewith.
12. Opinion and Consent of Ropes & Gray as to tax matters; filed herewith.
</TABLE>
C-1
<PAGE> 168
<TABLE>
<S> <C> <C>
13. Form of Cross-Indemnity Agreement among the Registrant, the Advantage Trust and The
Advest Group, Inc.; filed herewith.
14. (a) Consent of Deloitte & Touche LLP regarding financial statements of the MFS Fund; filed
herewith.
(b) Consent of Price Waterhouse LLP regarding financial statements of the Advantage Fund; filed
herewith.
15. Not Applicable.
16. Power of Attorney dated August 11, 1994. (7)
17. Rule 24f-2 Notice of Election of Registrant; filed herewith.
<FN>
- ---------------
(1) Incorporated by reference to Post-Effective Amendment No. 11 filed with the SEC March 30, 1990.
(2) Incorporated by reference to Post-Effective Amendment No. 12 filed with the SEC March 29, 1991.
(3) Incorporated by reference to Post-Effective Amendment No. 16 filed with the SEC May 28, 1992.
(4) Incorporated by reference to Post-Effective Amendment No. 20 filed with the SEC on April 1, 1993.
(5) Incorporated by reference to Post-Effective Amendment No. 22 filed with the SEC on June 28, 1993.
(6) Incorporated by reference to Post-Effective Amendment No. 23 filed with the SEC October 29, 1993.
(7) Incorporated by reference to Post-Effective Amendment No. 26 filed with the SEC February 22, 1995.
</TABLE>
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that, prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the 1933 Act, each
post-effective amendment shall be deemed to be a new registration statement
for the securities affected therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
C-2
<PAGE> 169
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has been
signed on behalf of the Registrant in the City of Boston and The Commonwealth of
Massachusetts on the 24th day of February, 1995.
MFS MUNICIPAL SERIES TRUST ON BEHALF
OF MFS MUNICIPAL INCOME FUND
James R. Bordewick, Jr.
By:.................................
NAME: JAMES R. BORDEWICK,
JR.
TITLE: ASSISTANT SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on February 24, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
A. Keith Brodkin* Chairman, President (Principal Executive
........................................ Officer) and Trustee
A. KEITH BRODKIN
W. Thomas London* Treasurer (Principal Financial Officer and
........................................ Principal Accounting Officer)
W. THOMAS LONDON
Richard B. Bailey* Trustee
........................................
RICHARD B. BAILEY
Marshall N. Cohan* Trustee
........................................
MARSHALL N. COHAN
Lawrence H. Cohn* Trustee
........................................
LAWRENCE H. COHN
J. David Gibbons* Trustee
........................................
J. DAVID GIBBONS
Abby M. O'Neill* Trustee
........................................
ABBY M. O'NEILL
Walter E. Robb, III* Trustee
........................................
WALTER E. ROBB, III
Arnold D. Scott* Trustee
........................................
ARNOLD D. SCOTT
Jeffrey L. Shames* Trustee
........................................
JEFFREY L. SHAMES
J. Dale Sherratt* Trustee
........................................
J. DALE SHERRATT
Ward Smith* Trustee
........................................
WARD SMITH
</TABLE>
James R. Bordewick, Jr.
*By:...............................
JAMES R. BORDEWICK, JR.,
AS ATTORNEY-IN-FACT
EXECUTED BY JAMES R. BORDEWICK, JR.
ON BEHALF OF THOSE INDICATED
PURSUANT TO A POWER-OF-ATTORNEY
DATED AUGUST 11, 1994 INCORPORATED
BY REFERENCE TO THE REGISTRANT'S
POST-EFFECTIVE AMENDMENT NO. 26,
FILED WITH THE SEC ON FEBRUARY 22,
1995.
<PAGE> 170
<TABLE>
EXHIBIT INDEX
The following exhibits are filed as a part of this Registration Statement
pursuant to General Instruction G of Form N-14.
