<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1996
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. 29
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 30
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)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 29, 1996 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, 1996 on May 28, 1996.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
-----------------------------------------------------------------------------------------
NUMBER PROPOSED PROPOSED
OF SHARES MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial
Interest (without par 17,160,991 $5.46 $290,000 $100
value)
-----------------------------------------------------------------------------------------
</TABLE>
Registrant elects to calculate the maximum aggregate offering price pursuant to
Rule 24e-2. 101,172,041 shares were redeemed during the fiscal year ended March
31, 1996. 84,064,163 shares were used for reductions pursuant to paragraph (c)
of Rule 24f-2 during the current fiscal year. 17,107,878 shares is the amount of
redeemed shares used for reduction in this Amendment. Pursuant to Rule 457(d)
under the Securities Act of 1933, the maximum public offering price of $5.46 per
share on July 15, 1996 is the price used as the basis for calculating the
registration fee. While no fee is required for the 17,107,878 shares, Registrant
has elected to register, for $100, an additional $290,000 of shares (53,113
shares at $5.46 per share).
<PAGE>
MFS MUNICIPAL SERIES TRUST
--------------------------
MFS ALABAMA MUNICIPAL BOND FUND
MFS ARKANSAS MUNICIPAL BOND FUND
MFS CALIFORNIA MUNICIPAL BOND FUND
MFS FLORIDA MUNICIPAL BOND FUND
MFS GEORGIA MUNICIPAL BOND FUND
MFS MARYLAND MUNICIPAL BOND FUND
MFS MASSACHUSETTS MUNICIPAL BOND FUND
MFS MISSISSIPPI MUNICIPAL BOND FUND
MFS NEW YORK MUNICIPAL BOND FUND
MFS NORTH CAROLINA MUNICIPAL BOND FUND
MFS PENNSYLVANIA MUNICIPAL BOND FUND
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
MFS TENNESSEE MUNICIPAL BOND FUND
MFS VIRGINIA MUNICIPAL BOND FUND
MFS WEST VIRGINIA MUNICIPAL BOND FUND
MFS MUNICIPAL INCOME FUND
CROSS REFERENCE SHEET
---------------------
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) Synopsis (state funds only) *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares of *
the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) The Fund; Investment Objective *
and Policies; Investment Techniques
(b), (c) Investment Objective and Policies; *
Investment Techniques
5 (a) The Fund; Management of the Fund - *
Investment Adviser
(b) Front Cover Page; Management of *
the Fund- Investment Adviser; Back
Cover Page
(c) Management of the Fund - Investment *
Adviser
(d) * *
(e) Management of the Fund - Shareholder *
Servicing Agent; Back Cover Page
(f) Expense Summary; Condensed *
Financial Information; Information
Concerning Shares of the Fund - Expenses
(g) Information Concerning Shares of *
the Fund - Purchases; Investment
Objective and Policies - Portfolio
Trading
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares of *
the Fund- Description of Shares,
Voting Rights and Liabilities;
Information Concerning Shares of
the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases; Information Concerning
Shares of the Fund - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares of *
the Fund - Distributions; Shareholder
Services - Distribution Options
(g) Information Concerning Shares of *
the Fund - Tax Status; Information
Concerning Shares of the Fund -
Distributions
(h) The Fund; Information Concerning Shares *
of the Fund - Purchases
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares of *
the Fund - Purchases; Information
Concerning Shares of the Fund - Net
Asset Value
(c) Information Concerning Shares of *
the Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges; Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares of *
the Fund - Distribution Plans;
Information Concerning Shares of
the Fund - Purchases; Expense
Summary; Expenses
(f) Information Concerning Shares of *
the Fund - Distribution Plans
8 (a) Information Concerning Shares of *
the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases; Shareholder Services
(b), (c), (d) Information Concerning Shares of *
the Fund - Redemptions and
Repurchases
9 * *
<PAGE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page or Table of
Contents
12 * The Trust; Definitions
13 (a), (b), (c) * Investment Objective; Policies and
Restrictions; Investment
Techniques
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Appendix
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d), (e) * *
(f) Information Concerning Shares Distribution Plans
of the Fund - Distribution Plans
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (c), (d) * Portfolio Transactions and
Brokerage Commissions
(b), (e) * *
18 (a) * Description of Shares, Voting
Rights and Liabilities
(b) * *
19 (a) Information Concerning Shares of Shareholder Services
the Fund - Purchases; Shareholder
Services
(b) Information Concerning Shares of Determination of Net Asset
the Fund - Net Asset Value; Value; Performance
Information Concerning Shares of Information; Management of
the Fund - Purchases the Fund - Distributor
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution Plans
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value; Performance Information
23 * Independent Auditors
and Financial Statements
- -----------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE>
[MFS Logo] Prospectus
THE FIRST NAME IN MUTUAL FUNDS August 1, 1996
<TABLE>
<S> <C>
MFS(R) ALABAMA MUNICIPAL BOND FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
</TABLE>
[Graphic omitted: two men seated in front of a window]
<PAGE>
PROSPECTUS
August 1, 1996
Class A Shares of Beneficial Interest
MFS(R) MUNICIPAL Class B Shares of Beneficial Interest
SERIES TRUST Class C Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) (For Certain Funds)
- --------------------------------------------------------------------------------
MFS Municipal Series Trust (the "Trust") is a mutual fund including the
following 15 separate series: MFS Alabama Municipal Bond Fund (the "Alabama
Fund"); MFS Arkansas Municipal Bond Fund (the "Arkansas Fund"); MFS California
Municipal Bond Fund (the "California Fund"); MFS Florida Municipal Bond Fund
(the "Florida Fund"); MFS Georgia Municipal Bond Fund (the "Georgia Fund"); MFS
Maryland Municipal Bond Fund (the "Maryland Fund"); MFS Massachusetts Municipal
Bond Fund (the "Massachusetts Fund"); MFS Mississippi Municipal Bond Fund (the
"Mississippi Fund"); MFS New York Municipal Bond Fund (the "New York Fund"); MFS
North Carolina Municipal Bond Fund (the "North Carolina Fund"); MFS Pennsylvania
Municipal Bond Fund (the "Pennsylvania Fund"); MFS South Carolina Municipal Bond
Fund (the "South Carolina Fund"); MFS Tennessee Municipal Bond Fund (the
"Tennessee Fund"); MFS Virginia Municipal Bond Fund (the "Virginia Fund"); and
MFS West Virginia Municipal Bond Fund (the "West Virginia Fund") (collectively
referred to as the "Funds"). The investment objective of each Fund is to provide
current income exempt from federal income taxes and from the personal income
taxes, if any, of the State to which its name refers. Each Fund will seek to
achieve its investment objective by investing its assets primarily in municipal
bonds and notes issued by the State to which its name refers, its political
subdivisions, municipalities, agencies, instrumentalities or public authorities.
NOT MORE THAN ONE-THIRD OF THE NET ASSETS OF EACH FUND MAY BE INVESTED IN
TAX-EXEMPT SECURITIES WHICH ARE RATED LOWER THAN THE THREE HIGHEST RATING
CATEGORIES OF RECOGNIZED RATING AGENCIES OR IN COMPARABLE UNRATED SECURITIES.
SUCH SECURITIES GENERALLY INVOLVE GREATER VOLATILITY OF PRICE AND RISKS TO
PRINCIPAL AND INCOME THAN SECURITIES IN THE HIGHER RATING CATEGORIES (see
"Investment Objective and Policies" below). The minimum initial investment in a
Fund is generally $1,000 per account (see "Purchases" below).
The investment adviser and distributor for each Fund are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL SERIES TRUST
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus sets forth concisely the information concerning the Trust and
each Fund that a prospective investor ought to know before investing. The Trust
has filed with the Securities and Exchange Commission ("SEC") a Statement of
Additional Information, dated August 1, 1996, as amended or supplemented from
time to time (the "SAI"), which contains more detailed information about the
Trust and each Fund and is incorporated into this Prospectus by reference. See
page 68 for a further description of the information set forth in the SAI. A
copy of the SAI may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number). The SEC maintains
an Internet World Wide Web site that contains the SAI, materials that are
incorporated by reference into this Prospectus and the SAI, and other
information regarding the Funds. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page
----
1. Synopsis ...................................................... 3
2. Condensed Financial Information ............................... 8
3. Investment Objective and Policies ............................. 38
4. Management of the Trust ....................................... 45
5. Information Concerning Shares of the Trust .................... 48
Purchases ................................................. 48
Exchanges ................................................. 53
Redemptions and Repurchases ............................... 54
Distribution Plans ........................................ 56
Distributions ............................................. 58
Tax Status ................................................ 59
Net Asset Value ........................................... 64
Description of Shares, Voting Rights and Liabilities ...... 64
Performance Information ................................... 65
Expenses .................................................. 65
6. Shareholder Services .......................................... 66
Appendix A -- Waivers of Sales Charges ........................ A-1
Appendix B -- Tax Equivalent Yield Tables ..................... B-1
Appendix C -- Description of Municipal Obligations and Ratings C-1
Appendix D -- Portfolio Composition Charts .................... D-1
Appendix E -- Additional Information Concerning the Funds ..... E-1
<PAGE>
1. SYNOPSIS
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Shares of each
Fund (as a percentage of offering price) ........................ 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as applicable) .. See Below(1) 4.00% 1.00%
THE FOLLOWING ANNUAL OPERATING EXPENSES FOR EACH CLASS OF SHARES OF EACH FUND ARE SHOWN AFTER APPLICABLE FEE REDUCTIONS AND
REIMBURSEMENTS, AS DESCRIBED IN THE FOOTNOTES.
ANNUAL OPERATING EXPENSES OF CLASS A SHARES OF EACH FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees .................................. 0.55% 0.55% 0.40%(2) 0.55% 0.45%(2)
Rule 12b-1 Fees(3) ............................... 0.25%(4) 0.10%(4) 0.00%(4) 0.00%(4) 0.25%(4)
Other Expenses(11) ............................... 0.34% 0.28% 0.26% 0.33%(5) 0.37%
----- ----- ----- ----- -----
Total Operating Expenses ......................... 1.14% 0.93% 0.66%(6) 0.88% 1.07%(6)
NORTH
<CAPTION>
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA
FUND FUND FUND FUND FUND
-------- ------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Management Fees .................................. 0.45%(2) 0.45%(2) 0.55% 0.55% 0.45%(2)
Rule 12b-1 Fees(3) ............................... 0.35% 0.35% 0.00%(4) 0.25%(4) 0.35%
Other Expenses(11) ............................... 0.29% 0.27% 0.30%(5) 0.30% 0.27%
----- ----- ----- ----- -----
Total Operating Expenses ......................... 1.09%(6) 1.07%(6) 0.85% 1.10% 1.07%(6)
<CAPTION>
SOUTH WEST
PENNSYLVANIA CAROLINA TENNESSEE VIRGINIA VIRGINIA
FUND FUND FUND FUND FUND
------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees .................................. 0.10%(2) 0.45%(2) 0.45%(2) 0.45%(2) 0.55%
Rule 12b-1 Fees(3) ............................... 0.00%(4) 0.35% 0.35% 0.35% 0.35%
Other Expenses(11) ............................... 0.00%(5) 0.30% 0.31% 0.28% 0.32%
----- ----- ----- ----- -----
Total Operating Expenses ......................... 0.10%(6) 1.10%(6) 1.11%(6) 1.08%(6) 1.22%
ANNUAL OPERATING EXPENSES OF CLASS B SHARES OF EACH FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees .................................. 0.55% 0.55% 0.40%(2) 0.55% 0.45%(2)
Rule 12b-1 Fees(7) ............................... 1.00% 0.85%(8) 0.80%(8) 0.80%(8) 1.00%
Other Expenses(11) ............................... 0.41% 0.36% 0.34% 0.40%(5) 0.45%
----- ----- ----- ----- -----
Total Operating Expenses ......................... 1.96% 1.76% 1.54%(9) 1.75% 1.90%(9)
<CAPTION>
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA
FUND FUND FUND FUND FUND
------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Management Fees .................................. 0.45%(2) 0.45%(2) 0.55% 0.55% 0.45%(2)
Rule 12b-1 Fees(7) ............................... 1.00% 1.00% 0.79%(8) 1.00% 1.00%
Other Expenses(11) ............................... 0.36% 0.35% 0.37%(5) 0.37% 0.35%
----- ----- ----- ----- -----
Total Operating Expenses ......................... 1.81%(9) 1.80%(9) 1.71% 1.92% 1.80%(9)
<CAPTION>
SOUTH WEST
PENNSYLVANIA CAROLINA TENNESSEE VIRGINIA VIRGINIA
FUND FUND FUND FUND FUND
------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees .................................. 0.10%(2) 0.45%(2) 0.45%(2) 0.45%(2) 0.55%
Rule 12b-1 Fees(7) ............................... 0.78%(8) 1.00% 1.00% 1.00% 1.00%
Other Expenses(11) ............................... 0.00%(5) 0.37% 0.38% 0.35% 0.39%
----- ----- ----- ----- -----
Total Operating Expenses ......................... 0.88%(9) 1.82%(9) 1.83%(9) 1.80%(9) 1.94%
ANNUAL OPERATING EXPENSES OF CLASS C SHARES OF EACH FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<CAPTION>
NORTH
CALIFORNIA CAROLINA VIRGINIA
FUND FUND FUND
---------- -------- --------
<S> <C> <C> <C>
Management Fees .................................................................... 0.40%(2) 0.45%(2) 0.45%(2)
Rule 12b-1 Fees(7) ................................................................. 1.00% 1.00% 1.00%
Other Expenses(11) ................................................................. 0.27% 0.28% 0.28%
----- ----- -----
Total Operating Expenses(10) ....................................................... 1.67% 1.73% 1.73%
<FN>
- ----------
(1) Purchases of $1 million or more and certain purchases by retirement plans are not subject to an initial sales charge;
however, a contingent deferred sales charge ("CDSC") of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases (see "Purchases" below).
(2) The Adviser has voluntarily reduced its management fee with respect to the California, Georgia, Maryland, Massachusetts,
North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia Funds to 0.40%, 0.45%, 0.45%, 0.45%, 0.45%, 0.10%,
0.45%, 0.45% and 0.45%, respectively, of each Fund's average daily net assets for an indefinite period of time. Absent these
reductions, Management Fees would have been 0.55% for each such Fund. See "Management of the Trust" below.
(3) Each Fund has adopted a distribution plan for its Class A shares in accordance with Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"), which provides that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 0.35% per annum of the net assets of the Fund attributable to Class A shares (see "Distribution
Plans" below). Currently, a portion of the fees payable under the Class A Distribution Plans with respect to certain Funds
are not being imposed (see footnote 4) below. Distribution expenses paid under these plans, together with the initial sales
charge, may cause long-term shareholders to pay more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge.
(4) For the California, Florida and Mississippi Funds, fees payable under the Class A Distribution Plans will commence on such
date or dates as the Trustees of the Trust may determine. For the Pennsylvania Fund, the 0.25% per annum Class A service fee
will commence when net assets attributable to Class A shares first equal or exceed $50 million and payment of the 0.10% per
annum Class A distribution fee will commence on such date as the Trustees of the Trust may determine. For the Arkansas Fund,
a portion of the Class A service fee equal to 0.10% per annum is currently being paid; payment of the remaining portion of
the Class A service fee and payment of the 0.10% per annum Class A distribution fee will commence on such date or dates as
the Trustees of the Trust may determine. For the Alabama, Georgia and New York Funds, payment of the 0.10% per annum Class A
distribution fee will commence on such date or dates as the Trustees of the Trust may determine. See "Distribution Plans"
below.
(5) The Adviser has agreed to pay "Other Expenses" of the Florida and Mississippi Funds until December 31, 2001, and of the
Pennsylvania Fund until December 31, 2002, subject to reimbursement by such Funds. To accomplish such reimbursement, the
Adviser is entitled to receive an additional fee from such Funds equal to 0.40% per annum of such Funds' average daily net
assets. For the Florida Fund, the Adviser has voluntarily reduced the expense reimbursement fee with respect to the Class A
shares to 0.33% of the average daily net assets of the Class A shares. For the Mississippi Fund, the Adviser has voluntarily
reduced the expense reimbursement fee to 0.30% and 0.37% of the average daily net assets of the Class A shares and Class B
shares, respectively, and will increase the fee to 0.33% and 0.40%, respectively, on October 1, 1996. The Adviser has
voluntarily waived receipt of the expense reimbursement fee for the Pennsylvania Fund. See "Expenses" below. Absent these
expense arrangements, "Other Expenses" would have been: 0.35% and 0.43% for Class A and Class B shares, respectively, of the
Florida Fund; 0.33% and 0.40% for Class A shares and Class B shares, respectively, of the Mississippi Fund; and 0.45%, and
0.52% for Class A shares and Class B shares, respectively, of the Pennsylvania Fund.
(6) Absent a reduction in certain Funds' management fees and/or expense reimbursement arrangements as described above, "Total
Operating Expenses" for Class A shares of the California, Florida, Georgia, Maryland, Massachusetts, Mississippi, North
Carolina, Pennsylvania, South Carolina, Tennessee and Virginia Funds would have been 0.81%, 0.90%, 1.17%, 1.19%, 1.17%,
0.88%, 1.17%, 1.00%, 1.20%, 1.21% and 1.18%, respectively.
(7) Each Fund has adopted separate distribution plans for its Class B shares and Class C shares (if offered by the Fund) in
accordance with Rule 12b-1 under the 1940 Act, which provide that it will pay distribution/service fees aggregating up to
(but not necessarily all of) 1.00% per annum of the average net daily assets attributable to the Class B shares under the
Class B Distribution Plan and the Class C shares under the Class C Distribution Plan (see "Distribution Plans" below).
Currently, a portion of the fees payable under the Class B Distribution Plans with respect to certain Funds are not being
imposed (see footnote 8 below). Distribution expenses paid under these Plans, together with any CDSC payable upon redemption
of Class B and Class C shares, may cause long-term shareholders to pay more than the maximum sales charge that would have
been permissible if imposed entirely as an initial sales charge.
(8) Except in the case of the 0.25% per annum Class B service fee paid by the relevant Fund upon the sale of Class B shares,
payment of the Class B service fee has been suspended for the California, Florida and Mississippi Funds until such date or
dates as the Trustees of the Trust may determine. Except in the case of the 0.25% per annum Class B service fee paid by the
Arkansas Fund upon the sale of Class B shares, the Class B service fee has been set by the Trust's Board of Trustees at 0.10%
per annum and may be increased to a maximum of 0.25% per annum on such date as the Trustees of the Trust may determine.
Except in the case of the 0.25% per annum Class B service fee paid by the Pennsylvania Fund upon the sale of Class B shares,
payment of the Class B service fee will be suspended until such date as the Class A service fee first becomes payable under
the Pennsylvania Fund's Class A Distribution Plan. See "Distribution Plans" below.
(9) Absent a reduction in certain Funds' management fees and/or expense reimbursement arrangements as described above, "Total
Operating Expenses" for Class B shares of the California, Florida, Georgia, Maryland, Massachusetts, Mississippi, North
Carolina, Pennsylvania, South Carolina, Tennessee and Virginia Funds would have been 1.69%, 1.78%, 2.00%, 1.91%, 1.90%,
1.74%, 1.90%, 1.85%, 1.92%, 1.93% and 1.90%, respectively.
(10) Absent a reduction in the California, North Carolina and Virginia Funds' management fees, "Total Operating Expenses" for
Class C shares would have been 1.82%, 1.83% and 1.83%, respectively.
(11) Each Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent, and may enter into other such arrangements and directed
brokerage arrangements (which would also have the effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a
hypothetical $1,000 investment in a Fund, assuming (a) 5% annual return and
(b) redemption at the end of each of the time periods indicated (unless
otherwise noted):
<TABLE>
<CAPTION>
ALABAMA ARKANSAS
FUND FUND
-------------------------------- --------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B
- ------ -------- ---------------------- -------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
(1) (1)
1 year ............ $ 59 $ 60 $ 20 $ 57 $ 58 $ 18
3 years ........... 82 92 62 76 85 55
5 years ........... 107 126 106 97 115 95
10 years .......... 180 207(2) 207(2) 156 185(2) 185(2)
<CAPTION>
CALIFORNIA FLORIDA
FUND FUND
-------------------------------------------------------- --------------------------------
PERIOD CLASS A CLASS B CLASS C CLASS A CLASS B
- ------ -------- ---------------------- ---------------------- -------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1)
1 year ............ $ 54 $ 56 $ 16 $ 27 $ 17 $ 56 $ 58 $ 18
3 years ........... 68 79 49 53 53 74 85 55
5 years ........... 83 104 84 91 91 94 115 95
10 years .......... 126 160(2) 160(2) 198 198 151 183(2) 183(2)
<CAPTION>
GEORGIA MARYLAND
FUND FUND
-------------------------------------- --------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B
- ------ -------- ---------------------------- -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
(1) (1)
1 year ........... $ 58 $ 59 $ 19 $ 58 $ 58 $ 18
3 years .......... 80 90 60 81 87 57
5 years .......... 104 123 103 105 118 98
10 years ......... 172 200(2) 200(2) 174 213(2) 213(2)
<CAPTION>
MASSACHUSETTS MISSISSIPPI
FUND FUND
-------------------------------------- --------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B
- ------ -------- ---------------------------- -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
(1) (1)
1 year ........... $ 58 $ 58 $ 18 $ 56 $ 57 $ 17
3 years .......... 80 97 67 73 84 54
5 years .......... 104 117 97 92 113 93
10 years ......... 172 192(2) 192(2) 147 179(2) 179(2)
<CAPTION>
NEW YORK NORTH CAROLINA
FUND FUND
-------------------------------- --------------------------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS C
- ------ -------- ---------------------- -------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1)
1 year ............. $ 58 $ 60 $ 20 $ 58 $ 58 $ 18 $ 28 $ 18
3 years ............ 81 90 60 80 87 57 54 54
5 years ............ 105 124 104 104 117 97 94 94
10 years ........... 175 203(2) 203(2) 172 212(2) 212(2) 204 204
<CAPTION>
PENNSYLVANIA SOUTH CAROLINA
FUND FUND
-------------------------------- --------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B
- ------ ---------- -------------------- -------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
(1) (1)
1 year ............. $ 48 $49 $ 9 $ 58 $ 58 $ 18
3 years ............ 51 58 28 81 87 57
5 years ............ 53 69 49 105 119 99
10 years ........... 60 86(2) 86(2) 175 214(2) 214(2)
<CAPTION>
TENNESSEE VIRGINIA
FUND FUND
------------------------------------ ----------------------------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS C
- ------ ---------- ------------------------ ---------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1)
1 Year .......... $ 58 $ 59 $ 19 $ 58 $ 58 $ 18 $ 28 $ 18
3 Years ......... 81 88 58 80 87 57 54 54
5 Years ......... 106 119 99 104 117 97 94 94
10 Years ........ 176 215(2) 215(2) 173 212(2) 212(2) 204 204
<CAPTION>
WEST VIRGINIA
FUND
----------------------------------
PERIOD CLASS A CLASS B
- ------ ---------- ----------------------
<S> <C> <C> <C>
(1)
1 Year .......... $ 59 $ 60 $ 20
3 Years ......... 84 91 61
5 Years ......... 111 125 105
10 Years ........ 188 226(2) 226(2)
<FN>
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after purchase; therefore years nine and ten reflect Class A
expenses.
</TABLE>
THE "EXAMPLE" SET FORTH ABOVE REFLECTS THE IMPOSITION OF THE MAXIMUM SALES
CHARGE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OF A FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table is to assist investors in understanding the
various costs and expenses that a shareholder in a Fund will bear directly or
indirectly. More complete descriptions of the following Trust expenses are set
forth in the following sections of the Prospectus: (i) varying sales charges
on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Management of the Trust -- Investment Adviser"; and (iv)
Rule 12b-1 (i.e., distribution plan) fees -- "Distribution Plans."
THE TRUST
The Trust is an open-end, management investment company which was organized as
a business trust under the laws of The Commonwealth of Massachusetts in 1984.
The Trust presently consists of 16 separate series, each of which represents a
portfolio with separate investment policies. This Prospectus offers shares of:
the Alabama Fund; the Arkansas Fund; the California Fund; the Florida Fund;
the Georgia Fund; the Maryland Fund; the Massachusetts Fund; the Mississippi
Fund; the New York Fund; the North Carolina Fund; the Pennsylvania Fund; the
South Carolina Fund; the Tennessee Fund; the Virginia Fund; and the West
Virginia Fund (each of which is a non-diversified series). Shares of the
remaining series of the Trust, the MFS Municipal Income Fund, which is a
diversified series, are offered and sold pursuant to a separate prospectus and
statement of additional information.
Each Fund currently offers Class A and Class B shares to the public. In
addition, the California Fund, the North Carolina Fund and the Virginia Fund
currently offer Class C shares to the public. Class A shares are offered at
net asset value plus an initial sales charge up to a maximum of 4.75% of the
offering price (or a CDSC of 1.00% upon redemption during the first year in
the case of purchases of $1 million or more and certain purchases by
retirement plans) and are subject to an annual distribution fee and service
fee up to a maximum of 0.35% per annum. Class B shares are offered at net
asset value without an initial sales charge but are subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and service fee up to a maximum of 1.00% per
annum. Class B shares will convert to Class A shares approximately eight years
after purchase. Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC of 1.00% upon redemption during
the first year and an annual distribution and service fee of 1.00% per annum.
Class A and Class C shares do not convert to any other class of shares.
Each Fund is "non-diversified" which means that each Fund will be able to
invest, subject to the diversification requirements of the Internal Revenue
Code of 1986, as amended (the "Code"), more than 5% of its assets in
obligations of each of one or more issuers. The proceeds of sales of shares of
each Fund are used to buy securities (primarily municipal bonds and notes and
other debt instruments the interest on which is exempt from federal income
taxes and from the personal income taxes, if any, of that State) for the
portfolio of that Fund. The Trust's Board of Trustees provides broad
supervision over the affairs of the Trust and each Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each Fund is to provide current income exempt from
federal income taxes and from the personal income taxes, if any, of the State
to which its name refers. Not more than one-third of each Fund's net assets
may be invested in tax-exempt securities which are rated lower than the three
highest grades of recognized rating agencies or comparable unrated securities.
Such securities generally involve greater volatility of price and risks to
principal and income than securities in the higher rating categories.
Prospective investors should be aware that the net asset value of the shares
of each Fund (as with any open-end investment company) will change as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities can be expected to
rise. Conversely, when interest rates rise, the value of such a portfolio can
be expected to decline. See "Investment Objective and Policies" below.
INVESTMENT ADVISER
MFS is the Trust's investment adviser. The Adviser is responsible for the
management of the assets of each Fund, and manages the portfolio of each Fund
from day to day in accordance with its investment objective and policies. For
these management and other services, the Adviser receives a management fee
from the Trust on behalf of each Fund computed and paid monthly at an annual
rate equal to 0.55% of the Fund's average daily net assets. For certain Funds,
the Adviser has voluntarily reduced the management fee. See "Expense Summary"
and "Management of the Trust" in this Prospectus. The MFS organization, with a
history of money management dating back to 1924, advises and administers each
of the other funds in the MFS Family of Funds (the "MFS Funds"). MFS and its
wholly owned subsidiary, MFS Asset Management, Inc., manage assets for certain
other registered investment companies and for substantial private clients.
NET ASSET VALUE OF SHARES
The value of each share of each class of each Fund is its net asset value. The
net asset value per share of each class of shares is determined by deducting
the amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. The value of each share of each class of each
Fund changes daily as the aggregate value of the securities in the portfolio
of that Fund increases or decreases. See "Net Asset Value" below. Therefore,
the value of shares owned by a shareholder may be more or less than the
shareholder's cost.
PURCHASE OF SHARES
Shares of each Fund are continuously sold to the public and may be purchased
through any securities dealer or other financial institution having a selling
agreement with MFD in its capacity as the Trust's distributor. Each Fund
currently offers Class A and Class B shares to the public. In addition, the
California Fund, the North Carolina Fund and the Virginia Fund currently offer
Class C shares to the public. See "Purchases" below.
DISTRIBUTIONS
The Trust intends to declare daily and pay monthly dividends to the
shareholders of each class from the net investment income of the Fund
allocable to that class. If a Fund has profits from the sale of securities
from its portfolio (after taking into account any available capital losses,
including capital loss carryforwards from prior years), one or more capital
gain distributions will be made to shareholders of the Fund during the
calendar year. A shareholder may elect to receive dividends and capital gain
distributions in either cash or additional shares. See "Tax Status" and
"Distributions" below.
REDEMPTION OF SHARES
The Trust will buy back shares of each Fund at their net asset value (subject,
in the case of Class B and Class C shares and certain Class A shares, to any
applicable CDSC) determined either on the day a dealer places an order or on
the day a shareholder's instructions are received in proper form by the
Shareholder Servicing Agent. The Trust reserves the right to pay the
redemption price, either totally or partially, by a distribution in kind of
securities from the portfolio of a Fund (instead of cash). See "Redemptions
and Repurchases" below.
EXCHANGE AND OTHER PRIVILEGES
Shareholders have the right to obtain quantity discounts on sales charges for
purchases of Class A shares under certain circumstances. Additionally,
shareholders have the right to exchange shares of a class of a Fund for shares
of the same class of another Fund (subject to residency requirements) or the
same class of shares of certain of the other MFS Funds. See "Exchanges" and
"Shareholder Services" below.
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of each Fund and should be read in conjunction with the financial
statements included in the Funds' Annual Reports to Shareholders, which are
incorporated by reference into the SAI in reliance upon the reports of the
Funds' independent auditors given upon their authority as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
Further information about the performance of each Fund is contained in the
Funds' Annual Reports to Shareholders, which can be obtained from the
Shareholder Servicing Agent (see back cover for address and phone number)
without charge.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ALABAMA FUND
------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED
MARCH 31, MARCH 31, YEAR ENDED JANUARY 31,
------------------------ --------------- -----------------------------------------------------
1996 1995 1994 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
CLASS A
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value
-- beginning of period ........ $10.34 $10.27 $10.98 $10.33 $ 9.95 $ 9.65 $ 9.53
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ...... $ 0.55 $ 0.56 $ 0.09 $ 0.55 $ 0.56 $ 0.60 $ 0.59
Net realized and unrealized
gain (loss)on investments.... 0.18 0.09 (0.71) 0.69 0.41 0.41 0.08
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.73 $ 0.65 $(0.62) $ 1.24 $ 0.97 $ 1.01 $ 0.67
------ ------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .... $(0.55) $(0.55) $(0.08) $(0.54) $ (0.58) $(0.65) $(0.55)
From net realized gain
on investments .............. -- -- -- (0.04) (0.01) (0.06) --
In excess of net investment
income(++) .................. -- -- (0.01) (0.01) -- -- --
In excess of net realized
gain on investments ......... -- (0.03) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders ........... $(0.55) $(0.58) $(0.09) $(0.59) $ (0.59) $(0.71) $(0.55)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period $10.52 $10.34 $10.27 $10.98 $10.33 $ 9.95 $ 9.65
====== ====== ====== ====== ====== ====== ======
Total return(+) ................. 7.13% 6.51% (5.66)%++ 12.26% 10.08% 10.92% 7.31%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................... 1.14% 1.15% 1.18%+ 1.21% 1.08% 0.95% 0.57%+
Net investment income ......... 5.18% 5.47% 5.17%+ 5.13% 5.79% 6.19% 6.63%+
PORTFOLIO TURNOVER .............. 37% 30% 4% 12% 17% 23% 64%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ................. $82,484 $83,805 $81,501 $87,344 $67,678 $48,476 $22,076
<FN>
- ----------
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For the fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended January 31, 1992, the per share distribution in excess of net investment income was $0.004.
(S)The investment adviser and/or the distributor voluntarily waived a portion of their management and distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share
and the ratios would have been:
Net investment income .... $ 0.54 $ 0.55 $ 0.09 $ 0.54 $ 0.55 $ 0.59 $ 0.52
RATIOS (TO AVERAGE NET ASSETS):
Expenses ................ 1.24% 1.25% 1.28%+ 1.31% 1.18% 1.08% 1.33%+
Net investment income ... 5.08% 5.37% 5.07%+ 5.03% 5.69% 6.06% 5.87%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
ALABAMA FUND
---------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
----------------- ----------- -----------
1996 1995 1994 1994**
---- ---- ---- ------
CLASS B
---------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ................ $10.34 $10.27 $10.98 $10.93
----- ----- ----- -----
Income from investment operations# --
Net investment income ..... $ 0.46 $ 0.47 $ 0.08 $ 0.18
Net realized and unrealized
gain (loss) on investments 0.18 0.09 (0.71) 0.07
----- ----- ----- -----
Total from investment
operations ............ $ 0.64 $ 0.56 $(0.63) $ 0.25
----- ----- ----- -----
Less distributions declared to shareholders --
From net investment income $(0.46) $(0.46) $(0.08) $(0.18)
From net realized gain on
investments ............. -- -- -- (0.02)
In excess of net realized
gain on investments ..... -- (0.03) -- --
----- ----- ----- -----
Total distributions
declared to shareholders $(0.46) $(0.49) $(0.08) $(0.20)
----- ----- ----- -----
Net asset value -- end of
period .................... $10.52 $10.34 $10.27 $10.98
----- ----- ----- -----
----- ----- ----- -----
Total return ................ 6.25% 5.64% (5.79)%++ 2.29%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................ 1.96% 1.97% 2.01%+ 1.98%+
Net investment income ..... 4.34% 4.63% 4.30%+ 3.98%+
PORTFOLIO TURNOVER .......... 37% 30% 4% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............... $6,139 $4,396 $2,849 $2,269
- ----------
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ARKANSAS FUND
----------------------------------------------------------------------------------------------------------
TWO MONTHS TWO MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
1996 1995 1994 1994 1993* 1996 1995 1994 1994**
---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A CLASS B
----------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period... $ 9.66 $ 9.69 $10.47 $ 9.88 $ 9.53 $ 9.65 $ 9.69 $10.47 $10.42
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income(S)........... $ 0.50 $ 0.53 $ 0.09 $ 0.56 $ 0.58 $ 0.42 $ 0.42 $ 0.07 $ 0.23
Net realized and
unrealized gain
(loss) on
investments........ 0.09 0.02 (0.77) 0.60 0.35 0.10 0.01 (0.78) (0.04)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations........ $ 0.59 $ 0.55 $(0.68) $ 1.16 $ 0.93 $ 0.52 $ 0.43 $(0.71) $ 0.19
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income.............. $(0.50) $(0.53) $(0.08) $(0.55) $(0.58) $(0.42) $(0.42) $(0.07) $(0.14)
From net realized
gain on
investments(++).... -- -- -- 0.00 -- -- -- -- 0.00
In excess of net
investment
income(+++)........ -- -- (0.02) (0.02) -- -- -- 0.00 0.00
In excess of net
realized gain on
investments........ -- (0.05) -- -- -- -- (0.05) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders..... $(0.50) $(0.58) $(0.10) $(0.57) $(0.58) $(0.42) $(0.47) $(0.07) $(0.14)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period............ $ 9.75 $ 9.66 $ 9.69 $10.47 $ 9.88 $ 9.75 $ 9.65 $ 9.69 $10.47
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+)........ 6.19% 5.90% (6.61)%++ 11.95% 10.11%++ 5.43% 4.67% (6.81)%++ 2.18%++
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses##.......... 0.93% 0.75% 0.75%+ 0.63% 0.16%+ 1.76% 1.84% 1.82%+ 1.75%+
Net investment
income............ 5.10% 5.51% 5.21%+ 5.30% 6.04%+ 4.27% 4.40% 4.11%+ 3.87%+
PORTFOLIO TURNOVER.... 6% 24% 1% 3% 10% 6% 24% 1% 3%
NET ASSETS AT END OF
PERIOD
(000 OMITTED)....... $172,907 $187,105 $195,042 $203,542 $124,644 $ 7,950 $7,231 $5,895 $5,179
<FN>
- ----------
* For the period from the commencement of investment operations, February 3, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are caluclated without reduction for fees paid
indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the year ended January 31, 1994, the per share distributions from net realized gain on investments and in excess of net
realized gain on investments were $0.0015 and $0.0003, respectively, for both Class A and Class B shares.
(+++) For the year ended March 31, 1994 and the year ended January 31, 1994, the per share distributions in excess of net
investment income were $0.002 and $0.004, respectively, for Class B shares.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share
and the ratios would have been:
Net investment income -- $ 0.52 $ 0.09 $ 0.53 $ 0.52 -- $ 0.41 $ 0.07 $ 0.12
------ ------ ------ ------ ------ ------ ------ ------ ------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses ........... -- 0.82% 0.96%+ 0.91% 0.75%+ -- 1.91% 2.02%+ 3.44%+
Net investment
income ............... -- 5.43% 5.01%+ 5.01% 5.45%+ -- 4.33% 3.91%+ 2.18%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CALIFORNIA FUND
------------------------------------------------------------------------------------------------------
TWO MONTHS ELEVEN MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY31, FEBRUARY 28,
---------------------- ------------- ------------- ----------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ----
CLASS A
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period ..... $ 5.41 $ 5.47 $ 5.95 $ 5.88 $ 5.42 $ 5.26 $ 5.19 $ 5.06
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income(S) ............. $ 0.30 $ 0.31 $ 0.05 $ 0.30 $ 0.34 $ 0.35 $ 0.33 $ 0.33
Net realized and
unrealized gain
(loss) on investments 0.11 (0.05) (0.48) 0.14 0.47 0.20 0.07 0.13
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .......... $ 0.41 $ 0.26 $(0.43) $ 0.44 $ 0.81 $ 0.55 $ 0.40 $ 0.46
------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income(++) ............ $(0.30) $(0.31) $(0.04) $(0.29) $(0.34) $(0.37) $(0.33) $(0.33)
From net realized gain
on investments ........ -- -- -- (0.07) (0.01) (0.02) -- --
In excess of net
investment income ...... 0.00 0.00 (0.01) (0.01) -- -- -- --
In excess of net
realized gain on
investments ............ -- (0.01) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ........ $(0.30) $(0.32) $(0.05) $(0.37) $(0.35) $(0.39) $(0.33) $(0.33)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period .................. $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 5.88 $ 5.42 $ 5.26 $ 5.19
====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ........... 7.86% 4.85% (7.21)%++ 7.64%++ 15.55% 10.69% 8.03% 9.28%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## .............. 0.66% 0.69% 0.68%+ 0.60%+ 0.39% 0.40% 0.87% 1.00%
Net investment income ... 5.48% 5.80% 5.27%+ 4.99%+ 6.18% 6.53% 6.39% 6.35%
PORTFOLIO TURNOVER ........ 69% 57% 8% 38% 64% 73% 102% 243%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .. $259,817 $272,161 $313,790 $356,419 $272,179 $177,291 $84,551 $68,879
<FN>
- ----------
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were $0.0049 and
$0.0027, respectively.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment income
per share and the ratios would have been:
Net investment income $0.29 $ 0.30 $ 0.05 $ 0.29 $ 0.32 $ 0.33 -- --
RATIOS (TO AVERAGE
NET ASSETS):
Expenses .......... 0.81% 0.84% 0.83%+ 0.78%+ 0.77% 0.79% -- --
Net investment
income ......... 5.33% 5.65% 5.12%+ 4.82%+ 5.80% 6.14% -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CALIFORNIA FUND
------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, MARCH 31, MARCH 31, JANUARY 31,
----------------------------------------------- ---------------- ------------ -------------
1989 1988 1987 1986* 1996 1995 1994 1994**
---- ---- ---- ---- ---- ---- ---- ----
CLASS A CLASS B
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period .... $ 5.08 $ 5.38 $ 5.07 $ 4.76 $ 5.41 $ 5.47 $ 5.95 $ 6.02
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.32 $ 0.31 $ 0.32 $ 0.20 $ 0.26 $ 0.25 $ 0.04 $ 0.10
Net realized and
unrealized gain (loss)
on investments ....... (0.02) (0.29) 0.34 0.28 0.11 (0.05) (0.48) --
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.30 $ 0.02 $ 0.66 $ 0.48 $ 0.37 $ 0.20 $(0.44) $ 0.10
------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income(++) ........... $(0.32) $(0.31) $(0.33) $(0.17) $(0.26) $(0.25) $(0.04) $(0.10)
From net realized gain
on investments ....... -- (0.01) (0.02) -- -- -- -- (0.07)
In excess of net
realized gain on
investments .......... -- -- -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ....... $(0.32) $(0.32) $(0.35) $(0.17) $(0.26) $(0.26) $(0.04) $(0.17)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................. $ 5.06 $ 5.08 $ 5.38 $ 5.07 $ 5.52 $ 5.41 $ 5.47 $ 5.95
====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ........... 6.07% 0.83% 13.57% 9.77%++ 6.93% 3.73% (7.38)%++ 1.68%++
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ............. 1.28% 1.20% 1.04% 0.95%+ 1.54% 1.76% 1.69%+ 1.60%+
Net investment income .. 6.35% 6.33% 6.25% 7.34%+ 4.59% 4.72% 4.18%+ 3.64%+
PORTFOLIO TURNOVER ....... 188% 240% 54% 23% 69% 57% 8% 38%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ... $59,212 $59,479 $62,368 $17,488 $34,675 $29,057 $21,252 $19,360
<FN>
- ----------
*For the period from the commencement of investment operations, June 18, 1985 to February 28, 1986.
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the two months ended March 31, 1994 and the period ended January 31, 1994, the per share
distributions in excess of net investment income were $0.0041, $0.002 and $0.003, respectively, for Class B shares.
(S)The investment adviser and/or the distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment income
per share and the ratios would have been:
Net investment income -- -- -- -- $ 0.25 $ 0.24 $ 0.04 $ 0.09
------ ------ ------ ------ ------ ------ ------ ------
RATIOS (TO AVERAGE
NET ASSETS):
Expenses .......... -- -- -- -- 1.69% 1.91% 1.83%+ 1.81%+
Net investment
income ......... -- -- -- -- 4.43% 4.57% 4.04%+ 3.43%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
CALIFORNIA FUND
--------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
------------------- ----------- -------------
1996 1995 1994 1994***
---- ---- ---- -------
CLASS C
--------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ... $ 5.42 $ 5.48 $ 5.95 $ 5.89
----- ----- ----- -----
Income from investment
operations# --
Net investment
income(S) ............ $ 0.25 $ 0.26 $ 0.03 $ 0.01
Net realized and
unrealized gain (loss)
on investments ....... 0.11 (0.06) (0.46) 0.06
----- ----- ----- -----
Total from investment
operations ....... $ 0.36 $ 0.20 $(0.43) $ 0.07
----- ----- ----- -----
Less distributions
declared to shareholders --
From net investment
income(++) .......... $(0.25) $(0.25) $(0.04) $(0.01)
In excess of net
realized gain on
investments ......... -- (0.01) -- --
----- ----- ----- -----
Total distributions
declared to
shareholders $(0.25) $(0.26) $(0.04) $(0.01)
----- ----- ----- -----
Net asset value -- end of
period .............. $ 5.53 $ 5.42 $ 5.48 $ 5.95
====== ====== ====== ======
Total return ............ 6.77% 3.79% (7.22)%++ 1.25%++
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ............ 1.67% 1.69% 1.64%+ 2.02%+
Net investment income . 4.47% 4.79% 3.92%+ 1.78%+
PORTFOLIO TURNOVER ...... 69% 57% 8% 38%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .... $4,353 $3,858 $1,701 $917
- ----------
***For the period from the commencement of offering of Class C shares,
January 3, 1994 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(++)For the year ended March 31, 1996, the two months ended March 31, 1994
and the period ended January 31, 1994, the per share distributions in
excess of net investment income were $0.004, $0.001 and $0.003,
respectively.
(S)The investment adviser and/or the distributor voluntarily waived a
portion of their management fee and/or distribution fee, respectively,
for the periods indicated. If these fees had been incurred by the Fund,
the net investment income per share and the ratios would have been:
Net investment income $ 0.24 $ 0.25 $ 0.03 --
RATIOS (TO AVERAGE
NET ASSETS):
Expenses .......... 1.82% 1.84% 1.80%+ 3.53%+
Net investment
income .......... 4.32% 4.64% 3.77%+ 0.27%+
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FLORIDA FUND
--------------------------------------------------------------------------------------------------------
TWO MONTHS TWO MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
-------------------- ------------ ---------------------- ------------------ ---------- -------------
1996 1995 1994 1994 1993* 1996 1995 1994 1994**
---- ---- ---- ---- ----- ---- ---- ---- ------
CLASS A CLASS B
-------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period .... $ 9.60 $ 9.65 $10.63 $ 9.89 $ 9.53 $ 9.60 $ 9.64 $10.62 $10.69
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.52 $ 0.54 $ 0.09 $ 0.57 $ 0.58 $ 0.43 $ 0.43 $ 0.07 $ 0.18
Net realized and
unrealized gain (loss)
on investments ....... 0.22 0.02 (0.98) 0.86 0.36 0.22 0.04 (0.98) 0.03
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........ $ 0.74 $ 0.56 $ (0.89) $ 1.43 $ 0.94 $ 0.65 $ 0.47 $ (0.91) $ 0.21
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income ............... $ (0.52) $ (0.54) $ (0.08) $ (0.57) $ (0.58) $ (0.43) $ (0.44) $ (0.06) $ (0.17)
From net realized gain
on investments ....... -- (0.04) -- (0.11) -- -- (0.04) -- (0.10)
In excess of net
investment income(++) 0.00 -- (0.01) (0.01) -- 0.00 -- (0.01) (0.01)
In excess of net
realized gain on
investments .......... -- (0.03) -- -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ....... $ (0.52) $ (0.61) $ (0.09) $ (0.69) $ (0.58) $ (0.43) $ (0.51) $ (0.07) $ (0.28)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................. $ 9.82 $ 9.60 $ 9.65 $10.63 $ 9.89 $ 9.82 $ 9.60 $ 9.64 $10.62
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ......... 7.81% 6.07% (8.39)%++ 14.71% 10.28%+ 6.88% 5.06% (8.55)%++ 4.87%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ............. 0.86% 0.60% 0.77%+ 0.49% 0.05%+ 1.74% 1.68% 1.82%+ 1.64%+
Net investment income .. 5.26% 5.75% 5.15%+ 5.42% 6.27%+ 4.36% 4.63% 4.08%+ 3.82%+
PORTFOLIO TURNOVER ....... 56% 131% 19% 53% 54% 56% 131% 19% 53%
NET ASSETS AT END OF
PERIOD
(000 OMITTED) .......... $87,553 $89,894 $108,579 $124,131 $74,329 $14,448 $12,667 $7,995 $7,244
<FN>
- ----------
*For the period from the commencement of investment operations, February 3, 1992 to January 31, 1993.
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0015 and $0.0012
for Class A and Class B shares, respectively.
(S)The investment adviser and/or the distributor voluntarily waived a portiion of their management fee and/or distribution
fee, respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per
share and the ratios would have been:
Net investment income $ 0.52 $ 0.52 $ 0.08 $ 0.52 $ 0.51 $ 0.43 $ 0.41 $ 0.06 $ 0.16
RATIOS (TO AVERAGE NET
ASSETS):
Expenses ........... 0.90% 0.83% 1.12%+ 0.93% 0.81%+ 1.78% 1.91% 2.17%+ 2.09%+
Net investment
income ............ 5.22% 5.52% 4.80%+ 4.97% 5.51%+ 4.33% 4.40% 3.72%+ 3.38%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GEORGIA FUND
-------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
-------------------- -------------- -----------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990 1989*
---- ---- ---- ---- ---- ---- ---- ---- -----
CLASS A
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .... $10.35 $10.38 $11.30 $10.57 $10.22 $ 9.83 $ 9.73 $ 9.73 $ 9.53
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.54 $ 0.57 $ 0.09 $ 0.57 $ 0.58 $ 0.61 $ 0.63 $ 0.66 $ 0.32
Net realized and
unrealized gain (loss)
on investments ....... 0.12 -- (0.92) 0.75 0.38 0.46 0.12 0.02 0.14
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........ $ 0.66 $ 0.57 $(0.83) $ 1.32 $ 0.96 $ 1.07 $ 0.75 $ 0.68 $ 0.46
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income ............... $(0.54) $(0.56) $(0.06) $(0.55) $(0.60) $(0.66) $(0.63) $(0.66) $(0.26)
From net realized gain
on investments ....... -- (0.01) -- (0.01) (0.01) (0.02) (0.02) (0.02) --
In excess of net
investment income(++) 0.00 -- (0.03) (0.03) -- -- -- -- --
In excess of net
realized gain on
investments .......... -- (0.03) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ....... $(0.54) $(0.60) $(0.09) $(0.59) $(0.61) $(0.68) $(0.65) $(0.68) $(0.26)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................ $10.47 $10.35 $10.38 $11.30 $10.57 $10.22 $ 9.83 $ 9.73 $ 9.73
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) .......... 6.48% 5.65% (7.34)%++ 12.71% 9.56% 11.29% 8.06% 7.19% 7.57%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ............. 1.17% 1.14% 1.18%+ 1.21% 1.08% 0.99% 0.74% 0.42% 0.40%+
Net investment income .. 5.11% 5.50% 5.05%+ 5.10% 5.75% 6.08% 6.46% 6.72% 6.18%+
PORTFOLIO TURNOVER ....... 65% 56% 5% 14% 27% 36% 71% 99% --
NET ASSETS AT END OF
PERIOD (000 OMITTED) ... $68,183 $74,432 $85,878 $94,407 $64,649 $47,869 $29,214 $12,628 $4,383
<FN>
- ----------
*For the period from the commencement of investment operations, June 6, 1988 to January 31, 1989.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the per share distribution in excess of net investment income for Class A shares was
$0.003.