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
(4) Agreement and Plan of Reorganization between the Registrant and the
Advantage Trust filed herewith as Exhibit A to the MFS Fund Prospectus
set forth as Part A to the Registration Statement on Form N-14.
(11) Opinion and Consent of Stephen E. Cavan, Senior Vice President and
General Counsel of Massachusetts Financial Service Company, as to
legality of securities being issued.
(12) Opinion and Consent of Ropes & Gray as to tax matters.
(13) Form of Cross-Indemnity Agreement among the Registrant, the Advantage
Trust and The Advest Group, Inc.
(14)(a) Consent of Deloitte & Touche LLP regarding the financial statements of
the MFS Fund.
(b) Consent of Price Waterhouse LLP regarding the financial statements of the
Advantage Fund.
(17) Rule 24f-2 Notice of Election.
</TABLE>
<PAGE> 1
EXHIBIT 11
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street - Boston, Massachusetts 02116-3741
STEPHEN E. CAVAN
Senior Vice President and General Counsel
Phone: (617) 954-5810
Fax: (617) 954-6624
February 23, 1995
MFS Municipal Income Fund
A series of MFS Municipal Series Trust
Ladies and Gentlemen:
I have acted as counsel to MFS Municipal Income Fund (the "MFS Fund"), a
series of MFS Municipal Series Trust, a Massachusetts business trust (the "MFS
Trust"), in connection with the Trust's Registration Statement on Form N-14 to
be filed with the Securities and Exchange Commission (the "Commission") on or
about February 24, 1995 (the "Registration Statement"), with respect to an
indefinite number of Shares of Beneficial Interest designated as Class B Shares
(no par value) (the "Shares") of the MFS Fund to be issued pursuant to an
Agreement and Plan of Reorganization dated February 23, 1995 by and among the
MFS Trust, on behalf of the MFS Fund, and The Advantage Municipal Bond Fund, a
Massachusetts business trust ("Advantage Trust"), on behalf of The National
Portfolio (the "Advantage Fund"), a series of the Advantage Trust (the
"Agreement').
In connection with this opinion, I have examined the following documents:
(a) the Registration Statement;
(b) the Agreement;
(c) a certificate of the Secretary of State of The Commonwealth of
Massachusetts as to the existence of the MFS Trust;
(d) copies, certified by the Secretary of State of The Commonwealth of
Massachusetts, of the MFS Trust's Declaration of Trust and of
all amendments thereto on file in the office of the Secretary
of State; and
(e) the MFS Trust's Amended and Restated By-Laws and certain votes of
the Trustees of the MFS Trust.
<PAGE> 2
MFS Municipal Income Fund
February 23, 1995
Page 2
In such examination, I have assumed the genuineness of all signatures, the
conformity to the originals of all of the documents reviewed by me as copies,
the authenticity and completeness of all original documents reviewed by me in
original or copy form and the legal competence of each individual executing any
document. I have also assumed, for the purposes of this opinion, that the
Agreement, in substantially the form reviewed by me, is duly executed and
delivered by the parties thereto and that all of the conditions set forth in
"Conditions Precedent to Closing" in the Registration Statement shall have
occurred prior to the issuance and sale of the Shares.
This opinion is based entirely on my review of the documents listed above.
I have made no other review or investigation of any kind whatsoever, and I have
assumed, without independent inquiry, the accuracy of the information set forth
in such documents.
This opinion is limited solely to the laws of The Commonwealth of
Massachusetts (other than the Massachusetts Uniform Securities Act, as to which
I express no opinion) as applied by courts in such Commonwealth.
I understand that all of the foregoing assumptions and limitations are
acceptable TO YOU.
Based upon and subject to the foregoing, please be advised that it is my
opinion that the Shares, when issued and sold in accordance with the
Registration Statement, the Agreement and the MFS Trust's Declaration of Trust
and By-laws, will be legally issued, fully paid and non-assessable, except that
shareholders of the MFS Trust may under certain circumstances be held
personally liable for the Trust's obligations.
A copy of the MFS Trust's Declaration of Trust is on file with the
Secretary of State of the Commonwealth of Massachusetts. I note specifically
that the obligations of or arising out of the Agreement are not binding upon
any of the MFS Trust's trustees, officers, employees, agents or shareholders
individually, but are binding solely upon the assets and property of the MFS
Trust in accordance with its interest under the Agreement. I further note that
the assets and liabilities of each series of the MFS Trust, such as the MFS
Fund, are separate and distinct and that the obligations of or arising out of
the Agreement are binding solely upon the assets or property of the MFS Fund.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
STEPHEN E. CAVAN
Stephen E. Cavan
SEC/kmm
<PAGE> 1
EXHIBIT 12
ROPES & GRAY
[LETTERHEAD]
February 24, 1995
The Advantage Municipal Bond Fund --
The National Portfolio
100 Federal Street
Boston, MA 02110
MFS Municipal Series Trust --
MFS Municipal Income Fund
500 Boylston Street
Boston, MA 02116
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of
Reorganization (the "Agreement") to be dated as of February 23, 1995 between
The Advantage Municipal Bond Fund, a Massachusetts business trust, on behalf of
its separate series, the National Portfolio (the "Transferor Fund"), and MFS
Municipal Series Trust, a Massachusetts business trust, on behalf of its
separate series, MFS Municipal Income Fund (the "Acquiring Fund"). The
Agreement describes a proposed transaction (the "Transaction"), to occur on or
about May 1, 1995 (the date of the Transaction is referred to hereinafter as
the "Exchange Date"), pursuant to which Acquiring Fund will acquire
substantially all of the assets of Transferor Fund in exchange for the issuance
by Acquiring Fund to Transferor Fund of shares of beneficial interest in
Acquiring Fund (the "Acquiring Fund Shares") and the assumption by Acquiring
Fund of all of the stated liabilities of Transferor Fund, following which the
Acquiring Fund Shares will be distributed by Transferor Fund to its
shareholders in liquidation and termination of Transferor Fund. This opinion
as to certain federal income tax consequences of the Transaction is furnished
to you pursuant to section 8.6 of the Agreement. Terms used but not defined
herein have the same meaning as is ascribed to them in the Agreement.
The Advantage Municipal Bond Fund is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company. Shares of Transferor Fund are redeemable at net asset
value at each shareholder's option. Transferor Fund has elected to be a
regulated investment
<PAGE> 2
The Advantage Municipal Bond Fund -2- February 24, 1995
MFS Municipal Series Trust
company for federal income tax purposes under section 851 of the Internal
Revenue Code of 1986, as amended (the "Code").
Acquiring Fund is registered under the 1940 Act as an open-end
management investment company. Shares of Acquiring Fund are redeemable at net
asset value at each shareholder's option. Acquiring Fund has elected to be a
regulated investment company for federal income tax purposes under section 851
of the Code.
For purposes of this opinion, we have considered the Agreement, the
Proxy Statement/Prospectus to be dated March 29, 1995 which will be distributed
to Transferor Fund shareholders (including the items incorporated by reference
therein), and such other items as we have deemed necessary to render this
opinion. In addition, you have represented to us that the following facts,
occurrences and information are true as of the date hereof and will be true as
of the Exchange Date, and have stated that we may rely upon the accuracy and
veracity of such facts, occurrences and information in rendering this opinion
(whether or not contained or reflected in the documents and items referred to
above):
1. Transferor Fund will transfer to Acquiring Fund all of its assets,
and Acquiring Fund will assume all of the stated liabilities of Transferor
Fund, as of the Exchange Date.
2. Transferor Fund will distribute the Acquiring Fund Shares it
receives in the Transaction to Transferor Fund's shareholders as provided in
the Agreement.