(S)The investment adviser and/or the distributor voluntarily waived a portion of their management and distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share
and the ratios would have been:
Net investment income $ 0.53 $ 0.56 $ 0.09 $ 0.56 $ 0.57 $ 0.60 $ 0.59 $ 0.57 $ 0.29
RATIOS (TO AVERAGE NET
ASSETS):
Expenses ........... 1.27% 1.24% 1.28%+ 1.31% 1.18% 1.09% 1.11% 1.31% 1.07%+
Net investment
income ........... 5.01% 5.40% 4.95%+ 5.00% 5.65% 5.98% 6.09% 5.83% 5.51%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
GEORGIA FUND
--------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
------------------- ------------ ------------
1996 1995 1994 1994**
---- ---- ---- ------
CLASS B
--------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .. $10.36 $10.38 $11.30 $11.26
------ ------ ------ ------
Income from investment
operations# --
Net investment income . $ 0.45 $ 0.47 $ 0.07 $ 0.19
Net realized and
unrealized gain (loss)
on investments ....... 0.12 0.02 (0.91) 0.05
------ ------ ------ ------
Total from investment
operations ........ $ 0.57 $ 0.49 $(0.84) $ 0.24
------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income ............. $(0.46) $(0.47) $(0.07) $(0.18)
From net realized gain
on investments ..... -- (0.01) -- (0.01)
In excess of net
investment income(++) 0.00 -- (0.01) (0.01)
In excess of net
realized gain on
investments ........ -- (0.03) -- --
------ ------ ------ ------
Total distributions
declared to
shareholders $(0.46) $(0.51) $(0.08) $(0.20)
------ ------ ------ ------
Net asset value -- end of
period ............... $10.47 $10.36 $10.38 $11.30
====== ====== ====== ======
Total return ............ 5.52% 4.88% (7.47)%++ 5.34%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............ 2.00% 1.96% 1.99%+ 1.97%+
Net investment income . 4.27% 4.66% 4.17%+ 3.83%+
PORTFOLIO TURNOVER ...... 65% 56% 5% 14%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .. $10,205 $8,695 $6,631 $5,766
- ----------
**For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(++)For the year ended March 31, 1996, the per share distribution in excess
of net investment income for Class B shares was $0.002.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MARYLAND FUND
------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
------------------------ -------------- ------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ----
CLASS A
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ..... $10.94 $10.89 $11.81 $11.40 $11.20 $10.97 $10.79 $10.76
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income . $ 0.57 $ 0.59 $ 0.10 $ 0.62 $ 0.67 $ 0.70 $ 0.70 $ 0.69
Net realized and
unrealized gain
(loss) on investments 0.09 0.09 (0.92) 0.53 0.24 0.31 0.19 0.04
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........ $ 0.66 $ 0.68 $(0.82) $ 1.15 $ 0.91 $ 1.01 $ 0.89 $ 0.73
------ ------ ------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income(++) .......... $(0.56) $(0.59) $(0.06) $(0.61) $(0.69) $(0.76) $(0.70) $(0.69)
From net realized gain
on investments ...... -- -- -- (0.07) (0.02) (0.02) (0.01) (0.01)
In excess of net
investment income ... -- -- (0.04) (0.04) -- -- -- --
In excess of net
realized gain on
investments ......... -- (0.04) -- (0.02) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ...... $(0.56) $(0.63) $(0.10) $(0.74) $(0.71) $(0.78) $(0.71) $(0.70)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................ $11.04 $10.94 $10.89 $11.81 $11.40 $11.20 $10.97 $10.79
====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ......... 6.17% 6.51% (6.96)%++ 10.27% 8.34% 9.55% 8.51% 6.90%
RATIOS (TO AVERAGE NET ASSETS)
/SUPPLEMENTAL DATA:
Expenses##............. 1.19% 1.21% 1.23%+ 1.25% 1.14% 1.16% 1.17% 1.18%
Net investment income . 5.10% 5.46% 4.97%+ 5.42% 6.13% 6.32% 6.45% 6.33%
PORTFOLIO TURNOVER ...... 15% 31% 1% 25% 5% 9% 41% 58%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .. $139,297 $145,361 $161,290 $173,419 $145,794 $119,120 $101,742 $93,175
<FN>
- ----------
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1995, the per share distribution in excess of net investment income was $0.003.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MARYLAND FUND
------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
YEAR ENDED JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------- ------------------------ ------------ ---------------
1989 1988 1987 1996 1995 1994 1994**
---- ---- ---- ---- ---- ---- ------
CLASS A CLASS B
-------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period ...... $10.62 $11.20 $10.44 $10.93 $10.88 $11.80 $11.88
------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income ... $ 0.69 $ 0.68 $ 0.71 $ 0.48 $ 0.51 $ 0.08 $ 0.22
Net realized and
unrealized gain (loss)
on investments ........ 0.14 (0.57) 0.78 0.10 0.09 (0.91) (0.01)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations .......... $ 0.83 $ 0.11 $ 1.49 $ 0.58 $ 0.60 $(0.83) $ 0.21
------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net
investment income(++) .. $(0.69) $(0.67) $(0.73) $(0.48) $(0.51) $(0.08) $(0.21)
From net realized gain
on investments ........ -- (0.01) -- -- -- -- (0.05)
In excess of net
investment income ..... -- -- -- -- -- (0.01) (0.01)
In excess of net
realized gain
on investments ........ -- -- -- -- (0.04) -- (0.02)
From paid-in capital .... -- (0.01) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ........ $(0.69) $(0.69) $(0.73) $(0.48) $(0.55) $(0.09) $(0.29)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period ............... $10.76 $10.62 $11.20 $11.03 $10.93 $10.88 $11.80
====== ====== ====== ====== ====== ====== ======
Total return(+) ........... 8.15% 1.25% 14.86% 5.41% 5.75% (7.08)%++ 4.45%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ............. 1.14% 1.10% 1.10% 1.91% 1.93% 1.95%+ 1.81%+
Net investment income ... 6.52% 6.47% 6.60% 4.36% 4.73% 4.19%+ 4.23%+
PORTFOLIO TURNOVER ........ 34% 13% 11% 15% 31% 1% 25%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ........... $84,380 $79,906 $81,712 $13,694 $11,168 $ 6,478 $ 5,345
<FN>
- ----------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1995, the per share distribution in excess of net investment income was $0.003.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MASSACHUSETTS FUND
---------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
-------------------- ------------ ---------------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period $10.84 $10.90 $11.75 $11.41 $11.05 $10.68 $10.58 $10.65 $10.60
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income ........... $ 0.60 $ 0.64 $ 0.11 $ 0.64 $ 0.68 $ 0.73 $ 0.71 $ 0.72 $ 0.72
Net realized and
unrealized gain
(loss) on
investments ...... 0.14 (0.03) (0.85) 0.58 0.39 0.43 0.11 (0.07) 0.05
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ..... $ 0.74 $ 0.61 $(0.74) $ 1.22 $ 1.07 $ 1.16 $ 0.82 $ 0.65 $ 0.77
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income ........... $(0.60) $(0.64) $(0.07) $(0.64) $(0.71) $(0.78) $(0.72) $(0.72) $(0.72)
From net realized
gain on
investments ...... -- (0.02) -- (0.20) -- -- -- -- --
In excess of net
investment income(++) 0.00 -- (0.04) (0.04) -- -- -- -- --
In excess of net
realized gain on
investments ...... -- (0.01) -- -- -- -- -- -- --
From paid-in capital -- -- -- -- -- (0.01) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders ... $(0.60) $(0.67) $(0.11) $(0.88) $(0.71) $(0.79) $(0.72) $(0.72) $(0.72)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period ......... $10.98 $10.84 $10.90 $11.75 $11.41 $11.05 $10.68 $10.58 $10.65
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ...... 6.95% 5.89% (6.34)%++ 11.02% 10.03% 11.23% 8.12% 6.28% 7.65%
RATIOS (TO AVERAGE NET
ASSETS)/ SUPPLEMENTAL
DATA:
Expenses## ......... 1.17% 1.17% 1.19%+ 1.19% 1.08% 1.06% 1.07% 1.10% 1.07%
Net investment
income ............ 5.44% 6.01% 5.64%+ 5.71% 6.33% 6.65% 6.74% 6.75% 6.90%
PORTFOLIO TURNOVER ... 31% 31% 4% 30% 32% 51% 43% 52% 26%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $249,497 $262,551 $277,748 $300,894 $270,778 $239,311 $213,679 $215,381 $212,763
<FN>
- ----------
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the per share distribution in excess of net investment income for Class A shares was
$0.002.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MASSACHUSETTS
---------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
-------------------------- -------------------------- ----------------- ---------------
1988 1987 1996 1995 1994 1994**
---- ---- ---- ---- ---- ------
CLASS A CLASS B
-------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period ... $11.25 $10.59 $10.84 $10.90 $11.75 $11.91
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income .. $ 0.71 $ 0.74 $ 0.52 $ 0.55 $ 0.09 $ 0.23
Net realized and
unrealized gain (loss)
on investments ....... (0.65) 0.68 0.15 (0.02) (0.85) 0.04
------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.06 $ 1.42 $ 0.67 $ 0.53 $(0.76) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income ............... $(0.71) $(0.75) $(0.52) $(0.56) $(0.09) $(0.22)
From net realized gain on
investments .......... -- (0.01) -- (0.02) -- (0.20)
In excess of net
investment income(++) .. -- -- 0.00 -- -- (0.01)
In excess of net realized
gain on investments ... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.71) $(0.76) $(0.52) $(0.59) $(0.09) $(0.43)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period .................. $10.60 $11.25 $10.99 $10.84 $10.90 $11.75
====== ====== ====== ====== ====== ======
Total return(+) ........... 0.80% 14.10% 6.27% 5.13% (6.46)%++ 5.89%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses## .............. 1.04% 0.87% 1.90% 1.89% 1.91%+ 1.81%+
Net investment income ... 6.79% 6.83% 4.71% 5.27% 4.89%+ 4.62%+
PORTFOLIO TURNOVER ........ 27% 7% 31% 31% 4% 30%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ........... $224,219 $242,119 $11,316 $8,676 $4,993 $4,191
<FN>
- ----------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the per share distribution in excess of net investment income for Class B shares was
$0.0013.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MISSISSIPPI FUND
-----------------------------------------------------------------------------------------------------------
TWO MONTHS TWO MONTHS YEAR ENDED
YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED JANUARY
MARCH 31, MARCH 31, JANUARY 31, MARCH 31, MARCH 31, 31,
-------------------- ---------- ---------------------- ----------------- --------- ----------
1996 1995 1994 1994 1993* 1996 1995 1994 1994**
---- ---- ---- ---- ----- ---- ---- ---- ------
CLASS A CLASS B
----------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period $ 9.15 $ 9.19 $10.00 $ 9.38 $ 9.53 $ 9.16 $ 9.19 $ 9.99 $ 9.94
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income(S)............ $ 0.52 $ 0.54 $ 0.09 $ 0.55 $ 0.24 $ 0.44 $ 0.45 $ 0.07 $ 0.18
Net realized and
unrealized gain
(loss) on
investments.......... 0.20 (0.01) (0.81) 0.62 (0.15) 0.20 -- (0.79) 0.05
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations......... $ 0.72 $ 0.53 $(0.72) $ 1.17 $ 0.09 $ 0.64 $ 0.45 $(0.72) $ 0.23
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income(++).......... $(0.52) $(0.54) $(0.09) $(0.55) $(0.24) $(0.44) $(0.45) $(0.08) $(0.18)
From net realized
gain on
investments(+++).... -- 0.00 -- -- -- -- 0.00 -- --
In excess of net
realized gain on
investments......... -- (0.03) -- -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders...... $(0.52) $(0.57) $(0.09) $(0.55) $(0.24) $(0.44) $(0.48) $(0.08) $(0.18)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value --
end of period......... $ 9.35 $ 9.15 $ 9.19 $10.00 $ 9.38 $ 9.36 $ 9.16 $ 9.19 $ 9.99
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+)......... 7.99% 6.08% (7.20)%++ 12.80% 5.00%++ 7.11% 5.14% (7.27)%++ 2.33%++
RATIOS (TO AVERAGE
NET ASSETS)/
SUPPLEMENTAL
DATA(S):
Expenses## ........... 0.45% 0.22% 0.10%+ 0.03% 0.00%+ 1.28% 1.23% 1.10%+ 1.06%+
Net investment
income............... 5.51% 5.99% 5.69%+ 5.68% 5.59%+ 4.67% 4.97% 4.67%+ 4.29%+
PORTFOLIO TURNOVER...... 31% 47% 2% 28% 14% 31% 47% 2% 28%
NET ASSETS AT END OF
PERIOD
(000 OMITTED)........ $74,435 $79,033 $79,541 $84,177 $41,212 $11,475 $9,429 $6,526 $6,268
<FN>
- ----------
*For the period from the commencement of investment operations, August 6, 1992 to January 31, 1993.
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0013 and $0.0011
for Class A and Class B shares, respectively. For the year ended March 31, 1995, the per share distributions in excess of
net investment income were $0.0035 and $0.0029 for Class A and Class B shares, respectively. For the two months ended March
31, 1994, the per share distribution in excess of net investment income was $0.002 for Class B shares.
(+++)For the year ended March 31, 1995, the per share distributions from net realized gain on investments were $0.0016 for Class
A and Class B shares.
(S)The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of average daily net
assets for Class A and Class B shares, respectively. To the extent actual expenses were over/under these limitations, the
net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.48 $ 0.08 $ 0.45 $ 0.19 $ 0.40 $ 0.38 $ 0.06 $ 0.14
RATIOS (TO AVERAGE
NET ASSETS):
Expenses........... 0.88% 0.93% 0.88%+ 1.01% 1.17%+ 1.71% 2.01% 1.95%+ 2.12%+
Net investment
income............ 5.08% 5.28% 4.91%+ 4.69% 4.42%+ 4.24% 4.19% 3.82%+ 3.23%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NEW YORK FUND
------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED
MARCH 31, MARCH 31, YEAR ENDED JANUARY 31,
---------------------- ------------- ---------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990 1989*
------ ------ ------ ------ ------ ------ ------ ------ ------
CLASS A
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of period .... $10.49 $10.50 $11.34 $10.78 $10.25 $ 9.90 $ 9.74 $ 9.79 $ 9.53
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income(S) ............. $ 0.55 $ 0.56 $ 0.09 $ 0.59 $ 0.63 $ 0.65 $ 0.65 $ 0.68 $ 0.29
Net realized and
unrealized gain (loss)
on investments ....... 0.17 0.05 (0.84) 0.74 0.58 0.44 0.16 0.01 0.21
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.72 $ 0.61 $(0.75) $ 1.33 $ 1.21 $ 1.09 $ 0.81 $ 0.69 $ 0.50
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income ............... $(0.55) $(0.56) $(0.06) $(0.57) $(0.65) $(0.69) $(0.65) $(0.67) $(0.24)
From net realized gain
on investments ....... -- -- -- (0.17) (0.03) (0.05) -- (0.06) --
In excess of net
investment income(++) 0.00 (0.01) (0.03) (0.03) -- -- -- -- --
In excess of net
realized gain on
investments .......... -- (0.05) -- -- -- -- -- -- --
From paid-in capital ... -- -- -- -- -- -- -- (0.01) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ....... $(0.55) $(0.62) $(0.09) $(0.77) $(0.68) $(0.74) $(0.65) $(0.74) $(0.24)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................ $10.66 $10.49 $10.50 $11.34 $10.78 $10.25 $ 9.90 $ 9.74 $ 9.79
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) .......... 6.98% 6.03% (6.58)%++ 12.69% 12.23% 11.42% 8.74% 7.33% 8.16%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ............. 1.10% 1.07% 1.03%+ 0.93% 0.53% 0.65% 0.54% 0.40% 0.40%+
Net investment income .. 5.09% 5.43% 5.09%+ 5.21% 6.16% 6.44% 6.73% 6.88% 5.93%+
PORTFOLIO TURNOVER ....... 102% 147% 15% 51% 61% 80% 188% 236% 32%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ... $134,449 $146,597 $162,621 $184,523 $135,749 $79,524 $37,385 $20,156 $6,412
<FN>
- ----------
*For the period from the commencement of investment operations, June 6, 1988 to January 31, 1989.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++For the year ended March 31, 1996, the per share distribution in excess of net investment income for Class A shares was
$0.0058.
(S)The investment adviser and/or the distributor voluntarily waived a portion of their management and distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share
and the ratios would have been:
Net investment
income ........... $ 0.54 $ 0.55 $ 0.07 $ 0.56 $ 0.57 $ 0.60 $ 0.61 $ 0.59 $ 0.26
------ ------ ------ ------ ------ ------ ------ ------ ------
RATIOS (TO AVERAGE NET ASSETS):
Expenses ......... 1.20% 1.18% 1.23%+ 1.23% 1.13% 1.16% 0.95% 1.32% 1.09%+
Net investment
income ......... 4.99% 5.31% 4.88%+ 4.90% 5.56% 5.93% 6.33% 5.96% 5.24%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
NEW YORK FUND
-------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
------------------- ------------ -------------
1996 1995 1994 1994**
---- ---- ---- ------
CLASS B
-------------------------------------------------
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of period ..... $10.49 $10.50 $11.34 $11.46
------ ------ ------ ------
Income from investment
operations# --
Net investment
income(S) ............ $ 0.47 $ 0.47 $ 0.07 $ 0.18
Net realized and
unrealized gain (loss)
on investments ...... 0.17 0.05 (0.83) 0.04
------ ------ ------ ------
Total from investment
operations ......... $ 0.64 $ 0.52 $(0.76) $ 0.22
------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income .............. $(0.47) $(0.47) $(0.07) $(0.18)
From net realized gain
on investments ...... -- -- -- (0.15)
In excess of net
investment income(++) 0.00 (0.01) (0.01) (0.01)
In excess of net
realized gain on
investments ......... -- (0.05) -- --
------ ------ ------ ------
Total distributions
declared to
shareholders ...... $(0.47) $(0.53) $(0.08) $(0.34)
------ ------ ------ ------
Net asset value -- end of
period ................ $10.66 $10.49 $10.50 $11.34
====== ====== ====== ======
Total return ............ 6.10% 5.17% (6.71)%++ 5.20%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ............ 1.92% 1.89% 1.87%+ 1.79%+
Net investment income . 4.27% 4.58% 4.21%+ 3.90%+
PORTFOLIO TURNOVER ...... 102% 147% 15% 51%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .. $28,068 $11,885 $6,265 $4,828
- ----------
**For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
(++)For the year ended March 31, 1996, the per share distribution in excess
of net investment income for Class B shares was $0.0048.
(S)The investment adviser and/or the distributor voluntarily waived a
portion of their management and distribution fee, respectively, for the
periods indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment
income ........ -- $ 0.47 $ 0.07 $ 0.17
RATIOS (TO AVERAGE
NET ASSETS):
Expenses ....... -- 1.91% 1.97%+ 2.00%+
Net investment
income ........ -- 4.57% 4.11%+ 3.69%+
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NORTH CAROLINA FUND
---------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
-------------------- ------------ ---------------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period $11.42 $11.48 $12.37 $11.80 $11.45 $11.30 $11.18 $11.15 $11.13
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income ........... $ 0.59 $ 0.61 $ 0.10 $ 0.64 $ 0.65 $ 0.70 $ 0.72 $ 0.73 $ 0.74
Net realized and
unrealized gain
(loss) on
investments ...... 0.15 0.03 (0.89) 0.58 0.37 0.26 0.17 0.03 0.02
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ..... $ 0.74 $ 0.64 $(0.79) $ 1.22 $ 1.02 $ 0.96 $ 0.89 $ 0.76 $ 0.76
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income(+++) ...... $(0.59) $(0.60) $(0.07) $(0.61) $(0.67) $(0.76) $(0.72) $(0.73) $(0.74)
From net realized
gain on
investments ...... -- (0.06) -- (0.01) -- (0.01) (0.05) -- --
In excess of net
investment income -- -- (0.03) (0.03) -- -- -- -- --
In excess of net
realized gain on
investments ...... -- (0.04) -- -- -- -- -- -- --
From paid-in capital(++) -- -- -- -- -- (0.04) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders ... $(0.59) $(0.70) $(0.10) $(0.65) $(0.67) $(0.81) $(0.77) $(0.73) $(0.74)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period ......... $11.57 $11.42 $11.48 $12.37 $11.80 $11.45 $11.30 $11.18 $11.15
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ...... 6.56% 5.86% (6.39)%++ 10.59% 9.23% 8.82% 8.34% 6.97% 7.12%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Expenses## ......... 1.17% 1.16% 1.16%+ 1.19% 1.07% 1.09% 1.09% 1.12% 1.11%
Net investment
income ........... 5.04% 5.38% 4.96%+ 5.21% 5.80% 6.17% 6.47% 6.48% 6.70%
PORTFOLIO TURNOVER ... 30% 58% 2% 12% 2% 39% 44% 61% 25%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $409,347 $429,131 $460,321 $495,158 $398,352 $312,466 $226,806 $175,101 $129,287
<FN>
- ----------
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended January 31, 1991, the per share distribution from paid-in capital was $0.0005.
(+++)For the year ended March 31, 1996, the per share distribution in excess of net investment income was $0.002.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
NORTH CAROLINA
---------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
-------------------------- -------------------------- --------------- ---------------
1988 1987 1996 1995 1994 1994**
---- ---- ---- ---- ---- ------
CLASS A CLASS B
--------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period ..... $11.82 $11.09 $11.42 $11.47 $12.36 $12.36
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income .... $ 0.73 $ 0.75 $ 0.50 $ 0.52 $ 0.08 $ 0.22
Net realized and
unrealized gain (loss)
on investments ......... (0.69) 0.90 0.14 0.05 (0.89) 0.01
------ ------ ------ ------ ------ ------
Total from investment
operations ............ $ 0.04 $ 1.65 $ 0.64 $ 0.57 $(0.81) $ 0.23
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income(++) ............. $(0.73) $(0.76) $(0.50) $ (0.52) $(0.08) $(0.21)
From net realized gain
on investments ......... -- (0.16) -- (0.06) -- (0.01)
In excess of net
investment income ...... -- -- -- -- -- (0.01)
In excess of net
realized gain on
investments ............. -- -- -- (0.04) -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.73) $(0.92) $(0.50) $(0.62) $(0.08) $(0.23)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................. $11.13 $11.82 $11.56 $11.42 $11.47 $12.36
====== ====== ====== ====== ====== ======
Total return(+) ............ 0.65% 15.76% 5.70% 5.20% (6.51)%++ 4.58%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ............... 1.08% 1.07% 1.90% 1.88% 1.88%+ 1.84%+
Net investment income .... 6.71% 6.63% 4.30% 4.64% 4.18%+ 4.03%+
PORTFOLIO TURNOVER ......... 10% 10% 30% 58% 2% 12%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ..... $110,462 $105,668 $33,847 $26,260 $15,866 $13,379
<FN>
- ----------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996 and the two months ended March 31, 1994, the per share distribution in excess of net
investment income for Class B shares was $0.002 and $0.004, respectively.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
NORTH CAROLINA
---------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
--------------------- -------------- ------------
1996 1995 1994 1994***
---- ---- ---- -------
CLASS C
---------------------------------------------------
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period ... $11.41 $11.47 $12.36 $12.24
------ ------ ------ ------
Income from investment
operations# --
Net investment income . $ 0.51 $ 0.53 $ 0.10 $ 0.02
Net realized and
unrealized gain (loss)
on investments ....... 0.15 0.04 (0.90) 0.12
------ ------ ------ ------
Total from investment
operations ........ $ 0.66 $ 0.57 $(0.80) $ 0.14
------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income(++) ........... $(0.51) $(0.53) $(0.09) $(0.02)
From net realized gain
on investments ...... -- (0.06) -- --
In excess of net
realized gain on
investments ......... -- (0.04) -- --
------ ------ ------ ------
Total distributions
declared to
shareholders ...... $(0.51) $(0.63) $(0.09) $(0.02)
------ ------ ------ ------
Net asset value -- end of
period ................ $11.56 $11.41 $11.47 $12.36
====== ====== ====== ======
Total return ............ 5.87% 5.18% (6.50)%++ 16.50%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............ 1.83% 1.81% 1.82%+ 1.44%+
Net investment income . 4.38% 4.71% 4.25%+ 2.33%+
PORTFOLIO TURNOVER ...... 30% 58% 2% 12%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .. $9,352 $8,149 $6,661 $4,584
- ----------
***For the period from the commencement of offering of Class C shares,
January 3, 1994 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(++)For the year ended March 31, 1996, the two months ended March 31, 1994
and the year ended January 31, 1994, the per share distribution in
excess of net investment income was $0.002, $0.002 and $0.003,
respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
--------------------------------------------------------------------------------------------------------
TWO MONTHS TWO MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
--------------------- ---------- ------------- -------------------- ---------- -------------
1996 1995 1994 1994* 1996 1995 1994 1994**
---- ---- ---- ----- ---- ---- ---- ------
CLASS A CLASS B
--------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period . $ 9.29 $ 9.15 $10.14 $ 9.53 $ 9.29 $ 9.15 $10.15 $10.06
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income(S) ........... $ 0.54 $ 0.54 $ 0.09 $ 0.50 $ 0.50 $ 0.45 $ 0.06 $ 0.17
Net realized and
unrealized gain (loss)
on investments ..... 0.09 0.18 (0.99) 0.62 0.07 0.18 (0.99) 0.10
------ ------ ------ ------ ------ ------ ------ ------
Total from
investment operations $ 0.63 $ 0.72 $(0.90) $ 1.12 $ 0.57 $ 0.63 $(0.93) $ 0.27
------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income(++) .......... $(0.55) $(0.54) $(0.09) $(0.50) $(0.47) $(0.45) $(0.07) $(0.17)
From net realized gain
on investments ...... -- (0.01) -- (0.01) -- (0.01) -- (0.01)
In excess of net
realized gain on
investments ......... -- (0.03) -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ...... $(0.55) $(0.58) $(0.09) $(0.51) $(0.47) $(0.49) $(0.07) $(0.18)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period ............ $ 9.37 $ 9.29 $ 9.15 $10.14 $ 9.39 $ 9.29 $ 9.15 $10.15
====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ........ 6.85% 8.14% (8.91)%++ 12.12% 6.23% 7.07% (9.16)%++ 6.76%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses ##........... 0.10% 0.01% 0.00%+ 0.00%+ 0.88% 1.01% 1.00%+ 1.00%+
Net investment income 5.76% 5.97% 5.43%+ 5.30%+ 4.98% 4.96% 4.37%+ 4.22%+
PORTFOLIO TURNOVER ..... 40% 49% 1% 10% 40% 49% 1% 10%
NET ASSETS AT END OF
PERIOD (000 OMITTED) . $18,030 $16,411 $13,961 $13,987 $24,170 $7,699 $4,304 $3,401
<FN>
- ----------
*For the period from the commencement of investment operations, February 1, 1993 to January 31, 1994.
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the two months ended March 31, 1994, Class B net investment income includes distributions in excess of net investment
income of less than $0.001 per share.