3. The fair market value of the Acquiring Fund Shares received by each
Transferor Fund shareholder will be approximately equal to the fair market
value of the Transferor Fund shares surrendered in exchange therefor. The
shareholders of the Transferor Fund will receive no consideration, other than
Acquiring Fund Shares (which may include fractional shares) as described in the
Agreement, in exchange for their Transferor Fund shares.
4. None of the compensation received by any shareholder-employees of
Transferor Fund, if any, will be separate consideration for, or allocable to,
any of their Transferor Fund shares; none of the Acquiring Fund Shares received
by any Transferor Fund shareholder-employee will be separate consideration for,
or allocable to, any employment agreement; and the compensation paid to any
Acquiring Fund or Transferor Fund shareholder-employees, if any, will be for
services actually rendered and will be commensurate with amounts
<PAGE> 3
The Advantage Municipal Bond Fund -3- February 24, 1995
MFS Municipal Series Trust
paid to third parties bargaining at arm's length for similar services.
5. There is no plan or intention by any Transferor Fund shareholder
who owns 5% or more of the outstanding Transferor Fund shares, and to the best
of the knowledge of the management of the Transferor Fund, there is no plan or
intention on the part of the remaining Transferor Fund shareholders to sell,
exchange, or otherwise dispose of a number of Acquiring Fund Shares such that
the Transferor Fund shareholders' ownership of Acquiring Fund Shares, in the
aggregate, would be reduced to a number of Acquiring Fund Shares having a
value, as of the date of the Transaction, of less than 50 percent of the value
of all of the formerly outstanding Transferor Fund shares as of the same date.
For purposes of this representation, Acquiring Fund Shares or Transferor Fund
shares surrendered by Transferor Fund shareholders in redemption or otherwise
disposed of, where such dispositions, if any, are initiated by Transferor Fund
shareholders in connection with or as a result of the Agreement or the
Transaction, will be treated as outstanding Transferor Fund shares on the date
of the Transaction.
6. Acquiring Fund will acquire at least 90 percent of the fair market
value of the net assets and at least 70 percent of the fair market value of the
gross assets held by the Transferor Fund immediately prior to the Transaction.
For purposes of this representation, (a) amounts paid by the Transferor Fund to
Transferor Fund shareholders in redemption of Transferor Fund shares, where
such redemptions (if any) are initiated by Transferor Fund shareholders in
connection with or as a result of the Agreement or the Transaction rather than
in the ordinary course of business apart from the Agreement or the Transaction,
(b) amounts used by the Transferor Fund to pay expenses of the Transaction, and
(c) amounts used by the Transferor Fund to effect any distributions (except for
regular, normal distributions and dividends declared and paid in order to
ensure Transferor Fund's continued qualification as a regulated investment
company and to avoid imposition of fund-level tax, including distributions
declared and paid in accordance with Section 8.5 of the Agreement) made by
Transferor Fund immediately prior to the Transaction, will be included as
assets of Transferor Fund held immediately prior to the Transaction. Further,
for purposes of this representation, the amounts (if any) that Acquiring Fund
pays after the Transaction to Acquiring Fund shareholders who are former
Transferor Fund shareholders in redemption of Acquiring Fund Shares received in
exchange for Transferor Fund shares, where such redemptions are initiated by
such shareholders in connection with or as a result of the Agreement or the
Transaction rather than in the ordinary course
<PAGE> 4
The Advantage Municipal Bond Fund -4- February 24, 1995
MFS Municipal Series Trust
of business apart from the Agreement or the Transaction, will be considered to
be assets of Transferor Fund that were not transferred to the Acquiring Fund.
7. Acquiring Fund has no plan or intention to sell or otherwise
dispose of any of the assets of Transferor Fund acquired in the Transaction,
except for (i) dispositions made in the ordinary course of its business as a
series of an open-end investment company (i.e., dispositions resulting from
investment decisions made after the Transaction on the basis of investment
considerations independent of the Transaction) and (ii) dispositions made by
Acquiring Fund to realign its portfolio in order to reflect its investment
objective and conform to its investment restrictions and/or to maintain its
qualification as a "regulated investment company" for federal income tax
purposes under section 851 of the Code ("Realignment Dispositions"), which
Realignment Dispositions shall not exceed 50% of the net assets of Transferor
Fund immediately prior to the Exchange Date. For purposes of this
representation, Realignment Dispositions made by Transferor Fund, if any, will
be considered to have been made by Acquiring Fund.