(S)The Adviser voluntarily agreed to maintain expenses of the Fund at not more than 1.30% and 1.95% of average daily net
assets for Class A and Class B shares, respectively. To the extent actual expenses were over/under these limitations, the
net investment income per share and the ratios would have been:
Net investment
income ......... $ 0.45 $ 0.43 $ 0.06 $ 0.32 $ 0.41 $ 0.34 $ 0.04 $ 0.05
RATIOS (TO
AVERAGE NET
ASSETS):
Expenses ...... 1.00% 1.18% 1.84%+ 1.94%+ 1.85% 2.26% 2.91%+ 2.50%+
Net investment
income ....... 4.86% 4.80% 3.60%+ 3.36%+ 4.01% 3.72% 2.47%+ 1.29%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SOUTH CAROLINA FUND
---------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
-------------------- ------------ ---------------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period $11.86 $11.79 $12.74 $12.02 $11.74 $11.45 $11.30 $11.24 $11.14
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income ........... $ 0.62 $ 0.63 $ 0.08 $ 0.63 $ 0.67 $ 0.70 $ 0.71 $ 0.72 $ 0.76
Net realized and
unrealized gain
(loss) on
investments ...... 0.11 0.15 (0.92) 0.74 0.34 0.40 0.21 0.06 0.11
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ...... $ 0.73 $ 0.78 $(0.84) $ 1.37 $ 1.01 $ 1.10 $ 0.92 $ 0.78 $ 0.87
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income(++) ....... $(0.62) $(0.62) $(0.08) $(0.61) $(0.69) $(0.76) $(0.71) $(0.72) $(0.77)
From net realized
gain on
investments ...... -- (0.06) -- (0.01) (0.04) (0.05) (0.06) -- --
In excess of net
investment income -- -- (0.03) (0.03) -- -- -- -- --
In excess of net
realized gain on
investments ...... -- (0.03) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders ... $(0.62) $(0.71) $(0.11) $(0.65) $(0.73) $(0.81) $(0.77) $(0.72) $(0.77)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period ......... $11.97 $11.86 $11.79 $12.74 $12.02 $11.74 $11.45 $11.30 $11.24
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ...... 6.20% 6.93% (6.65)%++ 11.69% 8.89% 9.95% 8.46% 7.13% 8.18%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Expenses## ......... 1.20% 1.19% 1.23%+ 1.22% 1.12% 1.15% 1.18% 1.21% 0.97%
Net investment
income ........... 5.10% 5.37% 5.09%+ 5.06% 5.74% 6.07% 6.30% 6.35% 6.90%
PORTFOLIO TURNOVER ... 18% 30% 4% 10% 11% 22% 47% 54% 27%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $166,801 $171,045 $173,316 $187,307 $144,539 $101,434 $75,922 $57,675 $45,391
<FN>
- ----------
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the per share distribution in excess of net investment income was $0.0006 for Class A
shares.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SOUTH CAROLINA FUND
---------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
-------------------------- -------------------------- --------------- ---------------
1988 1987 1996 1995 1994 1994**
---- ---- ---- ---- ---- ------
CLASS A CLASS B
---------------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period .... $11.54 $10.89 $11.86 $11.78 $12.73 $12.67
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income .. $ 0.77 $ 0.77 $ 0.52 $ 0.54 $ 0.08 $ 0.21
Net realized and
unrealized gain (loss)
on investments ....... (0.36) 0.69 0.12 0.17 (0.94) 0.06
------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.41 $ 1.46 $ 0.64 $ 0.71 $(0.86) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income(++) ........... $(0.77) $(0.78) $(0.53) $ (0.54) $(0.08) $(0.20)
From net realized gain
on investments ....... -- (0.03) -- (0.06) -- --
In excess of net
investment income .... -- -- -- -- (0.01) (0.01)
In excess of net
realized gain on
investments .......... -- -- -- (0.03) -- --
From paid-in capital ... (0.04) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.81) $(0.81) $(0.53) $(0.63) $(0.09) $(0.21)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................. $11.14 $11.54 $11.97 $11.86 $11.78 $12.73
====== ====== ====== ====== ====== ======
Total return(+) .......... 3.92% 14.05% 5.43% 6.26% (6.77)%++ 5.47%+
RATIOS (TO AVERAGE NET ASSETS)
/SUPPLEMENTAL DATA:
Expenses## ............. 0.81% 0.99% 1.92% 1.90% 1.96%+ 1.90%+
Net investment income .. 7.07% 7.00% 4.35% 4.63% 4.29%+ 3.86%+
PORTFOLIO TURNOVER ....... 12% 13% 18% 30% 4% 10%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ... $34,025 $27,978 $18,420 $12,964 $10,085 $8,217
<FN>
- ----------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996 and March 31, 1995, the per share distribution in excess of net investment income for
Class B shares was $0.0005 and $0.00436, respectively.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TENNESSEE FUND
----------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
------------------ ----------- -------------------------------------
1996 1995 1994 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
CLASS A
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of period .............. $10.27 $10.26 $10.94 $10.37 $10.10 $ 9.90 $ 9.80
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ............................ $ 0.54 $ 0.56 $ 0.09 $ 0.57 $ 0.57 $ 0.61 $ 0.62
------ ------ ------ ------ ------ ------ ------
Net realized and unrealized gain (loss) on investments 0.13 0.02 (0.68) 0.57 0.31 0.30 0.13
------ ------ ------ ------ ------ ------ ------
Total from investment operations .................... $ 0.67 $ 0.58 $(0.59) $ 1.14 $ 0.88 $ 0.91 $ 0.75
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income(++++) .................. $(0.54) $(0.56) $(0.07) $(0.54) $(0.57) $(0.66) $(0.63)
From net realized gain on investments(++) ......... -- -- -- -- (0.01) (0.05) (0.02)
In excess of net investment income ................ -- -- (0.02) (0.03) (0.03) -- --
In excess of net realized gain on investments ..... -- (0.01) -- -- -- -- --
From paid-in capital(+++) ......................... -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions declared to shareholders .......... $(0.54) $(0.57) $(0.09) $(0.57) $(0.61) $(0.71) $(0.65)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period ...................... $10.40 $10.27 $10.26 $10.94 $10.37 $10.10 $ 9.90
====== ====== ====== ====== ====== ====== ======
Total return(+) ....................................... 6.66% 5.86% (5.39)%++ 11.20% 9.03% 9.50% 7.96%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .......................................... 1.21% 1.22% 1.21%+ 1.29% 1.14% 1.15% 1.03%
Net investment income ............................... 5.18% 5.52% 5.31%+ 5.25% 5.89% 6.11% 6.37%
PORTFOLIO TURNOVER .................................... 20% 27% 4% 12% 9% 42% 58%
NET ASSETS AT END OF PERIOD (000 OMITTED) ........... $109,811 $117,572 $117,117 $123,050 $99,443 $87,898 $72,108
<FN>
- ----------
*For the period from the commencement of investment operations, August 12, 1988 to January 31, 1989.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1995, the per share distribution from net realized gain on investments was $0.0014.
(+++)For the year ended January 31, 1991, the per share distribution from paid-in capital was $0.0013.
(++++)For the year ended March 31, 1996, the per share distribution in excess of net investment income was $0.0024.
(S)The investment adviser did not impose all or a portion of its advisory, distribution or expense reimbursement fees for the
the periods indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios
would have been:
Net investment income ....................... -- -- -- -- $0.61 -- --
RATIOS (TO AVERAGE NET ASSETS) :
Expenses .............................. -- -- -- -- 1.17% -- --
Net investment income ................. -- -- -- -- 6.23% -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TENNESSEE FUND
----------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 31, MARCH 31, MARCH 31, JANUARY 31
------------------------- -------------------------- ------------ --------------
1990 1989* 1996 1995 1994 1994**
---- ----- ---- ---- ---- ------
CLASS A CLASS B
------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ........... $ 9.68 $ 9.53 $10.26 $10.26 $10.95 $10.87
Income from investment operations# --
Net investment income(S) ....... $ 0.67 $ 0.22 $ 0.46 $ 0.48 $ 0.08 $ 0.19
Net realized and unrealized gain
(loss) on investments ......... 0.11 0.10 0.14 0.01 (0.69) 0.08
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.78 $ 0.32 $ 0.60 $ 0.49 $(0.61) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income(+++) $(0.66) $(0.17) $(0.47) $(0.48) $(0.08) $(0.19)
From net realized gain on
investments(++) ............. -- -- -- -- -- --
In excess of net realized gain
on investments .............. -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders ... $(0.66) $(0.17) $(0.47) $(0.49) $(0.08) $(0.19)
------ ------ ------ ------ ------ ------
Net asset value -- end of period $ 9.80 $ 9.68 $10.39 $10.26 $10.26 $10.95
====== ====== ====== ====== ====== ======
Total return .................... 8.30% 3.43%++ 5.89% 5.00% (5.59)%++ 2.48%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## .................... 0.53% 0.40%+ 1.93% 1.94% 1.93%+ 1.93%+
Net investment income ......... 6.70% 5.98%+ 4.43% 4.80% 4.49%+ 4.20%+
PORTFOLIO TURNOVER .............. 78% 5% 20% 27% 4% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................. $56,048 $15,832 $12,935 $10,006 $5,294 $3,818
<FN>
- ----------
*For the period from the commencement of investment operations, August 12, 1988 to January 31, 1989.
**For the period from the commencement of offering of Class B shares, September 7, 1993, to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(++)For the year ended March 31, 1995, the per share distribution from net realized gain on investments was $0.0014.
(+++)For the year ended March 31, 1996, the per share distribution in excess of net investment income was $0.0021.
(S)The investment adviser did not impose all or a portion of its advisory, distribution or expense reimbursement fees for the
the periods indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios
would have been:
Net investment income ........ $ 0.60 $ 0.20 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses ................ 1.24% 0.95%+ -- -- -- --
Net investment income ... 5.99% 5.43%+ -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
VIRGINIA FUND
----------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED
MARCH 31, MARCH 31, YEAR ENDED JANUARY 31,
-------------------- ---------- --------------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of period . $11.09 $11.15 $12.07 $11.72 $11.44 $11.16 $10.97 $10.91 $10.75
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment
operations# --
Net investment
income .......... $ 0.59 $ 0.56 $ 0.10 $ 0.65 $ 0.68 $ 0.71 $ 0.73 $ 0.73 $ 0.74
Net realized and
unrealized gain
(loss) on
investments ...... 0.13 0.04 (0.92) 0.56 0.30 0.34 0.19 0.06 0.16
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ..... $ 0.72 $ 0.60 $(0.82) $ 1.21 $ 0.98 $ 1.05 $ 0.92 $ 0.79 $ 0.90
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income(++) ...... $(0.60) $(0.61) $(0.06) $(0.62) $(0.70) $(0.77) $(0.73) $(0.73) $(0.74)
From net realized
gain on
investments(+++) -- (0.04) -- (0.20) -- -- -- -- --
In excess of net
investment income -- -- (0.04) (0.04) -- -- -- -- --
In excess of net
realized gain on
investments ..... -- (0.01) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders .. $(0.60) $(0.66) $(0.10) $(0.86) $(0.70) $(0.77) $(0.73) $(0.73) $(0.74)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value --
end of period ..... $11.21 $11.09 $11.15 $12.07 $11.72 $11.44 $11.16 $10.97 $10.91
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ..... 6.52% 5.67% (6.80)%++ 10.67% 8.88% 9.76% 8.74% 7.46% 8.76%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Expenses## ........ 1.18% 1.16% 1.17%+ 1.18% 1.08% 1.08% 1.11% 1.12% 1.09%
Net investment income 5.20% 4.91% 5.33%+ 5.37% 6.02% 6.32% 6.64% 6.67% 6.91%
PORTFOLIO TURNOVER .. 42% 27% 5% 22% 20% 13% 38% 41% 38%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $418,408 $430,688 $443,580 $479,333 $399,696 $328,664 $275,202 $240,553 $270,680
<FN>
- ----------
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996 and March 31, 1995, the per share distribution in excess of net investment income was
$0.005 and $0.003, respectively.
(+++)For the year ended January 31, 1993, the per share distribution from net realized gain on investments was $0.00348.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
VIRGINIA FUND
-----------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
-------------------------- ------------------------- ------------ ---------------
1988 1987 1996 1995 1994 1994**
---- ---- ---- ---- ---- ------
CLASS A CLASS B
-------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR
A SHARE
OUTSTANDING
THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of
period .......... $11.38 $10.78 $11.08 $11.14 $12.06 $12.14
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income ........ $ 0.72 $ 0.74 $ 0.51 $ 0.53 $ 0.09 $ 0.22
Net realized and
unrealized gain
(loss) on
investments ... (0.57) 0.61 0.13 (0.01) (0.92) 0.01
------ ------ ------ ------ ------ ------
Total from
investment
operations ... $ 0.15 $ 1.35 $ 0.64 $ 0.52 $(0.83) $ 0.23
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income(++) ...... $(0.71) $(0.75) $(0.51) $(0.53) $(0.09) $(0.21)
From net realized
gain on investments (0.05) -- -- (0.04) -- (0.09)
In excess of net
investment income -- -- -- -- -- (0.01)
In excess of net
realized gain on
investments ..... -- -- -- (0.01) -- --
From paid-in
capital(+++) ... (0.02) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ... $(0.78) $(0.75) $(0.51) $(0.58) $(0.09) $(0.31)
------ ------ ------ ------ ------ ------
Net asset value --
end of period ..... $10.75 $11.38 $11.21 $11.08 $11.14 $12.06
====== ====== ====== ====== ====== ======
Total return(+) ..... 1.61% 13.12% 5.85% 4.91% (6.92)%++ 4.93%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Expenses## ....... 1.04% 1.02% 1.90% 1.88% 1.88%+ 1.82%+
Net investment
income .......... 6.75% 6.73% 4.46% 4.84% 4.52%+ 4.25%+
PORTFOLIO TURNOVER 11% 20% 42% 27% 5% 22%
NET ASSETS AT END
OF PERIOD (000
OMITTED) ......... $192,104 $181,937 $28,420 $22,007 $13,337 $10,877
<FN>
- ----------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the year ended March 31, 1995 and the two months ended March 31, 1994, the per share
distribution in excess of net investment income was $0.002, $0.005 and $0.002, respectively.
(+++)For the year ended January 31, 1987 the per share distribution from paid-in capital was $0.0005.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
VIRGINIA FUND
---------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
--------------------- ---------- -------------
1996 1995 1994 1994***
---- ---- ---- -------
CLASS C
----------------------------------------------------
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of period .. $11.07 $11.14 $12.06 $11.94
------ ------ ------ ------
Income from investment
operations# --
Net investment income $ 0.51 $ 0.56 $ 0.08 $ 0.02
Net realized and
unrealized gain
(loss) on
investments ........ 0.15 (0.04) (0.91) 0.12
------ ------ ------ ------
Total from
investment operations $ 0.66 $ 0.52 $(0.83) $ 0.14
------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income(++) ......... $(0.52) $(0.54) $(0.09) $(0.02)
From net realized gain
on investments ..... -- (0.04) -- --
In excess of net
realized gain on
investments ........ -- (0.01) -- --
------ ------ ------ ------
Total distributions
declared to
shareholders ..... $(0.52) $(0.59) $(0.09) $(0.02)
------ ------ ------ ------
Net asset value -- end
of period ........... $11.21 $11.07 $11.14 $12.06
====== ====== ====== ======
Total return ........... 6.02% 4.85% (6.91)%++ 17.05%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses## ........... 1.83% 1.80% 1.82%+ 1.18%+
Net investment income 4.53% 4.90% 4.48%+ 1.79%+
PORTFOLIO TURNOVER ..... 42% 27% 5% 22%
NET ASSETS AT END OF
PERIOD (000 OMITTED) . $3,366 $2,300 $1,760 $833
- ----------
***For the period from the commencement of offering of Class C shares,
January 3, 1994 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
(++)For the year ended March 31, 1996, March 31, 1995 and January 31, 1994,
the per share distribution in excess of net investment income was
$0.005, $0.002 and $0.002, respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
WEST VIRGINIA FUND
--------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JANUARY 31,
------------------ ------------ ---------------------------------------------------------------------
1996 1995 1994 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period $11.21 $11.19 $12.06 $11.50 $11.20 $10.93 $10.72 $10.68 $10.51
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income $ 0.61 $ 0.62 $ 0.01 $ 0.64 $ 0.66 $ 0.70 $ 0.71 $ 0.71 $ 0.77
Net realized and
unrealized gain
(loss) on
investments ...... 0.12 0.03 (0.78) 0.69 0.34 0.34 0.21 0.04 0.18
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ..... $ 0.73 $ 0.65 $(0.77) $ 1.33 $ 1.00 $ 1.04 $ 0.92 $ 0.75 $ 0.95
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income(++) ....... $(0.61) $(0.62) $(0.06) $(0.61) $(0.69) $(0.76) $(0.71) $(0.71) $(0.78)
From net realized
gain on
investments ...... -- -- -- (0.12) (0.01) (0.01) -- -- --
In excess of net
investment income -- -- (0.04) (0.04) -- -- -- -- --
In excess of net
realized gain on
investments ...... -- (0.01) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders ... $(0.61) $(0.63) $(0.10) $(0.77) $(0.70) $(0.77) $(0.71) $(0.71) $(0.78)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period .......... $11.33 $11.21 $11.19 $12.06 $11.50 $11.20 $10.93 $10.72 $10.68
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ...... 6.58% 6.07% (6.37)%++ 11.80% 9.12% 9.84% 8.91% 7.26% 9.43%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Expenses## ......... 1.22% 1.19% 1.30%+ 1.24% 1.15% 1.17% 1.21% 1.22% 0.86%
Net investment
income ............ 5.30% 5.62% 5.36%++ 5.30% 5.97% 6.33% 6.59% 6.63% 7.01%
PORTFOLIO TURNOVER ... 11% 23% 2% 26% 19% 14% 37% 34% 9%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $134,514 $127,616 $130,726 $141,190 $115,289 $80,440 $61,984 $52,398 $43,026
<FN>
- ----------
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the year ended March 31, 1996, the per share distribution in excess of net investment income for Class A shares was
$0.002.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
WEST VIRGINIA FUND
---------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 31, MARCH 31, MARCH 31, JANUARY 31,
-------------------------- ------------------------ -------------- ------------
1988 1987 1996 1995 1994 1994**
---- ---- ---- ---- ---- ------
CLASS A CLASS B
-------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period ...... $11.30 $10.77 $11.21 $11.19 $12.06 $12.13
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ..... $ 0.77 $ 0.81 $ 0.52 $ 0.53 $ 0.01 $ 0.22
Net realized and unrealized
gain (loss) on investments (0.72) 0.56 0.12 0.04 (0.87) 0.05
------ ------ ------ ------ ------ ------
Total from investment
operations ............ $ 0.05 $ 1.37 $ 0.64 $ 0.57 $(0.86) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income(++) .............. $(0.76) $(0.81) $(0.52) $(0.54) $(0.01) $(0.21)
From net realized gain
on investments .......... (0.02) (0.03) -- -- -- (0.12)
In excess of net
investment income ....... -- -- -- -- -- (0.01)
In excess of net
realized gain on
investments ............. -- -- -- (0.01) -- --
From paid-in capital(+++) . (0.06) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.84) $(0.84) $(0.52) $(0.55) $(0.01) $(0.34)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................... $10.51 $11.30 $11.33 $11.21 $11.19 $12.06
====== ====== ====== ====== ====== ======
Total return(+) ............. 0.76% 13.42% 5.81% 5.30% (6.48)%++ 5.59%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ................ 0.79% 0.87% 1.94% 1.91% 2.02%+ 1.89%+
Net investment income ..... 7.32% 7.42% 4.56% 4.87% 4.56%+ 4.14%+
PORTFOLIO TURNOVER .......... 11% 9% 11% 23% 2% 26%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............. $36,276 $34,436 $12,647 $10,046 $5,456 $4,530
<FN>
- ----------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++)For the years ended March 31, 1996 and March 31, 1995, the per share distribution in excess of net investment income for
Class B shares was $0.002 and $0.005.
(+++)For the year ended January 31, 1987, the per share distribution from paid-in capital was $0.0018.
</TABLE>
<PAGE>
3. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of each Fund is to provide
current income exempt from federal income taxes and personal income taxes, if
any, of the State to which its name refers. Any investment involves risk and
there can be no assurance that any Fund will achieve its investment
objective.
INVESTMENT POLICIES -- As a fundamental policy, each Fund seeks to achieve its
investment objective by investing its assets primarily (i.e., at least 80% of
its net assets under normal conditions) in municipal bonds and notes and
other debt instruments the interest on which is exempt from federal income
taxes and from the personal income taxes, if any, of the State to which its
name refers. These obligations are issued primarily by such States, its
political subdivisions, municipalities, agencies, instrumentalities or public
authorities. The interest income on certain of these obligations may be
subject to an alternative minimum tax, which is considered to be tax-exempt
for purposes of the 80% test described above.
Although each Fund seeks to invest all its assets in the obligations described
in the preceding paragraph, market conditions may from time to time limit the
availability of such obligations. During periods when a Fund is unable to
purchase obligations described in the preceding paragraph, the Fund will seek
to invest its assets in Municipal Obligations (as defined below) the interest
on which would be exempt from federal income taxes, but would be subject to
personal income taxes of the State to which its name refers. Also, as a
temporary defensive measure during times of adverse market conditions, up to
50% of the assets of a Fund may be held in cash or invested in the short-term
obligations described in paragraphs 4 and 5 below. Under normal conditions,
substantially all of the investments of each Fund will be made in:
(1) Tax-exempt securities which are rated AAA, AA, or A by Standard &
Poor's Ratings Services ("S&P"), Fitch Investors Service, Inc. ("Fitch")
or Duff & Phelps Credit Rating Co. ("Duff & Phelps") or are rated Aaa, Aa,
or A by Moody's Investors Service, Inc. ("Moody's"), or which are unrated
but are considered to have essentially the same characteristics and
quality as securities having such ratings and are issued by issuers which
have other securities rated not lower than A by S&P, Fitch or Moody's;
(2) Tax-exempt securities which are not rated and do not qualify
under paragraph 1 above or which are rated lower than the three highest
grades of S&P, Fitch, Duff & Phelps or Moody's. However, not more than
one-third of a Fund's net assets will be invested in such securities;
(3) Notes of issuers having an issue of outstanding Municipal
Obligations rated AAA, AA or A by S&P, Fitch or Duff & Phelps or Aaa, Aa
or A by Moody's or which are guaranteed by the U.S. Government or which
are rated MIG-1 or MIG-2 by Moody's;
(4) Obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; and
(5) Commercial paper which is rated A-1 or A-2 by S&P or P-1 or P-2 by
Moody's (or which is unrated but which is considered to have essentially
the same characteristics and qualities as commercial paper having such
ratings), obligations (including certificates of deposit, bankers'
acceptances and repurchase agreements) of banks with $1 billion or more
of assets, and cash.
From time to time, a portion of a Fund's distributions will be taxable to
shareholders, for example, distributions of income from the obligations
described in paragraphs 4 and 5 above, from capital gains, from transactions
in certain Municipal Bonds purchased at a market discount and from certain
other transactions. For a comparison of yields on Municipal Obligations and
taxable securities, see the Taxable Equivalent Yield Tables in Appendix B.
For a general discussion of Municipal Obligations, the risks associated with
an investment therein, and descriptions of the ratings of S&P, Fitch, Duff &
Phelps and Moody's of Municipal Obligations and short-term obligations
permitted as investments, see Appendix C. As used in this Prospectus, the
terms "Municipal Obligations" and "tax-exempt securities" are used
interchangeably to refer to debt instruments issued by or on behalf of
States, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies or instrumentalities, the
interest on which is exempt from federal income taxes (without regard to
whether the interest thereon is also exempt from the personal income taxes of
any State).
LOWER RATED MUNICIPAL OBLIGATIONS -- The lower rated or unrated securities
described in paragraph 2 above, while generally providing greater income than
investments in higher rated securities, usually are high risk securities
involving greater volatility of price (especially during periods of economic
uncertainty or change) and risk to principal and income (including the
possibility of default by or bankruptcy of the issuers of such securities)
than securities in the higher rating categories and because yields vary over
time, no specific level of income can ever be assured. These lower rated high
yielding fixed income securities generally tend to reflect economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates, although these lower rated fixed income securities are also
affected by changes in interest rates. In particular, securities rated BBB by
S&P, Fitch or Duff & Phelps or Baa by Moody's (and comparable unrated
securities), while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions and other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher rated Municipal Obligations.
Securities rated lower than BBB by S&P, Fitch or Duff & Phelps or Baa by
Moody's (and comparable unrated securities) (commonly referred to as "junk
bonds"), are considered speculative. While these high risk securities may have
some quality and protective characteristics, these can be expected to be
outweighed by large uncertainties or major risk exposures during times of
adverse market conditions. Furthermore, an economic downturn may result in a
higher incidence of defaults by issuers of these securities. During certain
periods, the higher yields on a Fund's lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, a Fund may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Fund's yield despite the
actual loss of principal. In addition, these lower rated or unrated high risk
tax-exempt securities are frequently traded only in markets where the number
of potential purchasers, if any, is very limited. Therefore, the judgment of
the Adviser may at times play a greater role in valuing these securities than
in the case of higher rated tax-exempt securities. This consideration may have
the effect of limiting the ability of the Trust to sell such securities for a
particular Fund at their fair value either to meet redemption requests or to
respond to changes in the economy or the financial markets. While the Adviser
may refer to ratings issued by established credit rating agencies, it is not a
policy of the Funds to rely exclusively on ratings issued by these agencies,
but rather to supplement such ratings with the Adviser's own independent and
ongoing review of credit quality. Furthermore, no minimum rating standard is
required by the Funds. With respect to those Municipal Obligations which are
not rated by a major rating agency, the Funds will be more reliant on the
Adviser's judgment, analysis and experience than would be the case if such
Municipal Obligations were rated. To the extent a Fund invests in these lower
rated securities, the achievement of its investment objective may be more
dependent on the Adviser's own credit analysis than in the case of an
investment in higher quality bonds. In evaluating the creditworthiness of an
issue, whether rated or unrated, the Adviser may take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, the operating history of and the community
support for the facility financed by the issue, the ability of the issuer's
management and regulatory matters.
See Appendix D to this Prospectus for charts indicating the composition of the
bond portion of the portfolio of certain Funds for the fiscal year ended March
31, 1996, with the debt securities separated into rating categories.