8. Acquiring Fund has no plan or intention to reacquire any of the
Acquiring Fund Shares issued in the Transaction, except for Acquiring Fund
Shares reacquired in the ordinary course of its business as a series of an
open-end investment company.
9. The liabilities of Transferor Fund to be assumed by Acquiring
Fund, and the liabilities, if any, to which the transferred assets will be
subject, will have been incurred by Transferor Fund in the ordinary course of
its business and will be associated with the assets transferred to Acquiring
Fund. For purposes of this paragraph, expenses of the Transaction are not
treated as liabilities.
10. The fair market value of the Transferor Fund assets transferred
to Acquiring Fund will equal or exceed the sum of all of the liabilities
assumed by Acquiring Fund, plus the amount of liabilities, if any, to which the
transferred assets are subject.
11. Following the Transaction, the MFS Fund will use in its business a
significant portion (in this case, at least 50%) of the historic business
assets of the Advantage Fund. Specifically, the MFS Fund will use such
significant portion of the Advantage Fund's historic business assets in its
business by continuing to hold at least such portion of the assets transferred
to it by the Advantage Fund, except for dispositions made in the ordinary
course of the MFS Fund's business as an open-end investment company (i.e.,
dispositions resulting from investment decisions made after the Transaction on
the basis of investment considerations independent of the Transaction).
12. Except as provided in Section 9.2 of the Agreement and the
agreement referred to therein, Transferor Fund, Acquiring Fund, and the
Transferor Fund shareholders will pay their respective expenses, if any,
incurred in connection with the Transaction; however, Acquiring Fund may pay
certain expenses of Transferor Fund which arise after the Transaction, provided
that Acquiring Fund will pay or assume only those expenses of
<PAGE> 5
The Advantage Municipal Bond Fund -5- February 24, 1995
MFS Municipal Series Trust
Transferor Fund that are solely and directly related to the Transaction and
will pay such expenses directly to the relevant providers of services or other
payees, all in accordance with the guidelines established in Rev. Rul. 73-54,
1973-1 CB 187.
13. There is no intercorporate indebtedness existing between the
Acquiring Fund and the Transferor Fund.
14. Acquiring Fund does not own, directly or indirectly, nor has it
owned during the past five years, directly or indirectly, any Transferor Fund
shares.
15. For federal income tax purposes, the Transferor Fund qualifies as
a regulated investment company, and the provisions of sections 851 through 855
of the Code apply to the Transferor Fund for its current taxable year beginning
January 1, 1995 and will continue to apply to it through the Exchange Date.
In that regard, on or prior to the Exchange Date, Transferor Fund will
distribute to its shareholders of record all of the excess of (i) its
investment income excludable from gross income under Section 103(a) of the Code
over (ii) its deductions disallowed under Sections 265 and 171(a)(2) of the
Code, all of its investment company taxable income as defined in Section
852(b)(2) of the Code and all of its net capital gain as such term is used in
Section 852(b)(3)(C) of the Code, after reduction by any capital loss
carryforward, in each case for its taxable year ending December 31, 1994 and
its short taxable year ending on the Closing Date.
16. For federal income tax purposes, Acquiring Fund qualifies as a
regulated investment company, and the provisions of sections 851 through 855 of
the Code apply to Acquiring Fund for its current taxable year beginning April
1, 1994 and will continue to apply to it through the Exchange Date.
17. Transferor Fund is not, and as of the Exchange Date will not be,
under the jurisdiction of a court in a Title 11 or similar case within the
meaning of section 368(a)(3)(A) of the Code.