Although higher quality tax-exempt securities may produce lower yields, they
are generally more marketable. To protect the capital of shareholders of a
Fund under adverse market conditions, a Fund may from time to time deem it
prudent to hold cash or to purchase higher quality securities or taxable
short-term obligations with a resultant decrease in yield or increase in the
proportion of taxable income.
NON-DIVERSIFIED STATUS -- Each Fund is a "non-diversified" series of the
Trust, which means that more than 5% of the assets of each Fund may be
invested in the obligations of each of one or more issuers, subject to the
diversification requirements of the Code. Since a relatively high percentage
of the assets of a Fund may be invested in the obligations of a limited number
of issuers, the value of shares of a Fund may be more susceptible to any
single economic, political or regulatory occurrence than would be the shares
of a diversified investment company.
CHARACTERISTICS OF MUNICIPAL OBLIGATIONS -- Each Fund may invest its assets in
a relatively high percentage of municipal bonds issued by entities having
similar characteristics. The issuers may pay their interest obligations from
revenue of similar projects such as multi-family housing, nursing homes,
electric utility systems, hospitals or life care facilities. This too may make
any Fund more susceptible to similar economic, political, or regulatory
occurrences, particularly since such issuers would likely be located in the
same State. As the similarity in issuers increases, the potential for
fluctuation of the net asset value of the Fund's shares also increases. Each
Fund will only invest in securities of issuers which it believes will make
timely payments of interest and principal.
Each Fund may invest more than 25% of its assets in industrial revenue bonds
(referred to under current tax law as private activity bonds), and also may
invest more than 25% of its assets in revenue bonds issued for housing,
including multi-family housing, health care facilities or electric utilities,
at times when the relative value of issues of such a type is considered, in
the judgment of the Adviser, to be more favorable than that of other available
types of issues, taking into consideration the particular restrictions on
investment flexibility arising from the investment objective of each Fund.
Therefore, investors should also be aware of the risks which these investments
may entail. Industrial revenue bonds are issued by various state and local
agencies to finance various projects.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local housing
authority and are secured only by the revenues of mortgages originated by the
authority using the proceeds of the bond issue. Because of the impossibility
of precisely predicting demand for mortgages from the proceeds of such an
issue, there is a risk that the proceeds of the issue will be in excess of
demand, which would result in early retirement of the bonds by the issuer.
Moreover, such housing revenue bonds depend for their repayment upon the cash
flow from the underlying mortgages, which cannot be precisely predicted when
the bonds are issued. Any difference in the actual cash flow from such
mortgages from the assumed cash flow could have an adverse impact upon the
ability of the issuer to make scheduled payments of principal and interest on
the bonds, or could result in early retirement of the bonds. Additionally,
such bonds depend in part for scheduled payments of principal and interest
upon reserve funds established from the proceeds of the bonds, assuming
certain rates of return on investment of such reserve funds. If the assumed
rates of return are not realized because of changes in interest rate levels or
for other reasons, the actual cash flow for scheduled payments of principal
and interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including satisfactory
completion of construction within cost constraints, the achievement and
maintainance of a sufficient level of occupancy, sound management of the
developments, timely and adequate increases in rents to cover increases in
operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and
economic trends.
Electric utilities face problems in financing large construction programs in
inflationary periods, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty
in obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory
problems, the effect of energy conservation and difficulty of the capital
market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium lifestyle
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs
importantly in this process. The facilities may also be affected by regulatory
cost restrictions applied to health care delivery in general, particularly
state regulations or changes in Medicare and Medicaid payments or
qualifications, or restrictions imposed by medical insurance companies. They
may also face competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are often
based on feasibility studies which contain projections of expenses, revenues
and occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability
of the hospital to provide the services required, management capabilities,
economic developments in the service area, efforts by insurers and government
agencies to limit rates and expenses, confidence in the hospital, service area
economic developments, competition, availability and expense of malpractice
insurance, Medicaid and Medicare funding, and possible federal legislation
limiting the rates of increase of hospital charges.
Each Fund may also invest in bonds for industrial and other projects, such as
sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components, there
are risks associated with their production, handling and disposal.
The net asset value of the shares of each Fund changes as the general levels
of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of such a portfolio can be
expected to decline.
Except for the policy identified above as fundamental, shareholder approval is
not required to change any of the foregoing investment policies, or any of the
policies discussed below.
ZERO COUPON AND DEFERRED INTEREST BONDS -- Municipal Obligations in which the
Funds may invest also include zero coupon bonds and deferred interest bonds.
Zero coupon bonds and deferred interest bonds are debt obligations which are
issued at a significant discount from face value. While zero coupon bonds do
not require the periodic payment of interest, deferred interest bonds provide
for a period of delay before the regular payment of interest begins. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at
a rate of interest reflecting the market rate of the security at the time of
issuance. Zero coupon bonds and deferred interest bonds benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value than
debt obligations which make regular payments of interest. Each Fund will
accrue income on such investments for tax and accounting purposes, which is
distributable to shareholders. Since no cash is received at the time of
accrual, a Fund may be required to liquidate other portfolio securities to
satisfy its distribution obligations.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement the Fund acquires securities subject to the seller's
agreement to repurchase them at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, each Fund has adopted certain
procedures which are intended to minimize the risks associated with repurchase
agreements.
"WHEN-ISSUED" SECURITIES -- Some issues of tax-exempt securities may be
purchased on a "when-issued" basis, which means that the obligations will be
delivered to a Fund at a future date usually beyond customary settlement time.
The commitment to purchase an obligation for which payment will be made on a
future date may be deemed a separate security. Although the amount of tax-
exempt securities for which there may be commitments to purchase on a "when-
issued" basis is not limited, it is expected that under normal circumstances
not more than 50% of the total assets of any Fund will be committed to such
purchases. A Fund does not pay for such obligations until received and does
not start earning interest on the obligations until the contractual settlement
date. Each Fund has established a segregated account consisting of cash,
short-term money market instruments or high quality debt securities equal to
the amount of the commitments on behalf of the Fund to purchase "when-issued"
securities. For additional information concerning the purchase of securities
on a "when-issued" basis, see the SAI.
INDEXED SECURITIES -- The Trust may invest in indexed securities whose value
is linked to foreign currencies, interest rates, commodities, indexes or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or
decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself.
SWAPS AND RELATED TRANSACTIONS -- As one way of managing its exposure to
different types of investments, each Fund may enter into interest rate swaps
and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by a Fund with another party of cash
payments based upon different interest rate indexes or other prices or rates.
For example, in the typical interest rate swap, a Fund might exchange a
sequence of cash payments based on a floating rate index for cash payments
based on a fixed rate. Payments made by both parties to a swap transaction are
based on a principal amount determined by the parties.
Each Fund may also purchase and sell caps, floors and collars. In a typical
cap or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one type
of investment to another. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may increase
or decrease the overall volatility of a Fund's investments and its share price
and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for further discussion on, and the risks
involved in, these activities.
VARIABLE AND FLOATING RATE OBLIGATIONS -- The interest rates payable on
certain securities in which a Fund may invest are not fixed and may fluctuate
based upon changes in market rates. Variable rate obligations have an interest
rate which is adjusted at predesignated periods and interest on floating rate
obligations is adjusted whenever there is a change in the market rate of
interest on which the interest rate payable is based. For additional
information concerning variable and floating rate obligations, see the SAI.
INVERSE FLOATING RATE OBLIGATIONS -- Each Fund may invest in so-called
"inverse floating rate obligations" or "residual interest" bonds or other
obligations or certificates relating thereto structured to have similar
features. Such obligations generally have floating or variable interest rates
that move in the opposite direction of short-term interest rates and generally
increase or decrease in value in response to changes in short-term interest
rates at a rate which is a multiple (approximately two times) of the rate at
which fixed-rate long-term tax-exempt securities increase or decrease in
response to such changes. As a result, such obligations have the effect of
providing investment leverage and may be more volatile than long-term fixed
rate tax-exempt obligations.
PARTICIPATION INTERESTS -- From time to time, a Fund may purchase from banks
participation interests in all or part of specific holdings of Municipal
Obligations. Each participation interest is backed by an irrevocable letter of
credit or guarantee of the selling bank. Participation interests only will be
purchased if, in the opinion of counsel, interest income on such interests
will be tax-exempt when distributed as dividends to shareholders of a Fund.
RESTRICTED SECURITIES -- Each Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a
continuing review of the trading markets for a specific Rule 144A security,
whether such security is liquid and thus not subject to a Fund's limitation on
investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to the Adviser the
daily function of determining and monitoring liquidity of Rule 144A
securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Board will carefully
monitor each Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of decreasing the
level of liquidity in each Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held
in a Fund's portfolio. Subject to the Funds' 15% limitation on investments in
illiquid investments, the Funds may also invest in restricted securities that
may not be sold under Rule 144A, which presents certain risks. As a result,
the Funds might not be able to sell these securities when the Adviser wishes
to do so, or might have to sell them at less than fair value. In addition,
market quotations are less readily available. Therefore, judgment may at times
play a greater role in valuing these securities than in the case of
unrestricted securities.
OPTIONS -- Each Fund may write (i.e., sell) "covered" put and call options on
fixed income securities subject to any applicable laws. Call options written
by a Fund give the holder the right to buy the underlying securities from the
Fund at a fixed exercise price up to a stated expiration date or, in the case
of certain options, on such date. Put options written by a Fund give the
holder the right to sell the underlying securities to the Fund during the term
of the option at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Call options are "covered" by a
Fund, for example, when it owns the underlying securities, and put options are
"covered" by a Fund, for example, when it has established a segregated account
of cash and high grade government securities of the Fund which can be
liquidated promptly to satisfy any obligation of the Fund to purchase the
underlying securities. Each Fund may utilize other forms of cover as well, as
described in the SAI. Each Fund may also write straddles (combinations of puts
and calls on the same underlying security). Such transactions generate
additional premium income but also present increased risk. See the SAI.
A Fund will receive a premium from writing a put or call option, which
increases the gross income of the Fund in the event the option expires
unexercised or is closed out at a profit. The amount of the premium will
reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. By writing a call option, a
Fund limits its opportunity to profit from any increase in the market value of
the underlying security above the exercise price of the option. By writing a
put option, a Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
A Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for
a Fund to close out its written option positions.
A Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce
the benefit, if any, realized by a Fund upon exercise of the option, and,
unless the price of the underlying security changes sufficiently, the option
may expire without value.
A Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, at a stated
time in the future, or in some cases, on a future date.
In addition, each Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to
the holder of the warrant the right, but not the obligation, to purchase a
fixed income security of a specific description from the issuer on a certain
date or dates (the exercise date) at a fixed exercise price.
Each Fund may write and purchase options on securities only for hedging
purposes and not in an effort to increase current income. Options on
securities, including warrants, that are written or purchased by the Funds
will be traded on U.S. exchanges and over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Each Fund may enter into
futures contracts on fixed income securities and on indexes of fixed income
securities, including municipal bond indexes, any other financial indexes and
any index of fixed income securities which may become available for trading,
and on Eurodollar deposits, subject to any applicable laws ("Futures
Contracts"). Each Fund may, subject to any applicable laws, purchase and write
options on all such Futures Contracts ("Options on Futures Contracts"). These
investments will be used to hedge against anticipated future changes in
interest rates which otherwise might either adversely affect the value of the
portfolio securities of a Fund or adversely affect the prices of long-term
bonds which are intended to be purchased for the Fund at a later date. Such
transactions may also be entered into for non-hedging purposes, to the extent
permitted by applicable law. Futures Contracts and Options on Futures
Contracts entail risks. Although the Trust believes that use of such
contracts will benefit the Funds, if the Adviser's investment judgment about
the general direction of interest rates is incorrect, the overall performance
of a Fund may be poorer than if the Fund had not entered into any such
contract.
In order to assure that each Fund will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodity
Futures Trading Commission (the "CFTC") require that each Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums
on such non-hedging positions do not exceed 5% of the liquidation value of
such Fund's assets. In addition, each Fund must comply with the requirements
of various state securities laws in connection with such transactions.
Each Fund has adopted the additional policy that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Fund's Futures Contracts would exceed 50% of
the value of the Fund's total assets. Moreover, a Fund will not purchase put
and call options on securities or on Futures Contracts if as a result more
than 5% of the total assets of the Fund would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by a
Fund will be traded on U.S. exchanges.
RISK FACTORS -- Although the Funds will enter into certain transactions in
options, Futures Contracts and Options on Futures Contracts for hedging
purposes, all subject to applicable laws, such transactions nevertheless
involve risks. For example, a lack of correlation between the instrument
underlying an option or Futures Contract and the assets being hedged, or
unexpected adverse price movements, could render a Fund's hedging strategy
unsuccessful and could result in losses. In addition, there can be no
assurance that a liquid secondary market will exist for any contract purchased
or sold, and a Fund may be required to maintain a position until exercise or
expiration, which could result in losses. Transactions in such instruments
entered into for non-hedging purposes, subject to applicable laws, involve
greater risks and may result in losses which are not offset by gains on other
portfolio assets. The SAI contains a further description of options, Futures
Contracts and Options on Futures Contracts, and a discussion of the risks
related to transactions therein.
Transactions in the foregoing instruments may be entered into by the Funds on
U.S. exchanges regulated by the SEC or the CFTC. Options on securities may
also be written or purchased in the over-the-counter market. Over-the-counter
transactions involve certain risks which may not be present in an exchange
environment.
Gains recognized from options and futures transactions engaged in by a Fund
are taxable to the Fund's shareholders when distributed to them.
CONCENTRATION IN STATE OBLIGATIONS -- RISKS; ADDITIONAL INFORMATION -- Because
each Fund will ordinarily invest 80% or more of its net assets in Municipal
Obligations issued by or on behalf of the State to which its name refers, each
Fund is more susceptible to factors affecting such State than is a comparable
municipal bond fund not concentrated in the obligations of issuers located in
a single state. It is also possible that there will not be sufficient
availability of suitable Municipal Obligations for each Fund to achieve its
objective of providing income and an investment exempt from state taxes.
Investors should be aware of certain additional information concerning
investments in each State's Municipal Obligations. For a discussion of this
information, which does not purport to be complete, see Appendix E.
PORTFOLIO TRADING -- Each Fund intends to fully manage its portfolio by buying
and selling securities, as well as holding securities to maturity. In managing
its portfolio, each Fund seeks to take advantage of market developments, yield
disparities and variations in the creditworthiness of issuers. For a
description of the strategies which may be used by the Funds in managing their
portfolios, which may include adjusting the average maturity of a Fund's
portfolio in anticipation of a change in interest rates, see the SAI.
Distributions of gains, if any, realized from the sale of Municipal
Obligations or other securities are subject to federal income taxes and State
personal income taxes (see "Tax Status"). The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to
obtain, and maintain the availability of, execution at the most favorable
prices and in the most effective manner possible. Consistent with the
foregoing primary consideration, the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"), and such other policies
as the Trustees may determine, the Adviser may consider sales of shares of
each Fund and of the other investment company clients of MFD as a factor in
the selection of broker-dealers to execute the portfolio transactions of any
Fund. From time to time, the Adviser may direct certain portfolio transactions
to broker-dealer firms which, in turn, have agreed to pay a portion of the
Fund's operating expenses (e.g., fees charged by the Custodian of the Fund's
assets). For a further discussion of portfolio transactions, see the SAI. For
the fiscal year ended March 31, 1996, the New York Fund had a portfolio
turnover rate of over 100%; therefore, transaction costs incurred by such Fund
and the realized capital gains and losses of such Fund may be greater than
that of a fund with a lesser portfolio turnover rate.
The SAI includes a listing of investment restrictions which govern the
investment policies of each Fund. A Fund's investment limitations, policies
and rating standards are generally adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy. Shareholder approval is not
required to change the investment objective of any Fund unless indicated
otherwise and a subsequent change in investment objective may result in the
Fund having an investment objective different from the objective which the
shareholder considered appropriate at the time of investment.
4. MANAGEMENT OF THE TRUST
INVESTMENT ADVISER -- The Trust's Board of Trustees provides broad supervision
over the affairs of each Fund. The Adviser is responsible for the management
of each Fund's assets and the officers of the Trust are responsible for its
operations. A majority of the Trustees are not affiliated with the Adviser.
The Adviser manages the assets of the Alabama, Georgia, Maryland,
Massachusetts, New York, North Carolina, South Carolina, Tennessee, Virginia
and West Virginia Funds pursuant to an Investment Advisory Agreement, dated
August 24, 1984. The Adviser manages the assets of the Arkansas and Florida
Funds pursuant to separate Investment Advisory Agreements, each dated February
1, 1992. The Adviser manages the assets of the Mississippi Fund pursuant to an
Investment Advisory Agreement, dated August 1, 1992. The Adviser manages the
assets of the Pennsylvania Fund pursuant to an Investment Advisory Agreement,
dated February 1, 1993. The Adviser manages the assets of the California Fund
pursuant to an Investment Advisory Agreement dated September 1, 1993. (Each of
these Investment Advisory Agreements are referred to herein as the "Advisory
Agreements.") The Adviser provides investment advisory and administrative
services with respect to each Fund, as well as office facilities and overall
administrative services for the Trust.
<TABLE>
<CAPTION>
The portfolio manager for each Fund is as follows:
YEAR BECAME PORTFOLIO
PORTFOLIO MANAGER FUND MANAGER OF THE FUND YEAR JOINED MFS
----------------- ---- ------------------- ---------------
<S> <C> <C> <C>
David B. Smith .................. California 1993 1988
Georgia 1996
Massachusetts 1993
Virginia 1993
West Virginia 1994
David R. King ................... Alabama 1994 1985
Arkansas 1994
Florida 1996
Maryland 1994
Pennsylvania 1994
South Carolina 1994
Tennessee 1994
Geoffrey L. Schechter* .......... Mississippi 1993 1993
New York 1993
North Carolina 1993
<FN>
*Prior to joining MFS in 1993, Mr. Schechter was a Senior Investment Analyst at Liberty Mutual Insurance Company.
Messrs. Smith, King and Schechter, Vice Presidents of the Trust, are also Vice Presidents of the Adviser.
</TABLE>
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for each Fund. For these services and facilities, the
Adviser receives a management fee from the Trust on behalf of each Fund
computed and paid monthly at an annual rate equal to 0.55% of each such
Fund's average daily net assets on an annualized basis for the Fund's then-
current fiscal year. The Adviser has voluntarily reduced its management fee
with respect to the California, Georgia, Maryland, Massachusetts, North
Carolina, Pennsylvania, South Carolina, Tennessee and Virgina Funds to 0.40%,
0.45%, 0.45%, 0.45%, 0.45%, 0.10%, 0.45%, 0.45% and 0.45%, respectively, of
each Fund's average daily net assets for an indefinite period of time. These
fee reductions may be revised or rescinded by the Adviser at any time without
notice to shareholders. See "Expenses" below.
For the Trust's fiscal year ended March 31, 1996, MFS received fees under the
Advisory Agreements with respect to each Fund in the following amounts and
waived the following amounts of certain of these fees:
<TABLE>
<CAPTION>
ADVISORY ADVISORY
FEES RECEIVED % OF AVERAGE FEES WAIVED % OF AVERAGE
BY MFS(1) NET ASSETS(1) BY MFS NET ASSETS
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Alabama Fund .......................... $ 500,417 0.55% $ N/A N/A
Arkansas Fund ......................... 1,060,604 0.55 N/A N/A
California Fund ....................... 1,225,235 0.40 457,078 0.15%
Florida Fund .......................... 536,315 0.51 38,724 0.04
Georgia Fund .......................... 458,694 0.55 N/A N/A
Maryland Fund ......................... 863,230 0.55 N/A N/A
Massachusetts Fund .................... 1,484,656 0.55 N/A N/A
Mississippi Fund ...................... 384,073 0.42 113,594 0.13
New York Fund ......................... 934,490 0.55 N/A N/A
North Carolina Fund ................... 2,550,849 0.55 N/A N/A
Pennsylvania Fund ..................... 39,790 0.10 177,800 0.45
South Carolina Fund ................... 1,031,063 0.55 N/A N/A
Tennessee Fund ........................ 697,496 0.55 N/A N/A
Virginia Fund ......................... 2,540,788 0.55 N/A N/A
West Virginia Fund .................... 795,243 0.55 N/A N/A
<FN>
(1) After any applicable fee reduction.
</TABLE>
MFS also serves as investment adviser to each of the other MFS Funds and to
MFS/Sun Life Series Trust, MFS(R) Municipal Income Trust, MFS Multimarket
Income Trust, MFS Government Markets Income Trust, MFS Intermediate Income
Trust, MFS Charter Income
Trust, MFS Special Value Trust, MFS Institutional Trust, MFS Union Standard
Trust, MFS Variable Insurance Trust, Sun Growth Variable Annuity Fund, Inc.
and seven variable accounts each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under management of the MFS organization were
approximately $47.2 billion on behalf of approximately 2.1 million investor
accounts as of June 28, 1996. As of such date, the MFS organization managed
approximately $19.5 billion of assets in fixed income securities and fixed
income securities of MFS Asset Management, Inc., including approximately $6.3
billion of assets in municipal securities. MFS is a subsidiary of Sun Life of
Canada (U.S.) which in turn is a wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin,
Jeffrey L. Shames, Arnold D. Scott, John D. McNeil and John R. Gardner. Mr.
Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the
Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Gardner are the Chairman and President, respectively, of Sun Life. Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895.
The executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. Cynthia M. Brown, Robert A. Dennis, David R. King,
David B. Smith, Geoffrey L. Schechter, Daniel E. McManus, W. Thomas London,
Stephen E. Cavan, James R. Bordewick, Jr., and James O. Yost, all of whom are
officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypothekenund Weschsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial share their views on a variety of investment related issues, such as
the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS has access to the
extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial has access to the extensive U.S. equity investment
expertise of MFS. Certain MFS investment analysts are working for an extended
period with Foreign & Colonial's portfolio managers and investment analysts at
their offices in London. In return, one or more Foreign & Colonial employees
are working in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as a Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the
Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of each Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- The Shareholder Servicing Agent, a wholly owned
subsidiary of MFS, performs transfer agency, certain dividend disbursing
agency and other services for the Trust.
5. INFORMATION CONCERNING SHARES OF THE TRUST
PURCHASES
Shares of the Funds may be purchased at the public offering price through any
dealer and other financial institution ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Funds.
Each Fund offers two classes of shares (Class A and Class B shares) and the
California Fund, the North Carolina Fund and the Virginia Fund also offer
Class C shares. The classes of shares bear sales charges and distribution fees
in different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SALES CHARGE* AS PERCENTAGE OF:
------------------------------------------ DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE(1) INVESTED OF OFFERING PRICE(1)
------------------ ----------------- ---------- --------------------
<S> <C> <C> <C>
Less than $100,000 .................................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ..................... 4.00 4.17 3.20
$250,000 but less than $500,000 ..................... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ................... 2.20 2.25 1.70
$1,000,000 or more .................................. None** None** See Below**
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
*Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
**A CDSC will apply to such purchases, as discussed below.
(1)Pursuant to a special arrangement, the dealer allowance as a percentage of offering price for Class A shares of the California
Fund and the New York Fund is as follows:
SALES CHARGE* DEALER ALLOWANCE
AS A PERCENTAGE AS A PERCENTAGE
OF OFFERING PRICE OF OFFERING PRICE
----------------- -----------------
4.75% 4.25%
4.00 3.45
2.95 2.50
2.20 1.95
</TABLE>
This special arrangement may be revised or discontinued at any time without
notice to shareholders.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price, except for the special arrangements
for the California and New York Funds described above. The sales charge may
vary depending on the number of shares of a Fund as well as certain other MFS
Funds owned or being purchased, the existence of an agreement to purchase
additional shares during a 13-month period (or 36-month period for purchases
of $1 million or more) or other special purchase programs. A description of
the Right of Accumulation, Letter of Intent and Group Purchase privileges by
which the sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend
and capital gain distributions) or the total cost of such shares in the event
of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization has demonstrated to the satisfaction of MFD
that either (i) the employer has at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares in the
MFS Funds will be in an aggregate amount of at least $250,000 within
a reasonable period of time, as determined by MFD in its sole
discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds will be in an
aggregate amount of at least $500,000 within a reasonable period of
time, as determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. The
retirement plan will qualify under this category only if the plan or
its sponsoring organization informs the Shareholder Servicing Agent
prior to the purchases that the plan has a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds.
The Shareholder Servicing Agent has no obligation independently to
determine whether such a plan qualifies under this category.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchases).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGES AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon the redemption of Class A shares is waived. These circumstances
are described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Code and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of the Shareholder Servicing Agent that the retirement plan
has, at the time of certification or will have pursuant to a purchase
order placed with the certification, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds and aggregate
assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ......................................................... 4%
Second ........................................................ 4%
Third ......................................................... 3%
Fourth ........................................................ 3%
Fifth ......................................................... 2%
Sixth ......................................................... 1%
Seventh and following ......................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under each Fund's Class
B Distribution Plan (see "Distribution Plans" below) at a rate equal to 0.25%
of the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to
such purchases, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable under
the Class B Distribution Plan. As discussed above, such retirement plans are
eligible to purchase Class A shares of a Fund at net asset value without an
initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class
or classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING
ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS
ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A
PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organizatiion subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change
to the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of a Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the same Fund. Shares purchased through the reinvestment of distributions paid
in respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. See "Distribution Plans" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
CLASS C SHARES: Class C shares of the California Fund, the North Carolina Fund
and the Virginia Fund are offered at net asset value without an initial sales
charge but are subject to a CDSC of 1.00% upon redemption during the first
year. Class C shares do not convert to any other class of shares of a Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
a Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar recordkeeping program made available by the
Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to this Prospectus.
GENERAL: The following information applies to purchases of all classes of each
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
Each Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. Each Fund and MFD reserve the
right to reject any specific purchase order or to restrict purchases by a
particular purchaser (or group of related purchasers). Each Fund or MFD may
reject or restrict any purchases by a particular purchaser or group, for
example, when such purchase is contrary to the best interests of the Fund's
other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of each Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are
effected in a timed account in the same calendar quarter or (ii) a purchase
would result in shares being held in timed accounts by market timers
representing more than (x) one percent of the relevant Fund's net assets or
(y) specified dollar amounts in the case of certain MFS Funds which may
include the relevant Fund and which may change from time to time. Each Fund
and MFD reserve the right to request market timers to redeem their shares at
net asset value, less any applicable CDSC, if either of these restrictions is
violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from
time to time, MFD may pay dealers 100% of the applicable sales charge on sales
of Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
shares of a Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives, payment for
travel expenses, including lodging, incurred by registered representatives for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of shareholders who invested in a Fund through a national
bank. It is not expected that shareholders would suffer any adverse financial
consequence as a result of these occurrences. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
broker-dealers pursuant to state law.
------------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from a Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with a Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of
the other MFS Funds at net asset value (if available for sale). Shares of one
class may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS):
No initial sales charges or CDSC will be imposed in connection with an
exchange from shares of an MFS Fund to shares of any other MFS Fund, except
with respect to exchanges from an MFS money market fund to another MFS Fund
which is not an MFS money market fund (discussed below). With respect to an
exchange involving shares subject to a CDSC, the CDSC will be unaffected by
the exchange and the holding period for purposes of calculating the CDSC will
carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received
for an established account by the Shareholder Servicing Agent in proper form
(i.e., if in writing -- signed by the record owner(s) exactly as the shares
are registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record) and each exchange must involve either
shares having an aggregate value of at least $1,000 ($50 in the case of
retirement plan participants whose sponsoring organizations subscribe to the
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by the Shareholder Servicing Agent) or all the shares in the
account. If an Exchange Request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the New York
Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the
exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions and
Repurchases -- Redemptions by Telephone." The exchange privilege (or any
aspect of it) may be changed or discontinued and is subject to certain
limitations, including certain restrictions on purchases by market timers.
Special procedures, privileges and restrictions with respect to exchanges may
apply to market timers who enter into an agreement with MFD, as set forth in
such agreement. See "Purchases -- General -- Right to Reject Purchase Orders/
Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases, however, are
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists. See "Tax Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone
redemption privilege must so elect on their Account Application, designate
thereon a bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature(s) guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds
of such a redemption, reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. If a telephone redemption request is
received by the Shareholder Servicing Agent by the close of regular trading on
the Exchange on any business day, shares will be redeemed at the closing net
asset value of the relevant Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or
wired on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent may be liable for any losses
resulting from unauthorized telephone transactions if it does not follow
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from
the caller, and will normally also record calls. Shareholders should verify
the accuracy of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A and Class C shares may be redeemed by check.
A shareholder owning Class A or Class C shares of a Fund may elect to have a
special account with State Street Bank and Trust Company (the "Bank") for the
purpose of redeeming Class A or Class C shares from his or her account by
check. The Bank will provide each Class A or Class C shareholder, upon
request, with forms of checks drawn on the Bank. Only shareholders having
accounts in which no share certificates have been issued will be permitted to
redeem shares by check. Checks may be made payable in any amount not less than
$500. Shareholders wishing to avail themselves of this redemption by check
privilege should so request on their Account Application, must execute
signature cards (for additional information, see the Account Application) with
signatures guaranteed in the manner set forth under the caption "Signature
Guarantee" below, and must return any Class A or Class C share certificates
issued to them. Additional documentation will be required from corporations,
partnerships, fiduciaries or other such institutional investors. All checks
must be signed by the shareholder(s) of record exactly as the account is
registered before the Bank will honor them. The shareholders of joint accounts
may authorize each shareholder to redeem by check. The check may not draw on
monthly dividends which have been declared but not distributed. SHAREHOLDERS
WHO PURCHASE CLASS A AND CLASS C SHARES BY CHECK (INCLUDING CERTIFIED CHECKS
OR CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY
HAVE BEEN ON THE RELEVANT FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS
PRESENTED TO THE BANK FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL
SHARES WILL BE REDEEMED TO COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC
AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE
CHECK, PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD IS GREATER THAN THE VALUE OF CLASS A OR CLASS C SHARES HELD IN THE
SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID, AND THE SHAREHOLDER
MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF CHECKS DUE TO
FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL
OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND
ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE
EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS. There is
presently no charge to the shareholder for the maintenance of this special
account or for the clearance of any checks, but each Fund and the Bank reserve
the right to impose such charges or to modify or terminate the redemption by
check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i)
with respect to Class A and Class C shares, 12 months (however, the CDSC on
Class A shares is only imposed with respect to purchases of $1 million or more
of Class A shares or purchases by certain retirement plans of Class A shares);
or (ii) with respect to Class B shares, six years. Purchases of Class A shares
made during a calendar month, regardless of when during the month the
investment occurred, will age one month on the last day of the month and each
subsequent month. Class C shares and Class B shares purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For
Class B shares of a Fund purchased prior to January 1, 1993, transactions will
be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year. Prior to April 1, 1996, Class C shares of the MFS Funds were
not subject to a CDSC upon redemption. In no event will Class C shares of the
MFS Funds purchased prior to this date be subject to a CDSC. For the purpose
of calculating the CDSC upon redemption of shares acquired in an exchange on
or after April 1, 1996, the purchase of shares acquired in one or more
exchanges is deemed to have occurred at the time of the original purchase of
the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore,
at the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the then-
current value of Reinvested Shares is not subject to the CDSC, but (iii) any
amount of the redemption in excess of the aggregate of the then-current value
of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will
first be applied against the amount of Direct Purchases which will result in
any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of each Fund's shares.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud, each
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE: Shareholders of a Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will
be imposed upon redemption. Such purchases under the Reinstatement Privilege
are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS: Subject to compliance with applicable regulations,
each Fund has reserved the right to pay the redemption or repurchase price of
shares of the Fund, either totally or partially, by a distribution in-kind of
securities (instead of cash) from such Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS: Due to the relatively high cost of
maintaining small accounts, each Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
shares of each Fund and separate Distribution Plans for Class C shares of
certain Funds pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the relevant
Funds and their shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the relevant Fund may
pay MFD a service fee of up to 0.25% of the average daily net assets
attributable to the class of shares to which the Distribution Plan relates
(i.e., Class A, Class B or Class C shares, as appropriate) (the "Designated
Class") annually in order that MFD may pay expenses on behalf of the Fund
relating to the servicing of shares of the Designated Class. The service fee
is used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated Class
owned by investors for whom such dealer is the dealer or holder of record. MFD
may from time to time reduce the amount of the service fees paid for shares
sold prior to a certain date. Service fees may be reduced for a dealer that is
the holder or dealer of record for an investor who owns shares of the Fund
having an aggregate net asset value at or above a certain dollar level.
Dealers may from time to time be required to meet certain criteria in order to
receive service fees. MFD or its affiliates are entitled to retain all service
fees payable under each Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the relevant Fund
may pay MFD a distribution fee based on the average daily net assets
attributable to the Designated Class as partial consideration for distribution
services performed and expenses incurred in the performance of MFD's
obligations under its distribution agreement with the Fund. See "Management of
the Trust -- Distributor" in the SAI. The amount of the distribution fee paid
by a Fund with respect to each class differs under the Distribution Plans, as
does the use by MFD of such distribution fees. Such amounts and uses are
described below in the discussion of the separate Distribution Plans. While
the amount of compensation received by MFD in the form of distribution fees
during any year may be more or less than the expense incurred by MFD under its
distribution agreement with a Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLANS. Class A shares are generally offered pursuant
to an initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). See "Purchases -- Class A Shares" above. In addition to the initial
sales charge, the dealer also generally receives the ongoing 0.25% per annum
service fee, as discussed above.
The distribution fee paid to MFD under each Class A Distribution Plan is
equal, on an annual basis, to 0.10% of the relevant Fund's average daily net
assets attributable to Class A shares. As noted above, MFD may use the
distribution fee to cover distribution-related expenses incurred by it under
its distribution agreement with each Fund, including commissions to dealers
and payments to wholesalers employed by MFD (e.g., MFD pays commission to
dealers with respect to purchases of $1 million or more and purchases by
certain retirement plans of Class A shares which are sold at net asset value
but which are subject to a 1% CDSC for one year after purchase). See
"Purchases -- Class A Shares" above. In addition, to the extent that the
aggregate service and distribution fees paid under each Class A Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
relevant Fund attributable to Class A shares, the Fund is permitted to pay
such distribution-related expenses or other distribution-related expenses.
CLASS B DISTRIBUTION PLANS. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefor, MFD may retain the service fee paid by the Fund
with respect to such shares for the first year after purchase. Dealers will
become eligible to receive the ongoing 0.25% per annum service fee with
respect to such shares commencing in the thirteenth month following purchase.
Under each Class B Distribution Plan, the relevant Fund pays MFD a
distribution fee equal, on an annual basis, to 0.75% of the Fund's average
daily net assets attributable to Class B shares. As noted above, this
distribution fee may be used by MFD to cover its distribution-related expenses
under its distribution agreement with a Fund (including the 3.75% commission
it pays to dealers upon purchase of Class B shares, as described under
"Purchases -- Class B Shares" above).
CLASS C DISTRIBUTION PLANS. Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
C shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by each Fund
with respect to such shares for the first year after purchase, and dealers
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under each Class C Distribution Plan (which MFD in turn pays to dealers),
as discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Class C Distribution Plan equal, on an annual
basis, to 0.75% of the relevant Fund's average daily net assets attributable
to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. Each Fund's Class A, Class
B and Class C distribution and service fees for its current fiscal year are as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---- ---- ----
<S> <C> <C> <C>
Alabama Fund ............................................ 0.25% 1.00%
Arkansas Fund ........................................... 0.10% 0.85%
California Fund ......................................... 0.00% 0.80% 1.00%
Florida Fund ............................................ 0.00% 0.80%
Georgia Fund ............................................ 0.25% 1.00%
Maryland Fund ........................................... 0.35% 1.00%
Massachusetts Fund ...................................... 0.35% 1.00%
Mississippi Fund ........................................ 0.00% 0.79%
New York Fund ........................................... 0.25% 1.00%
North Carolina Fund ..................................... 0.35% 1.00% 1.00%
Pennsylvania Fund ....................................... 0.00% 0.78%
South Carolina Fund ..................................... 0.35% 1.00%
Tennessee Fund .......................................... 0.35% 1.00%
Virginia Fund ........................................... 0.35% 1.00% 1.00%
West Virginia Fund ...................................... 0.35% 1.00%
</TABLE>
For the California, Florida and Mississippi Funds, fees payable under the
Class A Distribution Plans will commence on such date or dates as the Trustees
of the Trust may determine. For the Pennsylvania Fund, the 0.25% per annum
Class A service fees will commence when net assets attributable to Class A
shares first equal or exceed $50 million and payment of the 0.10% per annum
Class A distribution fee will commence on such date as the Trustee of the
Trust may determine. For the Arkansas Fund, a portion of the Class A service
fee equal to 0.10% per annum is currently being paid; payment of the remaining
portion of the Class A service fee and payment of the 0.10% per annum Class A
distribution fee will commence on such date or dates as the Trustees of the
Trust may determine. For the Alabama, Georgia and New York Funds, payment of
the 0.10% per annum Class A distribution fee will commence on such date or
dates as the Trustees of the Trust may determine. Except in the case of the
0.25% per annum Class B service fee paid by the relevant Fund upon the sale of
Class B shares, payment of the Class B service fee has been suspended for the
California, Florida and Mississippi Funds until such date or dates as the
Trustees of the Trust may determine. Except in the case of the 0.25% per annum
Class B service fee paid by the Arkansas Fund upon the sale of Class B shares,
the Class B service fee has been set by the Trust's Board of Trustees at 0.10%
per annum and may be increased to a maximum of 0.25% per annum on such date as
the Trustees of the Trust may determine. Except in the case of the 0.25% per
annum Class B service fee paid by the Pennsylvania Fund upon the sale of Class
B shares, payment of the Class B service fee will be suspended until such date
as the Class A service fee first becomes payable under the Pennsylvania Fund's
Class A Distribution Plan.
DISTRIBUTIONS
Each Fund intends to declare daily and pay to its shareholders substantially
all of its net investment income as dividends on a monthly basis. Dividends
generally are distributed on the first business day of the following month. In
addition, a Fund may make one or more distributions during the calendar year
to its shareholders from any long-term capital gains. Each Fund also may make
one or more distributions during the calendar year to its shareholders from
short-term capital gains. Shareholders may elect to receive dividends and
capital gain distributions in either cash or additional shares of the same
class with respect to which a distribution is made (see "Tax Status" and
"Shareholder Services -- Distribution Options" below). Distributions paid by
each Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable
to Class B and Class C shares will generally be higher.
TAX STATUS
FEDERAL INCOME TAXES -- Each Fund is treated as a separate entity for federal
income tax purposes. In order to minimize the taxes that the Funds would
otherwise be required to pay, each Fund has elected to be treated and intends
to qualify each year as a "regulated investment company" under Subchapter M of
the Code, and to make distributions to its shareholders in accordance with
the timing requirements imposed by the Code. It is expected that each Fund
will not be required to pay any entity level federal income or excise taxes.
Each Fund expects that the dividends it pays to its shareholders from interest
on Municipal Obligations will be exempt from federal income tax, because each
Fund intends to satisfy certain requirements of the Code. One such
requirement is that at the close of each quarter of its taxable year, at least
50% of the value of each Fund's total assets consists of obligations whose
interest is exempt from federal income tax. Distributions of income from
capital gains, from investments in taxable securities and from certain other
transactions including options and futures transactions and transactions
involving Municipal Obligations purchased at a market discount will be taxable
to shareholders, whether distributed in cash or in additional shares.
Shareholders may not have to pay state or local taxes on dividends derived
from interest on U.S. government obligations, although such taxes generally
would be due with respect to capital gains realized on the disposition of such
obligations. Investors should consult with their tax advisers in this regard.
Shortly after the end of each calendar year, each Fund shareholder will be
sent a statement setting forth the federal income tax status of all
distributions for the year, including the portion (if any) taxable as ordinary
income; the portion taxable as long term capital gains; the portion, if any,
representing a return of capital (which generally is free of current taxes but
results in a basis reduction); the portion exempt from federal income taxes as
"exempt-interest dividends"; the portion, if any, that is a tax preference
item under the federal alternative minimum tax; and the amount, if any, of
federal income tax withheld.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of a Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisers before purchasing shares in a Fund.
All exempt-interest dividends may affect a corporate shareholder's alternative
minimum tax liability.
Each Fund intends to withhold U.S. federal income tax at the rate of 30% on
taxable dividends and any other payments that are subject to such withholding
and are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable
treaty. Each Fund is also required in certain circumstances to apply backup
withholding of 31% of taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident
of the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have been subject to
30% withholding. Prospective investors should read the Account Application for
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
a Fund.
STATE INCOME TAXES -- The Trust is organized as a Massachusetts business trust
and, under current law, neither the Trust nor any Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts as long as it
qualifies as a regulated investment company under the Code. Set forth below
are brief descriptions of the personal income tax status of an investment in
the Funds under tax laws currently in effect in the state for which the Fund
is named. A statement setting forth the state income tax status of each Fund's
distributions made during each calendar year will be sent to shareholders
annually.
ALABAMA TAXES -- The Alabama Department of Revenue has advised the Trust that
under existing Alabama law as long as the Alabama Fund qualifies as a separate
"regulated investment company" under the Code, and provided the Fund is
invested in obligations the interest on which would be exempt from Alabama
personal income taxes if held directly by an individual shareholder (such as
obligations of Alabama or its political subdivisions, of the United States or
of certain territories or possessions of the United States), dividends
received from the Alabama Fund that represent interest received by the Alabama
Fund on such obligations will be exempt from Alabama personal income taxes. To
the extent that distributions by the Alabama Fund are derived from long-term
or short-term capital gains on such obligations, or from dividends or capital
gains on other types of obligations, such distributions will not be exempt
from Alabama personal income tax.
Capital gains or losses realized from a redemption, sale or exchange of shares
of the Alabama Fund by an Alabama resident will be taken into account for
Alabama personal income tax purposes.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the Alabama Fund to purchase or carry shares of the Alabama Fund will not be
deductible for Alabama income tax purposes.
ARKANSAS TAXES -- On December 13, 1991, the Arkansas Department of Finance and
Administration issued a letter ruling to counsel to the Arkansas Fund
providing that with respect to funds like the Arkansas Fund, under the current
terms of the Arkansas Fund's Prospectus, income distributions to Arkansas Fund
shareholders, to the extent such distributions represent interest on
obligations of the State of Arkansas or obligations of the United States or
its possessions, will be exempt from Arkansas income tax.
Capital gains or losses realized from transactions in the portfolio securities
of the Arkansas Fund and distributed to shareholders and the capital gains and
losses realized by shareholders from redemptions, sales or exchanges of shares
of the Arkansas Fund will be taken into account for Arkansas income tax
purposes.
CALIFORNIA TAXES -- The California Fund believes that under existing
California law, as long as at the end of each quarter of the California Fund's
taxable year the California Fund continues to qualify for the special federal
income tax treatment afforded regulated investment companies and at least 50%
of the value of the California Fund's assets consists of obligations that, if
held by an individual, would pay interest exempt from California taxation,
shareholders of the California Fund will be able to exclude from income, for
California personal income tax purposes, "California exempt-interest
dividends" received from the California Fund during that taxable year. A
"California exempt-interest dividend" is any dividend or portion thereof of
the California Fund not exceeding the interest received by the California
Fund during the taxable year on obligations that, if held by an individual,
would pay interest exempt from California taxation (less certain direct and
allocated expenses which include amortization of acquisition premium) and so
designated by written notice to shareholders within 60 days after the close of
that taxable year.
Distributions, other than "California exempt-interest dividends," by the
California Fund to California residents will be subject to California
personal income taxation. Gains realized by California residents from a
redemption or sale of shares of the California Fund will also be subject to
California personal income taxation. In general, California nonresidents,
other than certain dealers, will not be subject to California personal income
taxation on distributions by the California Fund or on gains from the
redemption or sale of shares of the California Fund, unless those shares have
acquired a California "business situs." (Such California nonresidents will,
however, likely be subject to other state or local income taxes on such
distributions or gains, depending on their residence.) Short-term capital
losses realized by shareholders from a redemption of shares of the California
Fund within six months from the date of their purchase will not be allowed for
California personal income tax purposes to the extent of any tax-exempt
dividends received with respect to such shares during such period. No
deduction will be allowed for California personal income tax purposes for
interest on indebtedness incurred or continued to purchase or carry shares of
the California Fund for any taxable year of a shareholder during which the
California Fund distributes "California exempt-interest dividends."
A statement setting forth the amount of "California exempt-interest dividends"
distributed during each calendar year will be sent to shareholders annually.
FLORIDA TAXES -- Florida's constitution prohibits the levy, under the
authority of the State, of an individual income tax upon the income of natural
persons who are residents or citizens of Florida in excess of amounts which
may be credited against or deducted from any similar tax levied by the United
States or any other state. Accordingly, a constitutional amendment would be
necessary to impose a state individual income tax in excess of the foregoing
constitutional limitations. The lack of an individual income tax exposes total
State tax collections to considerably more volatility than would otherwise be
the case and, in the event of an economic downswing, could effect the State's
ability to pay principal and interest in a timely manner.
The Florida Department of Revenue has ruled that shares of a Florida series
fund owned by a Florida resident will be exempt from the Florida Intangible
Personal Property Tax so long as the fund's portfolio includes on January 1 of
each year only assets, such as Florida tax-exempt securities and United States
Government securities, that are exempt from the Florida Intangible Personal
Property Tax. Although the date of valuation is prescribed as the close of
business on the last business day of the previous calendar year, only the
assets held in the portfolio of the fund on January 1 are to be valued.
The Florida Fund will normally attempt to invest substantially all of its
assets in tax-exempt obligations of Florida, the United States, the
territories or political subdivisions of the United States or Florida
("Florida Obligations"), and it will strive to hold, on January 1 of each
year, only assets that are exempt from the Florida intangibles tax.
Accordingly, the value of the Florida Fund shares held by a shareholder
should, under normal circumstances, be exempt from the Florida intangibles
tax.
GEORGIA TAXES -- Under existing laws, shareholders will not be subject to
Georgia income tax on distributions with respect to shares of the Georgia Fund
to the extent such distributions represent "exempt-interest dividends" for
federal income tax purposes that are attributable to interest-bearing
obligations issued by or on behalf of the State of Georgia or its political
subdivisions, or issued by territories or possessions of the United States (to
the extent federal law exempts interest on obligations of such territories or
possessions from state income taxation) which are held by the Georgia Fund.
Distributions, if any, derived from capital gain or other sources generally
will be taxable to shareholders of the Georgia Fund for Georgia income tax
purposes.
MARYLAND TAXES -- Holders of the Maryland Fund who are individuals,
corporations, estates or trusts and who are subject to Maryland state and
local income tax will not be subject to tax in Maryland on Maryland Fund
dividends to the extent such dividends (A) qualify as exempt-interest
dividends of a regulated investment company under Section 852(b)(5) of the
Code which are attributable to (i) interest on tax-exempt obligations of the
State of Maryland or its political subdivisions or authorities or (ii)
interest on obligations of the United States or an authority, commission,
instrumentality, possession or territory of the United States, or (B) are
attributable to gain realized by the Maryland Fund from the sale or exchange
of bonds issued by Maryland or a political subdivision of Maryland or of the
United States or an authority, commission or instrumentality of the United
States.
To the extent that distributions of the Maryland Fund are attributable to
sources other than those described above, such as (i) interest on obligations
issued by states other than Maryland or (ii) income from repurchase contracts,
such distributions will not be exempt from Maryland state and local income
taxes. In addition, gain realized by a shareholder upon a redemption or
exchange of Maryland Fund shares will be subject to Maryland taxation.
In the event the Maryland Fund fails to qualify as a "regulated investment
company," the Maryland Fund would be subject to corporate Maryland income tax
and distributions would be taxable as ordinary income to the shareholders.
Maryland presently includes in taxable net income items of tax preferences as
defined in the Code. Interest paid on certain private activity bonds
constitutes a tax preference. Accordingly, subject to a threshold amount, 50%
of any distributions on the Maryland Fund attributable to such private
activity bonds will not be exempt from Maryland state and local income taxes.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the Maryland Fund to purchase or carry shares of the Maryland Fund will not be
deductible for Maryland state and local income tax purposes to the extent such
interest is allocable to exempt-interest dividends.
MASSACHUSETTS TAXES -- Under existing Massachusetts law, as long as the
Massachusetts Fund qualifies as a separate "regulated investment company"
under the Code, (i) the Massachusetts Fund will not be liable for any income
or corporate excise tax in The Commonwealth of Massachusetts and (ii)
shareholders of the Massachusetts Fund who are subject to Massachusetts
personal income taxation will not be required to include in their
Massachusetts gross income that portion of dividends paid by the Fund which is
identified in a written notice mailed to its shareholders not later than 60
days after the close of the Fund's tax year as (a) "exempt-interest
dividends" directly attributable to interest received by the Massachusetts
Fund on obligations issued by The Commonwealth of Massachusetts, its political
subdivisions, or agencies or instrumentalities of either of the foregoing,
that is exempt from Massachusetts taxation; (b) capital gain dividends
directly attributable to gain from obligations issued by The Commonwealth of
Massachusetts, its political subdivisions, or agencies or instrumentalities of
either of the foregoing, that is exempt from Massachusetts taxation; or (c)
dividends attributable to interest on obligations of the United States that
are exempt from state taxation.
Any capital gains distributed by the Massachusetts Fund (except for cases in
which capital gains on an obligation are specifically exempted from income
taxation under the legislation authorizing issuance of the obligation) and any
gains realized by the shareholder from a redemption or sale of shares of the
Massachusetts Fund will be subject to Massachusetts personal income taxation.
MISSISSIPPI TAXES -- Interest received upon the obligations of the State of
Mississippi or political subdivisions thereof are exempt from income tax in
the State of Mississippi. A Mississippi Income Tax Regulation provides a pass-
through of the tax-exempt character of interest received by a regulated
investment company, such as the Mississippi Fund, upon distribution to its
shareholders. Under this Regulation, a taxpayer's pro rata portion of interest
dividends distributed by the Mississippi Fund is exempt from Mississippi
income tax to the extent that such pro rata portion represents interest
received by the Fund from governmental securities which would be exempt for
Mississippi income tax purposes if such governmental securities were directly
held by the taxpayer.
NEW YORK TAXES -- Under existing New York laws, shareholders will not be
subject to New York State nor New York City personal income taxes on New York
Fund dividends to the extent that such dividends qualify as "exempt-interest
dividends" under the Code and represent interest income attributable to
obligations of the State of New York and its political subdivisions (as well
as certain other obligations the interest on which is exempt from New York
State and New York City personal income taxes, such as, for example, certain
obligations of The Commonwealth of Puerto Rico). To the extent that New York
Fund distributions are derived from other income, including long-term or
short-term capital gains, such distributions will not be exempt from New York
State or New York City personal income tax.
Dividends on shares of the New York Fund are not excluded from net income in
determining New York State or New York City franchise taxes on corporations or
financial institutions.
Capital gains or losses realized by a shareholder from a redemption, sale or
exchange of shares of the New York Fund will be taken into account for New
York State personal income tax purposes, in the case of a New York State
resident, and for New York City personal income tax purposes, in the case of a
resident of New York City.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the New York Fund to purchase or carry shares of the New York Fund will not be
deductible for New York State or New York City personal income tax purposes.