Based on the foregoing representations and our review of the documents
and items referred to above, we are of the opinion that for federal income tax
purposes:
(i) The acquisition by the Acquiring Fund of all of the assets of
Transferor Fund, solely in exchange for Acquiring Fund Shares
and the assumption of the stated liabilities of Transferor
Fund by
<PAGE> 6
The Advantage Municipal Bond Fund -6- February 24, 1995
MFS Municipal Series Trust
Acquiring Fund, followed by the distribution by Transferor
Fund of the Acquiring Fund Shares in complete liquidation to
the shareholders of Transferor Fund in exchange for their
Transferor Fund shares and the termination of The Advantage
Municipal Bond Fund, will constitute a reorganization within
the meaning of Section 368(a) of the Code, and Transferor Fund
and Acquiring Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code;
(ii) No gain or loss will be recognized by Transferor Fund upon the
transfer of all of its assets to Acquiring Fund solely in
exchange for Acquiring Fund Shares and the assumption of the
stated liabilities of Transferor Fund by Acquiring Fund or
upon the distribution to Transferor Fund shareholders of such
Acquiring Fund Shares pursuant to the Agreement;
(iii) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Transferor Fund solely in exchange
for Acquiring Fund Shares and the assumption of the stated
liabilities of Transferor Fund by Acquiring Fund;
(iv) The basis of the assets of Transferor Fund acquired by
Acquiring Fund will be, in each instance, the same as the
basis of those assets in the hands of Transferor Fund
immediately prior to the transfer;
(v) The holding period of the assets of Transferor Fund in the
hands of Acquiring Fund will include, in each instance, the
holding period of such assets in the hands of Transferor Fund;
(vi) The shareholders of Transferor Fund will not recognize gain or
loss upon the exchange of all of their Transferor Fund shares
of beneficial interest solely for Acquiring Fund Shares as
part of the transaction;
<PAGE> 7
The Advantage Municipal Bond Fund -7- February 24, 1995
MFS Municipal Series Trust
(vii) The basis of the Acquiring Fund Shares to be received by
each Transferor Fund shareholder will be, in the
aggregate, the same as the basis, in the aggregate, of the
Transferor Fund shares of beneficial interest surrendered by
such shareholder in exchange therefor; and
(viii) The holding period of the Acquiring Fund Shares to be received
by each Transferor Fund shareholder will include the holding
period of the Transferor Fund shares of beneficial interest
surrendered by such shareholder in exchange therefor, provided
the Transferor Fund shares were held by such shareholder as
capital assets on the date of the exchange.
Very truly yours,
Ropes & Gray
Ropes & Gray
CRR/lr
<PAGE> 1
EXHIBIT 13
CROSS-INDEMNITY AGREEMENT
-------------------------
ARTICLE 1. The Advantage Municipal Bond Fund, a Massachusetts business trust
(the "Advantage Trust"), on behalf of The National Portfolio, a series thereof
(the "Advantage Fund"), and not on behalf of any other series thereof, and The
Advest Group, Inc, a [Delaware] corporation ("Advest"), jointly and severally
agree to indemnify and hold harmless MFS Municipal Series Trust, a
Massachusetts business trust (the "MFS Trust"), on behalf of MFS Municipal
Income Fund (the "MFS Fund"), a series of the Trust, the MFS Trust's trustees
and officers, and each person, if any, who controls the MFS Fund within the
meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), Section
20 of the Securities Exchange Act of 1934 (the "1934 Act") or Section 48 of the
Investment Company Act of 1940 (the "1940 Act"), and Massachusetts Financial
Services Company, a Delaware corporation ("MFS"), together with its
wholly-owned subsidiaries, and the directors, officers and employees of MFS
and such subsidiaries, to the extent and in the manner as follows:
(a) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as paid or incurred, arising out
of any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement of the
MFS Fund filed on Form N-14 (the "Registration Statement")
with the Securities and Exchange Commission (the "SEC"), in
the Notice of a Special Meeting of Shareholders of the
Advantage Fund to be held on April 27, 1995 (the "Meeting") or
in the Proxy Statement and Prospectus of the Advantage Fund
and the MFS Fund mailed in connection with the Special Meeting
(such Notice and Proxy Statement and Prospectus being
collectively referred to herein as the "Proxy Statement and
Prospectus"), or the omission or alleged omission therefrom of