NORTH CAROLINA TAXES -- The North Carolina Department of Revenue has advised
the Trust that under existing North Carolina law, as long as the North
Carolina Fund qualifies as a separate "regulated investment company" under the
Code and 50% or more of the value of the total assets of the North Carolina
Fund consists of obligations whose interest is exempt from federal income tax,
dividends received from the North Carolina Fund that represent either (i)
interest exempt from federal income tax and received by the North Carolina
Fund on obligations of North Carolina or its political subdivisions, nonprofit
educational institutions organized or chartered under the laws of North
Carolina, or Guam, Puerto Rico, or the U.S. Virgin Islands including the
governments thereof and their agencies, instrumentalities and authorities, or
(ii) interest received by the North Carolina Fund on direct obligations of the
United States will be exempt from North Carolina personal income taxes. In the
event the North Carolina Fund fails to qualify as a separate "regulated
investment company" or does not satisfy the 50% test, the foregoing exemption
may be unavailable or substantially limited.
Any capital gains distributed by the North Carolina Fund (except for capital
gains attributable to the sale by the North Carolina Fund of an obligation the
profit from which is exempt by a North Carolina statute) or gains realized by
the shareholder from a redemption or sale of shares of the North Carolina Fund
will be subject to North Carolina personal income taxes.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the North Carolina Fund to purchase or carry shares of the North Carolina
Fund generally will not be deductible for North Carolina income tax purposes.
PENNSYLVANIA TAXES -- Individual shareholders who are Pennsylvania residents
subject to the Pennsylvania personal income tax will not be subject to
Pennsylvania personal income tax on distributions of income and gains made by
the Fund which are attributable to obligations issued by the Commonwealth of
Pennsylvania and its political subdivisions, agencies and instrumentalities,
certain qualifying obligations of United States territories and possessions or
United States Government obligations, the interest and gains from which are
statutorily free from state taxation in the Commonwealth of Pennsylvania
("exempt obligations"). Capital gain distributions by the Fund will be subject
to Pennsylvania personal income tax.
Distributions attributable to most other sources will not be exempt from
Pennsylvania personal income tax.
Corporate shareholders who are subject to the Pennsylvania corporate net
income tax will not be subject to corporate net income tax on distributions of
interest made by the Pennsylvania Fund, provided such distributions are
attributable to obligations issued by the Commonwealth of Pennsylvania and its
political subdivisions, agencies and instrumentalities, and certain qualifying
territories and possessions of the United States, and further provided such
distributions are not included in such shareholder's Federal taxable income
determined before net operating loss carryovers and special deductions.
Shares of the Pennsylvania Fund which are held by individual shareholders who
are Pennsylvania residents and subject to the Pennsylvania county personal
property tax will be exempt from such tax to the extent that the Fund's
portfolio consists of exempt obligations on the annual assessment date.
Further, shares of the Fund which are held by individual shareholders who are
residents of the City of Pittsburgh or the School District of Pittsburgh, or
both, will be exempt from the personal property tax imposed by each such
jurisdiction to the extent that the Fund's portfolio consists of exempt
obligations on the annual assessment date. Corporations are not subject to
Pennsylvania personal property taxes.
In the case of individual shareholders who are residents of the City of
Philadelphia, distributions of interest derived from exempt obligations will
not be taxable for purposes of the Philadelphia School District Investment Net
Income Tax.
SOUTH CAROLINA TAXES -- Under existing South Carolina law, as long as the
South Carolina Fund qualifies as a separate "regulated investment company"
under the Code, shareholders of the South Carolina Fund will not be required
to include in their South Carolina gross income distributions from the South
Carolina Fund to the extent such distributions qualify as "exempt-interest
dividends" as defined in the Code, which are directly attributable to interest
received by the South Carolina Fund on tax-exempt obligations issued by the
State of South Carolina or its political subdivisions or the United States. In
the event the South Carolina Fund fails to qualify as a separate "regulated
investment company," the foregoing exemption may be unavailable or
substantially limited.
Any capital gains distributed by the South Carolina Fund, or gains realized by
a shareholder from a redemption or sale of shares of the South Carolina Fund,
will be subject to South Carolina income taxation.
As intangible personal property, the shares of the South Carolina Fund are
exempt from any and all ad valorem taxation in South Carolina.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the South Carolina Fund to purchase or carry shares of the South Carolina Fund
generally will not be deductible for South Carolina income tax purposes.
TENNESSEE TAXES -- Under existing Tennessee law, as long as the Tennessee Fund
qualifies as a separate "regulated investment company" under the Code,
dividends received from the Tennessee Fund will not be subject to the
Tennessee individual income tax, also known as the Hall Income Tax, to the
extent that such dividends represent income of the Tennessee Fund attributable
to interest on (i) bonds or securities of the United States Government or any
agency or instrumentality thereof, (ii) bonds of the State of Tennessee or any
county, municipality, or political subdivision thereof, including any agency,
board, authority, or commission, or (iii) bonds of Puerto Rico, U.S. Virgin
Islands, or Guam. In addition, the administrative position of the Tennessee
Department of Revenue is that dividends received from the Tennessee Fund will
not be subject to the Tennessee individual income tax to the extent that such
dividends represent income of the Tennessee Fund attributable to capital gains
from the sale, exchange, redemption, payment at maturity, or other disposition
of such bonds or securities.
Other distributions from the Tennessee Fund, including dividends attributable
to obligations of issuers in states other than Tennessee, will not be exempt
from the Tennessee individual income tax.
VIRGINIA TAXES -- Under existing Virginia law, as long as the Virginia Fund
qualifies as a separate "regulated investment company" under the Code, and 50%
or more of the value of the total assets of the Virginia Fund consists of
obligations whose interest is exempt from federal income tax, dividends
received from the Virginia Fund that represent either (i) interest exempt from
federal income tax and received by the Virginia Fund on obligations of
Virginia or its political subdivisions or Guam, Puerto Rico, or the U.S.
Virgin Islands or (ii) interest received by the Virginia Fund on direct
obligations of the United States will be exempt from Virginia personal income
taxes. In the event the Virginia Fund fails to qualify as a separate
"regulated investment company" or does not satisfy the 50% test, the foregoing
exemption may be unavailable or substantially limited.
An individual shareholder of the Virginia Fund who is a Virginia resident will
recognize capital gains for Virginia income tax purposes to the same extent
that he would for federal income tax purposes when the Virginia Fund makes a
capital gain distribution or when the shareholder redeems or sells shares.
Interest on indebtedness incurred (directly or indirectly) by a shareholder of
the Virginia Fund to purchase or carry shares of the Virginia Fund generally
will not be deductible for Virginia income tax purposes.
WEST VIRGINIA TAXES -- In 1993, the West Virginia Department of Tax and
Revenue issued Technical Assistance Advisory 93-002 which was declared to be
of precedential value. This Technical Assistance Advisory addresses liability
for West Virginia personal income tax on interest and dividend income received
by investors in regulated investment companies. Accordingly, under existing
law, as long as the West Virginia Fund qualifies as a separate "regulated
investment company" under the Code, that portion of exempt-interest dividends
that represents interest income received by the West Virginia Fund from
obligations of the United States and its possessions and interest or dividend
income received by the West Virginia Fund on obligations or securities of any
authority, commission or instrumentality of the United States or of the State
of West Virginia, which is exempt from West Virginia State income tax by
federal or West Virginia law, is exempt from West Virigina Personal Income
Tax. This exemption does not apply to any portion of interest income on
obligations of any state other than West Virginia, regardless of any exemption
provided under federal law. In the event the West Virginia Fund fails to
qualify as a separate "regulated investment company," the foregoing exemption
may be unavailable or substantially limited.
The Technical Assistance Advisory contains a more specific, although
nonexclusive, list of obligations and authorities which are exempt from
taxation. The Technical Assistance Advisory also confirms that interest on
indebtedness incurred (directly or indirectly) by a shareholder of the West
Virginia Fund to purchase or carry shares of the West Virginia Fund will not
be deductible for West Virginia income purposes.
NET ASSET VALUE
The net asset value per share of each class of each Fund is determined each
day during which the Exchange is open for trading. This determination is made
once each day as of the close of regular trading on the Exchange by deducting
the amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. In determining such net asset value, the
portfolio securities of each Fund are valued on the basis of valuations
furnished by a pricing service, since such valuations are believed to reflect
the fair value of such securities, as described in the SAI. A share's net
asset value is effective for orders received by the dealer prior to its
calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Fund has two classes of shares entitled Class A and Class B Shares of
Beneficial Interest (without par value). The California Fund, the North
Carolina Fund and the Virginia Fund also have a third class of shares entitled
Class C Shares of Beneficial Interest (without par value). The Trust presently
has 16 series of shares and has reserved the right to create and issue
additional series and classes of shares. The shares of each class of each Fund
participate equally in the earnings, dividends and assets attributable to that
class of shares of the particular Fund. Shareholders are entitled to one vote
for each share held. Shares of each Fund generally vote separately, for
example to approve investment advisory agreements, but shares of all Funds
vote together, including shares of other series of the Trust, to the extent
required under the 1940 Act, in the election of Trustees and selection of
accountants. Additionally, each class of shares of a Fund will vote separately
on any material increases in the fees under its Distribution Plan or on any
other matter that affects solely its class of shares, but will otherwise vote
together with all other classes of shares of the Fund on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Declaration
of Trust provides that a Trustee may be removed from office in certain
instances (see "Description of Shares, Voting Rights and Liabilities" in the
SAI).
Each share of a class of each Fund represents an equal proportionate interest
in that Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B Shares"). Shares are
fully paid and non-assessable. Should a Fund be liquidated, shareholders of
each class of that Fund are entitled to share pro rata in the net assets
attributable to that class available for distribution to shareholders. Shares
will remain on deposit with the Shareholder Servicing Agent and certificates
will not be issued except in connection with pledges and assignments and in
certain other limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and errors and omissions
insurance) existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Trust will provide yield, tax-equivalent yield, current
distribution rate and total rate of return quotations for each class of shares
of each Fund and may also quote fund rankings in the relevant fund category
from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Yield and tax-equivalent yield
quotations are based on the annualized net investment income per share of each
class of a Fund over a 30-day period stated as a percent of the maximum public
offering price of shares of that class on the last day of that period. The
yield calculation for Class B and Class C shares assumes no CDSC is paid. The
current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past 12 months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of
such period. Current distribution rate calculations for Class B and Class C
shares assume no CDSC is paid. The current distribution rate differs from the
yield and tax-equivalent yield calculations because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income from option writing, short-term capital gains, and
return of invested capital, and is calculated over a different period of time.
Total rate of return quotations reflect the average annual percentage change
over stated periods in the value of an investment in a class of shares of a
Fund made at the maximum public offering price of the shares of that class
with all dividends reinvested and which will give effect to the imposition of
any applicable CDSC assessed upon redemptions of Class B and Class C shares.
Such total rate of return quotations may be accompanied by quotations which do
not reflect the reduction in value of the initial investment due to the sales
charge or the deduction of the CDSC, and which will thus be higher. Each
Fund's yield, tax-equivalent yield and total rate of return quotations are
based on historical performance and are not intended to indicate future
performance. Yield and tax-equivalent yield reflect only net portfolio income
allocable to a class as of a stated period of time, and current distribution
rate reflects only the rate of distributions paid by a Fund over a stated
period of time, while total rate of return reflects all components of
investment return over a stated period of time. All performance quotations for
a Fund may from time to time be used in advertisements, shareholder reports or
other communications to shareholders. For a discussion of the manner in which
the Trust will calculate yield, tax-equivalent yield, current distribution
rate and total rate of return, see the SAI. For further information about each
Fund's performance for the fiscal year ended March 31, 1996, please see the
Trust's Annual Report. A copy of the Annual Report may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Trust may, in its discretion, from time to time, make a list of
all or a portion of a Fund's holdings available to investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of the
Adviser and all the Trust's expenses (other than those assumed by MFS or MFD),
including: all fees paid under the Investment Advisory Agreements and
Distribution Plans; governmental fees; interest charges; taxes (if any);
membership dues in the Investment Company Institute allocable to the Trust;
fees and expenses of independent auditors and of legal counsel; expenses of
preparing, printing and mailing share certificates, periodic reports, notices
and proxy statements to shareholders and to governmental officers and
commissions; brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions; insurance
premiums; fees and expenses of State Street Bank and Trust Company, the
Trust's Custodian, for all services to the Trust, including safekeeping of
funds and securities and maintaining required books and accounts; fees and
expenses of the Shareholder Servicing Agent and of any registrar or dividend
disbursing agent of the Trust; expenses of repurchasing and redeeming shares
and servicing shareholder accounts; expenses of calculating the net asset
value of the shares of each Fund; and expenses of shareholder meetings.
Expenses relating to the issuance, registration and qualification of shares of
each Fund and the preparation, printing and mailing of prospectuses for such
purposes are borne by the Trust except that its Distribution Agreement with
MFD, as the Trust's distributor, requires MFD to pay for prospectuses which
are to be used for sales to prospective investors. Expenses of the Trust
which are not attributable to a specific Fund are allocated among the Funds in
a manner believed by management of the Trust to be fair and equitable. The
Adviser has agreed to pay the foregoing expenses for the Arkansas, Florida,
Mississippi and Pennsylvania Funds (except for the fees paid under the
Advisory Agreements and any Distribution Plan) until the dates specified
below, subject to reimbursement by such Funds, as applicable. To accomplish
such reimbursement, the Adviser is entitled to receive an expense
reimbursement fee from each such Fund in addition to the management fees,
computed and paid monthly at the annual rate of 0.40% of the average daily net
assets of the Fund for its then-current fiscal year, with a limitation that
immediately after any such payment the aggregate expenses of each such Fund,
including the management fee but excluding any Distribution Plan fees, will
not exceed 0.95% of its average daily net assets. For the Florida Fund, MFS
has voluntarily reduced its expense reimbursement fee with respect to the
Class A shares to 0.33% per annum of the average daily net assets of the Class
A shares. For the Missisippi Fund, MFS has voluntarily reduced its expense
reimbursement fee to 0.30% and 0.37% per annum of the average daily net assets
of the Class A shares and Class B shares, respectively, and will increase the
fee to 0.33% and 0.40% per annum, respectively, on October 1, 1996. For the
Pennsylvania Fund, MFS has voluntarily reduced its expense reimbursement fee
to 0.00% for an indefinite period. These fee reductions may be revised or
rescinded by the Adviser at any time without notice to shareholders. The
expense reimbursement and fee agreement terminates for each such Fund on the
earlier of either the date on which the payments made thereunder by such Fund
equal the prior payment of such reimbursable expenses by the Adviser or
December 31, 2001 (in the case of the Arkansas, Florida and Mississippi
Funds), or December 31, 2002 (in the case of the Pennsylvania Fund).
6. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Trust should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder of each Fund will
receive confirmation statements showing the transaction activity in his
account. Cancelled checks, if any, will be sent to shareholders monthly. Each
shareholder will receive an annual statement of the federal income tax and the
state personal income tax status of reportable distributions made by the Fund
during the calendar year (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts ) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares of that Fund. This option will be assigned if no other option is
specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares of that Fund.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) of dividends and capital gain
distributions will be made in additional full and fractional shares of that
Fund at the net asset value in effect at the close of business on the last
business day of the month. Dividends and capital gain distributions in amounts
less than $10 will automatically be reinvested in additional shares of the
Fund. If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from the Shareholder Servicing Agent with regard to
uncashed distribution checks, such shareholder's distribution option
automatically will be converted to having all dividends and other
distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent a
reasonable time prior to the last business day of the month for a dividend or
distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Trust makes available the following programs designed to enable shareholders
to add to their investment in an account with the Trust or withdraw from it
with a minimum of paper work. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Trust.
LETTER OF INTENT: If a shareholder (other than group purchases as
described in the SAI) anticipates purchasing $100,000 or more of Class A
shares of a Fund alone or in combination with Class B or Class C Shares of the
Fund or any of the classes of the other MFS Funds or MFS Fixed Fund (a bank
collective investment fund) within a 13-month period (or 36-month period for
purchases of $1 million or more), the shareholder may obtain such shares at
the same reduced sales charge as though the total quantity were invested in
one lump sum, subject to escrow agreements and the appointment of an attorney
for redemptions from the escrow amount if the intended purchases are not
completed, by completing the Letter of Intent section of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds, reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of a Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of another MFS Fund. Furthermore, distributions made by a Fund may
be automatically invested at net asset value (and without any applicable CDSC)
in shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) periodic payments based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
(a "SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP will not be subject to a CDSC and generally are limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC
will not be waived in the case of SWP redemptions of Class A shares which are
subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or
investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of the other MFS Funds, and in the case of Class C shares, for shares of MFS
Money Market Fund, under the Automatic Exchange Plan, a dollar cost averaging
program. The Automatic Exchange Plan provides for automatic monthly or
quarterly exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of other MFS Funds selected by the shareholder
provided such shares are available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different
funds. A shareholder should consider the objectives and policies of a fund and
review its prospectus before electing to exchange money into such fund through
the Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges
from MFS Money Market Fund, MFS Government Money Market Fund or Class A shares
of MFS Cash Reserve Fund will be subject to any applicable sales charge. For
federal and (generally) state income tax purposes, an exchange is treated as a
sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and
loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares and because of
assessement of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Funds may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax advisers before establishing any of the tax-deferred retirement
plans described above.
----------------
The Trust's SAI contains more detailed information about the Trust and the
Funds, including, but not limited to, information related to (i) each Fund's
investment objective, policies and restrictions; (ii) the Trust's Trustees,
officers and investment adviser; (iii) portfolio transactions; (iv) the method
used to calculate performance quotations of each of the Funds; (v) the Class
A, Class B and Class C Distribution Plans; (vi) various services and
privileges provided by the Trust for the benefit of the shareholders of each
of the Funds; (vii) determination of net asset value of shares of each of the
Funds; and (viii) certain voting rights of shareholders of each of the Funds.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and CDSC for Class A
shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on redemptions of certain
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of the MFS Funds pursuant to the
Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Management, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of 401(a) or ESP Plan participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of the
401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn),
unless immediately prior to the redemption, the aggregate amount
invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on redemptions of certain Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1.
SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
TAX EQUIVALENT YIELD TABLES
(RATES FOR 1996 UNDER FEDERAL AND STATE INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent
to tax-exempt bond yields, for the ranges indicated, under federal and,
respectively, Alabama, Arkansas, California, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia and West Virginia personal income tax laws that apply to
1996. The State of Florida does not currently impose an income tax on
individuals. Such yields will differ under the laws applicable to subsequent
years. Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns. In each table, the effective marginal income tax rate
will be increased if personal exemptions are phased out (for the phase out
period only) and if a portion of itemized deductions is disallowed. This
increase in the marginal rates, if applicable, will cause a corresponding
increase in the equivalent taxable yields.
<TABLE>
<CAPTION>
ALABAMA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 19.11% 3.71% 4.94% 6.18% 7.42% 8.65% 9.89% 0.15 0.048333 0.1911
$ 0- 40,100 19.08 3.71 4.94 6.18 7.41 8.65 9.89 0.15 0.048004 0.1908
$ 24,000- 58,150 $ 40,100- 96,900 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 58,150-121,300 $ 96,900-147,700 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$121,300-263,750 $147,700-263,750 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$263,750 & Over $263,750 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
<FN>
* Net amount subject to Federal and Alabama personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Alabama rate assumes itemization of state tax deduction.
</TABLE>
<TABLE>
ARKANSAS
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 18.61% 3.69% 4.91% 6.14% 7.37% 8.60% 9.83% 0.15 0.042502 0.1861
$ 0- 40,100 19.53 3.73 4.97 6.21 7.46 8.70 9.94 0.15 0.053293 0.1953
$ 24,000- 58,150 33.02 4.48 5.97 7.46 8.96 10.45 11.94 0.28 0.069707 0.3302
$ 40,100- 96,900 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 58,150-121,300 $ 96,900-147,700 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$121,300-263,750 $147,700-263,750 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$263,750 & over $263,750 & over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
<FN>
* Net amount subject to Federal and Arkansas personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Arkansas rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 17.84% 3.65% 4.87% 6.09% 7.30% 8.52% 9.74% 0.15 0.033389 0.1784
$ 0- 40,100 17.39 3.63 4.84 6.05 7.26 8.47 9.68 0.15 0.028147 0.1739
$ 24,000- 58,150 34.44 4.58 6.10 7.63 9.15 10.68 12.20 0.28 0.089435 0.3444
$ 40,100- 96,900 34.06 4.55 6.07 7.58 9.10 10.62 12.13 0.28 0.084123 0.3406
$ 58,150-121,300 37.50 4.80 6.40 8.00 9.60 11.20 12.80 0.31 0.094260 0.3750
$ 96,900-147,700 37.42 4.79 6.39 7.99 9.59 11.19 12.78 0.31 0.093000 0.3742
$121,300-263,750 42.60 5.23 6.97 8.71 10.45 12.20 13.94 0.36 0.103080 0.4260
$147,700-263,750 42.12 5.18 6.91 8.64 10.37 12.09 13.82 0.36 0.095647 0.4212
$263,750-439,744 45.64 5.52 7.36 9.20 11.04 12.88 14.72 0.396 0.100000 0.4564
$263,750 & over $439,744 & over 46.24 5.58 7.44 9.30 11.16 13.02 14.88 0.396 0.110000 0.4624
<FN>
* Net amount subject to Federal and California personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and California rate assumes itemization of state tax deduction.
**** California tax rates are based on 1995 information, since at this time 1996 information is not available.
</TABLE>
<TABLE>
<CAPTION>
GEORGIA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 19.43% 3.72% 4.96% 6.21% 7.45% 8.69% 9.93% 0.15 0.052075 0.1943
$ 0- 40,100 19.55 3.73 4.97 6.22 7.46 8.70 9.94 0.15 0.053516 0.1955
$ 24,000- 58,150 $ 40,100- 96,900 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 58,150-121,300 $ 96,900-147,700 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$121,300-263,750 $147,700-263,750 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$263,750 & over $263,750 & over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
<FN>
* Net amount subject to Federal and Georgia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Georgia rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MARYLAND
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 19.04% 3.71% 4.94% 6.18% 7.41% 8.65% 9.88% 0.15 0.047499 0.1904
$ 0- 40,100 19.12 3.71 4.95 6.18 7.42 8.65 9.89 0.15 0.048503 0.1912
$ 24,000- 58,150 $ 40,100- 96,900 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 58,150-121,300 $ 96,900-147,700 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$121,300-263,750 $147,700-263,750 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$263,750 & Over $263,750 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
<FN>
* Net amount subject to Federal and Maryland personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Maryland rate assumes itemization of state tax deduction.
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 $ 0- 40,100 25.20% 4.01% 5.35% 6.68% 8.02% 9.36% 10.70% 0.15 0.120000 0.2520
$ 24,000- 58,150 $ 40,100- 96,900 36.64 4.73 6.31 7.89 9.47 11.05 12.63 0.28 0.120000 0.3664
$ 58,150-121,300 $ 96,900-147,700 39.28 4.94 6.59 8.23 9.88 11.53 13.18 0.31 0.120000 0.3928
$121,300-263,750 $147,700-263,750 43.68 5.33 7.10 8.88 10.65 12.43 14.20 0.36 0.120000 0.4368
$263,750 & over $263,750 & over 46.85 5.64 7.53 9.41 11.29 13.17 15.05 0.396 0.120000 0.4685
<FN>
* Net amount subject to Federal and Massachusetts personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Massachusetts rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MISSISSIPPI
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 18.72% 3.69% 4.92% 6.15% 7.38% 8.61% 9.84% 0.15 0.043749 0.1872
$ 0- 40,100 18.93 3.70 4.93 6.17 7.40 8.63 9.87 0.15 0.046259 0.1893
$ 24,000- 58,150 $ 40,100- 96,900 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 58,150-121,300 $ 96,900-147,700 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$121,300-263,750 $147,700-263,750 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$263,750 & over $263,750 & over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
<FN>
* Net amount subject to Federal and Mississippi personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Mississippi rate assumes itemization of state tax deduction.
</TABLE>
<TABLE>
<CAPTION>
NEW YORK STATE RESIDENTS (EXCEPT NEW YORK CITY RESIDENTS)
1996 TAX YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 20.13% 3.76% 5.01% 6.26% 7.51% 8.76% 10.02% 0.15 0.060363 0.2013
$ 0- 40,100 19.95 3.75 5.00 6.25 7.50 8.74 9.99 0.15 0.058219 0.1995
$ 24,000- 58,150 33.13 4.49 5.98 7.48 8.97 10.47 11.96 0.28 0.071250 0.3313
$ 40,100- 96,900 33.13 4.49 5.98 7.48 8.97 10.47 11.96 0.28 0.071250 0.3313
$ 58,150-121,300 35.92 4.68 6.24 7.80 9.36 10.92 12.48 0.31 0.071250 0.3592
$ 96,900-147,700 35.92 4.68 6.24 7.80 9.36 10.92 12.48 0.31 0.071250 0.3592
$121,300-263,750 $147,700-263,750 40.56 5.05 6.73 8.41 10.09 11.78 13.46 0.36 0.071250 0.4056
$263,750 & over $263,750 & over 43.90 5.35 7.13 8.91 10.70 12.48 14.26 0.396 0.071250 0.439
<FN>
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY
1996 TAX YEAR
- ------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------ INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX -------------------------------------------
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
- ----------------- ----------------- --------- -------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 23.35% 3.91% 5.22% 6.52% 7.83% 9.13% 10.44%
$ 0- 40,100 23.14 3.90 5.20 6.51 7.81 9.11 10.41
$ 24,000- 58,150 36.31 4.71 6.28 7.85 9.42 10.99 12.56
$ 40,100- 96,900 36.30 4.71 6.28 7.85 9.42 10.99 12.56
$ 58,150-121,300 38.99 4.92 6.56 8.20 9.83 11.47 13.11
$ 96,900-147,700 38.98 4.92 6.56 8.19 9.83 11.47 13.11
$121,300-263,750 $147,700-263,750 43.41 5.30 7.07 8.84 10.60 12.37 14.14
$263,750 & over $263,750 & over 46.60 5.62 7.49 9.36 11.24 13.11 14.98
<CAPTION>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY (CONTINUED)
1996 TAX YEAR
- --------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------ INCOME AVERAGE AVERAGE AVERAGE AVERAGE COMBINED
SINGLE JOINT TAX FEDERAL STATE CITY NYC ADD'L FED. & ST.