a material fact required to be stated therein or necessary to
make the statements therein not misleading, but only with
respect to untrue statements or omissions, or alleged untrue
statements or omissions, in or from those sections of the
Registration Statement and Proxy Statement and Prospectus
identified as "Advantage Fund Information" on the copy of the
Registration Statement and Proxy Statement and Prospectus
attached hereto as Exhibits A and B, respectively ("Covered
Information");
(b) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as paid or incurred, arising out
of (i) any breach of any representation, warranty or covenant
of the Advantage Trust or the Advantage Fund set forth in the
Agreement and Plan of Reorganization dated February 23, 1995
(the "Reorganization Agreement") between the MFS Trust, on
behalf of the MFS Fund, and the Advantage Trust, on behalf of
the Advantage Fund, or set forth in any certificate provided
by the Advantage Trust in connection with the consummation of
the transactions contemplated by the Reorganization Agreement
- 1 -
<PAGE> 2
(including, without limitation, any certificate provided by
the Advantage Trust in support of the legal opinion required
pursuant to Section 8.6 of the Reorganization Agreement); (ii)
the failure of the Advantage Fund or its designee to timely
file all federal, state and other tax returns, forms and
reports when due of the Advantage Fund with respect to all
periods up to and including the Closing Date (as defined in
the Reorganization Agreement) or to pay any taxes due by the
Advantage Fund to any taxing authority with respect to all
such periods, including without any limitation, any failure to
pay such taxes due in a timely manner; and (iii)
non-compliance of the Advantage Fund with any applicable
federal or state securities laws, including without limitation
the 1933 Act, the 1934 Act and the 1940 Act, or with
applicable provisions of the Internal Revenue Code of 1986, as
amended, or with the investment policies and restrictions
contained in the Advantage Fund's prospectus and statement of
additional information, as in effect from time to time;
(c) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as paid or incurred, to the
extent of the aggregate amount paid in settlement of any
litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, with
respect to those matters for which indemnification is provided
as set forth in paragraphs (a) and (b) above, if settlement is
effected with the written consent of each indemnifying party;
and
(d) against any and all expense whatsoever, joint or several, as
paid or incurred (including, subject to Article 3 hereof, the
fees and disbursements of counsel chosen by the MFS Trust on
behalf of the MFS Fund), reasonably incurred in investigating,
preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or
body, commenced or threatened, with respect to those matters
for which indemnification is provided as set forth in
paragraphs (a) and (b) above, to the extent that any such
expense is not paid under paragraphs (a) or (b) above.
This Agreement will be in addition to any liability which any of the Advantage
Trust, on behalf of the Advantage Fund, and Advest may otherwise have.
ARTICLE 2. The MFS Trust, on behalf of the MFS Fund and not on behalf of any
other series of the MFS Trust, agrees to indemnify and hold harmless the
Advantage Trust, on behalf of the Advantage Fund, the Advantage Trust's
trustees and officers, and each person, if any, who controls the Advantage Fund
within the meaning of Section 15 of the 1933 Act, Section 20 of the 1934 Act or
Section 48 of the 1940 Act, and Advest, together with its wholly-owned
subsidiaries, and the directors, officers and employees of Advest and of such
subsidiaries, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in paragraphs (a), (c) and (d) (but not
paragraph (b)) of Article 1 of this Agreement, as paid or incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
- 2 -
<PAGE> 3
omissions, made in the Registration Statement or the Proxy Statement and
Prospectus, except that no indemnification shall be provided with respect to
any such untrue statements or omissions, or alleged untrue statements or
omissions, in or from the Covered Information or in or from those sections of
the Registration Statement and Proxy Statement and Prospectus identified as
"Not Covered" on the copy of the Registration Statement and Proxy Statement and
Prospectus attached hereto as Exhibits A and B, respectively. This Agreement
will be in addition to any liability that the MFS Trust, on behalf of the MFS
Fund, may otherwise have.
ARTICLE 3. Each indemnified party hereunder shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
to so notify an indemnifying party shall not relieve such indemnifying party
from any liability which it may have otherwise than on account of this
Agreement, or relieve such indemnifying party from any liability under this
Agreement except to the extent that the indemnifying party's ability to defend
the action is materially adversely affected by the indemnified party's failure
to give notice as promptly as reasonably practicable. An indemnifying party
may participate at its own expense in the defense of any such action. In no
event shall the indemnifying party or parties be liable for fees and expenses
of more than one counsel (in addition to any local counsel) separate from their
own counsel for all indemnified parties under this Agreement in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
ARTICLE 4. Copies of the Declarations of Trust of the MFS Trust and the
Advantage Trust (the "Trusts") are on file with the Secretary of State of The
Commonwealth of Massachusetts. The undersigned acknowledge that the
obligations of or arising out of this Agreement are not binding upon any of
either Trust's officers, employees, agents or shareholders individually, but
are binding solely upon the assets and property of the MFS Fund, with respect
to the MFS Trust, and the Advantage Fund, with respect to the Advantage Trust,
as the case may be. The undersigned further acknowledge that the assets and
liabilities of each series of each Trust are separate and distinct and that the
obligations of or arising out of this Agreement are binding solely upon the
assets or property of the series on whose behalf each Trust has executed this
instrument.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by a duly authorized officer on this ____ day of March, 1995.
THE ADVANTAGE MUNICIPAL BOND FUND,
on behalf of The National Portfolio, one of its series
By: ___________________________________________________
Name:
Title:
THE ADVEST GROUP, INC.
By: ___________________________________________________
Name:
Title:
MFS MUNICIPAL SERIES TRUST,
on behalf of MFS Municipal Income Fund, one of
its series
By: ___________________________________________________
Name:
Title:
- 4 -
<PAGE> 1
Exhibit 14(a)
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the inclusion in the Registration Statement on Form N-14 of MFS
Municipal Series Trust on behalf of MFS Municipal Income Fund (one of the
series constituting MFS Municipal Series Trust) of our reports dated May 5,
1994 and November 4, 1994 appearing, respectively, in the Annual Report and
Semiannual Report to shareholders of MFS Municipal Income Fund for the year
ending March 31, 1994 and the six months ending September 30, 1994. We also
consent to the reference to us under the heading "Experts" appearing in the
Combined Prospectus/Proxy Statement which is included as part of such
Registration Statement.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 21, 1995
<PAGE> 1
EXHIBIT 14B
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the combined Statement of Additional
Information constituting part of this registration statement on Form N-14 (the
"Registration Statement") of our reports dated February 15, 1995 and February
16, 1994, relating to the financial statements and financial highlights
appearing in the December 31, 1994 Annual Report to Shareholders and the
December 31, 1993 Annual Report to Shareholders, respectively, of the National
Portfolio of The Advantage Municipal Bond Fund, which appear in such Statement
of Additional Information, and to the incorporation by reference of our reports
into the Proxy Statement and Prospectus which constitutes part of this
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Proxy Statement and Prospectus.
/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 22, 1995
<PAGE> 1
EXHIBIT 17
As filed with the Securities and Exchange Commission on February 22, 1995
1933 Act File No. 2-92915
1940 Act File No. 811-4096
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 26
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27
MFS MUNICIPAL SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
/x/ immediately upon filing pursuant to paragraph (b)
/ / on [date] pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on [date] pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest (without par value), under the
Securities Act of 1933. The Registrant filed a Rule 24f-2 Notice on behalf of
all of its series for its fiscal year ended March 31, 1994 on May 26, 1994.
================================================================================