1996 1996 BRACKET** RATE RATE RATE SURCHARGE SURCHARGE RATE
- ----------------- ----------------- --------- ------ -------- -------- --------- --------- ----------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 23.35% 0.15 0.060363 0.029791 0.003465 0.004656 0.2335
$ 0- 40,100 23.14 0.15 0.058219 0.029543 0.003399 0.004611 0.2314
$ 24,000- 58,150 36.31 0.28 0.071250 0.033485 0.005112 0.005602 0.3631
$ 40,100- 96,900 36.30 0.28 0.071250 0.033457 0.005135 0.005403 0.363
$ 58,150-121,300 38.99 0.31 0.071250 0.033985 0.005100 0.005473 0.3899
$ 96,900-147,700 38.98 0.31 0.071250 0.033891 0.005100 0.005459 0.3898
$121,300-263,750 $147,700-263,750 43.41 0.36 0.071250 0.034000 0.005100 0.005474 0.4341
$263,750 & over $263,750 & over 46.60 0.396 0.071250 0.034000 0.005100 0.005474 0.466
<FN>
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTH CAROLINA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 20.50% 3.77% 5.03% 6.29% 7.55% 8.81% 10.06% 0.15 0.064685 0.2050
$ 0- 40,100 20.50 3.77 5.03 6.29 7.55 8.81 10.06 0.15 0.064699 0.2050
$ 24,000- 58,150 $ 40,100- 96,900 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 58,150-121,300 36.33 4.71 6.28 7.85 9.42 10.99 12.56 0.31 0.077280 0.3633
$ 96,900-147,700 36.32 4.71 6.28 7.85 9.42 10.99 12.56 0.31 0.077042 0.3632
$121,300-263,750 $147,700-263,750 40.96 5.08 6.78 8.47 10.16 11.86 13.55 0.36 0.077500 0.4096
$263,750 & over $263,750 & over 44.28 5.38 7.18 8.97 10.77 12.56 14.36 0.396 0.077500 0.4428
<FN>
* Net amount subject to Federal and North Carolina personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and North Carolina rate assumes itemization of state tax deduction.
</TABLE>
<TABLE>
<CAPTION>
PENNSYLVANIA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 $ 0- 40,100 17.38% 3.63% 4.84% 6.05% 7.26% 8.47% 9.68% 0.15 0.028000 0.1738
$ 24,000- 58,150 $ 40,100- 96,900 30.02 4.29 5.72 7.14 8.57 10.00 11.43 0.28 0.028000 0.3002
$ 58,150-121,300 $ 96,900-147,700 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.31 0.028000 0.3293
$121,300-263,750 $147,700-263,750 37.79 4.82 6.43 8.04 9.64 11.25 12.86 0.36 0.028000 0.3779
$263,750 & over $263,750 & over 41.29 5.11 6.81 8.52 10.22 11.92 13.63 0.396 0.028000 0.4129
<FN>
* Net amount subject to Federal and Pennsylvania personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average rate for the Federal tax bracket.
*** Combined Federal and Pennsylvania rate assumes itemization of state tax deduction.
**** Pennsylvania tax rates and brackets are based on 1995 information, since at this time 1996 information is not available.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTH CAROLINA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 19.79% 3.74% 4.99% 6.23% 7.48% 8.73% 9.97% 0.15 0.056405 0.1979
$ 0- 40,100 20.26 3.76 5.02 6.27 7.52 8.78 10.03 0.15 0.061863 0.2026
$ 24,000- 58,150 $ 40,100- 96,900 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 58,150-121,300 $ 96,900-147,700 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$121,300-263,750 $147,700-263,750 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$263,750 & over $263,750 & over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
<FN>
* Net amount subject to Federal and South Carolina personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and South Carolina rate assumes itemization of state tax deduction.
</TABLE>
<TABLE>
<CAPTION>
TENNESSEE
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 $ 0- 40,100 20.10% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 0.15 0.060000 0.2010
$ 24,000- 58,150 $ 40,100- 96,900 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 58,150-121,300 $ 96,900-147,700 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$121,300-263,750 $147,700-263,750 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$263,750 & over $263,750 & over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
<FN>
* Net amount subject to Federal and Tennessee personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Tennessee rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VIRGINIA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 18.98% 3.70% 4.94% 6.17% 7.41% 8.64% 9.87% 0.15 0.046770 0.1898
$ 0- 40,100 19.34 3.72 4.96 6.20 7.44 8.68 9.92 0.15 0.051078 0.1934
$ 24,000- 58,150 $ 40,100- 96,900 32.14 4.42 5.89 7.37 8.84 10.32 11.79 0.28 0.057500 0.3214
$ 58,150-121,300 $ 96,900-147,700 34.97 4.61 6.15 7.69 9.23 10.76 12.30 0.31 0.057500 0.3497
$121,300-263,750 $147,700-263,750 39.68 4.97 6.63 8.29 9.95 11.60 13.26 0.36 0.057500 0.3968
$263,750 & over $263,750 & over 43.07 5.27 7.03 8.78 10.54 12.30 14.05 0.396 0.057500 0.4307
<FN>
* Net amount subject to Federal and Virginia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Virginia rate assumes itemization of state tax deduction.
</TABLE>
<TABLE>
<CAPTION>
WEST VIRGINIA
1996 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED & ST.
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 18.05% 3.66% 4.88% 6.10% 7.32% 8.54% 9.76% 0.15 0.035832 0.1805
$ 0- 40,100 18.35 3.67 4.90 6.12 7.35 8.57 9.80 0.15 0.039426 0.1835
$ 24,000- 58,150 31.80 4.40 5.87 7.33 8.80 10.26 11.73 0.28 0.052826 0.3180
$ 40,100- 96,900 32.55 4.45 5.93 7.41 8.90 10.38 11.86 0.28 0.063248 0.3255
$ 58,150-121,300 35.47 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.064734 0.3547
$ 96,900-147,700 35.49 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.065000 0.3549
$121,300-263,750 $147,700-263,750 40.16 5.01 6.68 8.36 10.03 11.70 13.37 0.36 0.065000 0.4016
$263,750 & over $263,750 & over 43.53 5.31 7.08 8.85 10.63 12.40 14.17 0.396 0.065000 0.4353
<FN>
* Net amount subject to Federal and West Virginia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and West Virginia rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
APPENDIX C
DESCRIPTION OF MUNICIPAL OBLIGATIONS AND RATINGS
Municipal Obligations include bonds, notes and commercial paper issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is also exempt from the personal
income taxes of any state). Municipal Obligation bonds are issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligation bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds (referred to under
current tax law as private activity bonds), are issued by or on behalf of public
authorities to obtain funds to provide privately-operated housing facilities,
airport, mass transit or port facilities, sewage disposal, solid waste disposal
or hazardous waste treatment or disposal facilities and certain local facilities
for water supply, gas or electricity. Such obligations are included within the
term Municipal Obligations if the interest paid thereon qualifies as exempt from
federal income tax. Other types of industrial development bonds, the proceeds of
which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute Municipal
Obligations, although the current federal tax laws place substantial limitations
on the size of such issues.
The two principal classifications of Municipal Obligation bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its good faith, credit and taxing power for the payment of
principal and interest. The payment of the principal of and interest on such
bonds may be dependent upon an appropriation by the issuer's legislative body.
The characteristics and enforcement of general obligation bonds vary according
to the law applicable to the particular issuer. Revenue bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source. Industrial development bonds which are Municipal Obligations are in most
cases revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. Municipal Bonds also include participations in
municipal leases. These are undivided interests in a portion of an obligation in
the form of a lease or installment purchase which is issued by state and local
governments to acquire equipment and facilities. Municipal leases frequently
have special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt- issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. Although the obligations will be secured by the leased
equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might, in some cases, prove difficult. In light
of these concerns, the Trust has adopted and follows procedures for determining
whether municipal lease securities purchased by the Trust are liquid and for
monitoring the liquidity of municipal lease securities held in the Trust's
portfolio. The procedures require that a number of factors be used in evaluating
the liquidity of a municipal lease security, including the frequency of trades
and quotes for the security, the number of dealers willing to purchase or sell
the security and the number of other potential purchasers, the willingness of
dealers to undertake to make a market in the security, the nature of the market
place in which the security trades, the credit quality of the security, and
other factors which the Adviser may deem relevant. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications, depending on numerous factors.
Municipal Obligation notes generally are used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
Obligation notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, use and business
taxes, and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under Federal Revenue Sharing Programs.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most
cases, the long-term bonds then provide the money for the repayment of the
Notes.
Issues of commercial paper typically represent short-term, unsecured, negotiable
promissory notes. These obligations are issued by agencies of state and local
governments to finance seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases, Municipal
Obligation commercial paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions of
the Municipal Obligation market, size of a particular offering, the maturity of
the obligation and rating (if any) of the issue.
DESCRIPTION OF RATINGS+
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their opinions as
to the quality of various debt obligations. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, Municipal
Obligations with the same maturity, coupon and rating may have different yields
while Municipal Obligations of the same maturity and coupon with different
ratings may have the same yield.
DESCRIPTION OF LONG-TERM DEBT RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. "BB" indicates the
least degree of speculation and "C" the highest. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or large exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payment is jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeble events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeble events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "D-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DESCRIPTION OF RATINGS OF STATE AND MUNICIPAL NOTES
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated MOODY'S INVESTMENT GRADE ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
Symbols used will be as follows:
MIG-1/VMIG-1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
STANDARD & POOR'S RATINGS SERVICES
A Standard & Poor's note rating reflects the liquidity concerns and market-
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- -- Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 -- Speculative capacity to pay principal and interest.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned "F-1+" and "F-1" ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
F-5: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D: Default. Issues assigned this rating are in actual or imminent payment
default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually senior debt obligations not having an original maturity in excess of
one year. Moody's two highest commercial paper rating categories are as follows:
"Prime-1" -- Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term senior debt obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
"Prime-2" -- Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term senior debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS SERVICES
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. S&P's two highest commercial paper rating categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
DESCRIPTION OF OTHER INVESTMENTS
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury or agencies,
authorities or instrumentalities of the U.S. Government and include bills,
certificates of indebtedness, notes and bonds. Agencies, authorities and
instrumentalities of the U.S. Government are established under the authority of
an act of Congress and include, but are not limited to, the Government National
Mortgage Association ("GNMA"), the Tennessee Valley Authority, the Bank for
Cooperatives, the Farmers Home Administration, Federal Home Loan Banks ("FHLB"),
Federal Intermediate Credit Banks, Federal Land Banks, Student Loan Marketing
Association ("SLMA") and the Federal National Mortgage Association ("FNMA").
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the United States;
others, such as securities of FHLB, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by the SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited
in a commercial bank, are for a definite period of time, earn a specified rate
of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed "accepted"
when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
- --------------
+The ratings indicated herein are believed to be the most recent ratings
available at the date of this Prospectus for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of the Trust's
fiscal year end.
<PAGE>
APPENDIX D
PORTFOLIO COMPOSITION CHARTS
The table below shows the percentages of the assets of each Fund listed below
at March 31, 1996, invested in bonds assigned to the various rating categories
by S&P, Moody's (provided only for bonds not rated by S&P), Fitch (provided
only for bonds not rated by S&P or Moody's) and Duff & Phelps (provided only
for bonds not rated by S&P, Moody's or Fitch) and in unrated bonds determined
by MFS to be of comparable quality. For a split rated bond, the S&P rating is
used, and when an S&P rating is unavailable, secondary sources are selected in
the following order: Moody's, Fitch, Duff & Phelps.
<TABLE>
<CAPTION>
FLORIDA FUND:
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 43.14% 0.00% 43.14%
AA/Aa 21.20% 0.00% 21.20%
A/A 7.32% 0.00% 7.32%
BBB/Baa 15.24% 0.00% 15.24%
BB/Ba 1.53% 6.83% 8.36%
B/B 2.56% 0.53% 3.09%
CCC/Caa 0.00% 0.00% 0.00%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.00% 0.00%
D 0.00% 0.00% 0.00%
------ ------ ------
Total: 90.99% 7.36% 98.35%
GEORGIA FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 43.68% 3.47% 47.15%
AA/Aa 23.71% 0.00% 23.71%
A/A 6.76% 1.33% 8.09%
BBB/Baa 8.18% 0.60% 8.78%
BB/Ba 4.10% 2.02% 6.12%
B/B 2.45% 1.68% 4.13%
CCC/Caa 0.00% 0.00% 0.00%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.00% 0.00%
D 0.00% 0.00% 0.00%
------ ------ ------
Total: 88.88% 9.10% 97.98%
MASSACHUSETTS FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 32.49% 0.52% 33.01%
AA/Aa 4.69% 0.36% 5.05%
A/A 32.62% 2.05% 34.67%
BBB/Baa 8.72% 4.33% 13.05%
BB/Ba 2.08% 1.91% 3.99%
B/B 0.00% 7.53% 7.53%
CCC/Caa 0.00% 0.00% 0.00%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.00% 0.00%
D 0.00% 0.14% 0.14%
------ ------ ------
Total: 80.60% 16.84% 97.44%
TENNESSEE FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 48.69% 3.14% 51.83%
AA/Aa 13.43% 0.00% 13.43%
A/A 16.94% 0.92% 17.86%
BBB/Baa 8.40% 0.81% 9.21%
BB/Ba 2.66% 2.65% 5.31%
B/B 0.00% 0.00% 0.00%
CCC/Caa 0.00% 0.00% 0.00%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.00% 0.00%
D 0.00% 0.00% 0.00%
------ ------ ------
Total: 90.12% 7.52% 97.64%
VIRGINIA FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 31.07% 1.07% 32.14%
AA/Aa 39.21% 0.00% 39.21%
A/A 12.77% 1.06% 13.83%
BBB/Baa 3.34% 2.39% 5.73%
BB/Ba 0.70% 4.18% 4.88%
B/B 0.00% 0.63% 0.63%
CCC/Caa 0.00% 0.00% 0.00%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.00% 0.00%
D 0.00% 0.00% 0.00%
------ ------ ------
Total: 87.09% 9.33% 96.42%
WEST VIRGINIA FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 49.05% 0.00% 49.05%
AA/Aa 2.57% 0.66% 3.23%
A/A 24.82% 0.29% 25.11%
BBB/Baa 16.35% 0.35% 16.70%
BB/Ba 4.67% 0.00% 4.67%
B/B 0.00% 0.90% 0.90%
CCC/Caa 0.00% 0.00% 0.00%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.00% 0.00%
D 0.00% 0.00% 0.00%
Other 0.00% 0.00% 0.00%
------ ------ ------
Total: 97.46% 2.20% 99.66%
</TABLE>
These charts do not necessarily indicate what the composition a Fund's
portfolio will be in subsequent years. Rather, a Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
<PAGE>
APPENDIX E
ADDITIONAL INFORMATION CONCERNING THE FUNDS
The following discussion regarding certain economic, financial and legal matters
pertaining to the relevant States and their governments is drawn primarily from
official statements relating to securities offerings of those States and other
publicly available documents, dated as of various dates prior to the date of
this Prospectus, and do not purport to be complete descriptions. Discussions
regarding the financial condition of a particular State government may not be
relevant to Municipal Obligations issued by political subdivisions of that
State. Moreover, the general economic conditions discussed may or may not affect
issuers of the obligations of these States. None of the information is relevant
to any tax-exempt securities issued by territories and possessions of the United
States or the District of Columbia or their political subdivisions, agencies or
instrumentalities.
ALABAMA FUND
Alabama's economy has experienced a major trend toward industrialization over
the last two decades. In 1994, manufacturing accounted for 25.58% of Alabama's
Real Gross State Product (the total value of goods and services produced in
Alabama). During the 1960's and 1970's, the State's industrial base became more
diversified and balanced, moving away from primary textiles (including apparel),
chemicals, rubber and plastics. Since the early 1990's, modernization of
existing facilities and an increase in direct foreign investments in the State
has made the manufacturing sector more competitive in domestic and international
markets.
Among the leading manufacturing industries have been pulp and paper and
chemicals, the development and growth of which have been made possible by
abundant rainfall and a high pulpwood growth rate. In recent years Alabama has
ranked as the fifth largest producer of timber in the nation. Alabama has fresh
water availability of 20 times present usage. The State's growing chemical
industry has been the natural complement of production of wood pulp and paper.
Mining, oil and gas production, textiles and apparel, rubber and plastics,
printing and publishing, steel, machinery and service industries are also
important to Alabama's economy. Coal mining is by far the most important mining
activity.
In recent years, the importance of service industries to the State's economy has
increased significantly. The major service industries in the State are the
general healthcare industries, most notably represented by the University of
Alabama medical complex in Birmingham, and the high technology research and
development industries concentrated in the Huntsville area. The financial,
insurance and real estate sectors have also shown strong growth over the last
several years.
The economy in the State of Alabama recovered quickly from the recession of the
early 1980's. The Alabama Development Office (ADO) reported as of December 31,
1994, that for the ninth consecutive year more than $2 billion in capital
investment was announced in Alabama for new and expanded industries. The State
had new and expanding capital investments of more than $3 billion in 1995, of
$2.6 billion in 1994 and $2.4 billion in 1993. These expenditures included
20,253 announced jobs created by 1,025 companies for 1993 and 22,862 announced
jobs by 944 companies in 1994. In the last six years, in excess of $15 billion
has been announced in new or expanding industry in the State. Some of the
largest investments during the period 1990-1995 included Champion International
($550 million); Mercedes Benz ($520 million); Trico Steel Co. LLC ($450
million); Boise Cascade Corp. ($400 million); Amoco Chemicals ($350 million);
EXXON Company, USA ($300 million); Amoco Chemicals ($250 million); Acustar Inc.
($200 million); United States Steel Corp. ($200 million); Courtaulds Fibers,
Inc. ($170 million); and USS Fairfield Works ($150 million).
Estimated per capita personal income in the State grew 157.9% from 1970 to 1980
and 95.0% from 1980 to 1990 as compared with growth nationwide of 141.3% and
88.4%, respectively. During 1990-94 the per capita personal income in Alabama
improved by 25.92% while nationally the improvement was only 15.42%.
Real Gross State Product (RGSP) is a comprehensive measure of economic
performance for the State of Alabama. Alabama's RGSP is defined as the total
value of all final goods and services produced in the State in constant dollar
terms. Hence, the changes in RGSP reflect changes in final output. From
1990-1994, RGSP originating in manufacturing increased by 2.0% while RGSP
originating in all the non-manufacturing sectors grew by 1.9% per year.
There was a significant decrease in unemployment in the period 1985-1989 due to
the economic recovery from the recession of the early 1980's. Since 1989,
unemployment rates have come down more gradually due to the general nationwide
reduction in activity and employment in the industrial sector. At the end of
December, 1995, the State unemployment rate was the same as the national
average, 5.6%.
In a case styled Alabama Coalition for Equity, Inc., et al. v. Folsom, et al.,
CV-90-883-M, filed on May 3, 1990, in the Circuit Court of Montgomery County,
the plaintiffs have alleged that the State of Alabama's public school funding
structure is unconstitutional under the United States Constitution and the
Alabama State Constitution. The plaintiffs sought inter alia, an injunction
prohibiting the State of Alabama from implementing or maintaining any public
school funding system perpetuating the current funding structure; a ruling
requiring the state of Alabama to maintain a constitutional public school
funding structure; and the payment of the plaintiffs' attorneys' fees.
On August 13, 1991, the court granted partial summary judgment to the plaintiffs
on the constitutionality of amendment 111, Section 256, of the Alabama
Constitution. The court ruled that this provision violated the Equal Protection
Clause of the Fourteenth Amendment to the United States Constitution. On
December 3, 1993, the court made final its Remedy Order which found the entire
educational system of the State of Alabama to be unconstitutional. The court
held that all school children have a right to attend school in a liberal system
of public schools required to be provided by the State. The Alabama Supreme
Court affirmed the trial court's ruling that the system was unconstitutional and
an appeal of the trial court's Remedy Order is pending. The trial court is
continuing to hear arguments from all parties as to its Remedy Order. The State
may be required to expend substantial amounts on implementation of and
compliance with the Order.
A case styled Eugene Crum, Jr., et al. v. State of Alabama, et al., CV-94-
T-356-N, is a class action suit pending in the United States District Court for
the Middle District of Alabama. In this case, approximately 20 state departments
are charged with racial discrimination in all aspects of their employment
practices. This case is in the discovery stage and no estimate can be made at
this time concerning any financial liability the State of Alabama that may
ultimately incur.
In an action styled South Central Bell Telephone Company v. Department of
Revenue, Montgomery County Court, Civil Action No. CV-89-2600-G, plaintiffs are
challenging the constitutionality of Section 40-14-40, Code of Alabama 1975,
which levies a franchise tax on domestic corporations based on the par value of
the shares of capital stock, while foreign corporations are taxed on the capital
employed in the State of Alabama. Plaintiff-taxpayers are attempting to
circumvent the Alabama Supreme Court's decision in White v. Reynolds Metals
Company, 558 So. 2d 373 (Ala. 1989), which upheld the franchise tax on foreign
corporations. Potential refunds could exceed $300 billion. The case was tried on
December 14, 1994, and a decision is pending.
ARKANSAS FUND
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. The State is now moving toward a heavier
manufacturing base involving more sophisticated processes and products such as
electrical machinery, transportation equipment, fabricated metals and
electronics. Arkansas now has a higher percentage of workers involved in
manufacturing than the national average. The diversification of economic
interests has lessened the State's cyclical sensitivity to the impact of any
single sector.
Arkansas' diversified economic base is also reflected in the distribution of the
State's employment among the manufacturing, trade, service and governmental
sectors. During the past decade, there have been gains in the services and
wholesale and retail trade sectors. Currently, the civilian unemployment rate in
Arkansas is below the national average.
Manufacturing continues to be a leading component of Arkansas' economy.
Manufacturing contributes over 17% of the total wage and salary component of
personal income. There is an almost equal division between durable and
nondurable goods. Non-manufacturing and non-agricultural goods provide a
balanced proportion of the overall economy and tend to insulate the State's
economy from any adverse economic conditions which affect manufacturing.
Agriculture is a significant and historical component of Arkansas' economy. Over
40% of the land in Arkansas is devoted to agriculture. Arkansas ranks first in
the nation in rice production, first in commercial broilers and fourth in
cotton.
Arkansas ranks first in the nation in the production of bromine. The State has
significant natural gas and oil production in its west, central and southern
regions.
CALIFORNIA FUND
Certain of the securities in the California Fund's portfolio may be obligations
of issuers which rely in whole or in part, directly or indirectly, on ad valorem
real property taxes as a source of revenue. Article XIIIA of the California
Constitution, adopted in 1978, limits ad valorem taxes on real property and
restricts the ability of taxing entities to increase real property tax revenues.
At the time of adoption of Article XIIIA, the State General Fund had a
substantial surplus. Following the adoption of Article XIIIA, legislation was
adopted which provided for a one-time distribution of a portion of the State's
General Fund surplus to local public agencies, the reallocation of property tax
and other revenue to such agencies, and the State's assumption of certain
obligations theretofore paid out of local funds. The surplus in the General Fund
was depleted and the State ended fiscal 1982-1983 with a General Fund deficit.
Although a surplus in the General Fund was subsequently reestablished, in recent
years the State was again operating at a substantial deficit.
At the date of this Prospectus, the State's economy appears to be improving
after a difficult recession that began in the early 1990s. During the recession,
the State has faced the worst economic, fiscal, and budgetary conditions since
the 1930s. The State ended fiscal years 1990-1991, 1991-1992, 1992-1993 and
1993-1994 with multibillion dollar deficits. Under a two-year budget plan for
fiscals 1994-1995 and 1995-1996, a substantial deficit was carried over into
fiscal 1995-1996. At the date of this Prospectus, however, current estimates
indicate that the State's deficit was substantially reduced or eliminated by the
end of fiscal 1995-1996. The State's ability to raise revenues and to reduce
expenditures to the extent necessary to balance the budget for any year depends,
among other things, upon the State's economic health and the accuracy of the
State's revenue predictions, as well as the impact of budgetary restrictions
imposed by voter-passed initiatives.
The financial difficulties experienced by the State and other issuers of
California municipal securities in recent years resulted in a series of
downgrades by the major rating agencies. Although the State has subsequently
experienced an economic recovery, as of the date of this Prospectus, Moody's and
S&P's have been reluctant to upgrade such ratings, citing, among other things,
concern about the State's ability to withstand another economic downturn, fiscal
problems at the county level, and concern about the State's ability to pass a
true balanced budget in light of federal funding cuts, political influences and
structural impediments under the State constitution.
Article XIIIB of the California Constitution, originally adopted in 1979, limits
significantly spending by state government and by "local government" (defined as
"any city, county, city and county, school district, special district,
authority, or other political subdivision of or within the state"). One of the
exclusions from these limitations for any entity of government is the debt
service costs of bonds existing or legally authorized as of January 1, 1979, or
thereafter approved by the voters. Although Article XIIIB states that it shall
not "be construed to impair the ability of the state or of any local government
to meet its obligations with respect to existing or future bonded indebtedness,"
concern has been expressed with respect to the combined effect of such
constitutionally imposed limits on the ability of California state and local
governments to utilize bond financing. For fiscal 1986-1987, Article XIIIB
spending limits required the State to return over $1 billion in unexpected
revenues to taxpayers. Article XIIIB was modified substantially by Propositions
98 and 111 of 1988 and 1990, respectively. Proposition 111 relaxed Article XIIIB
spending limits and revised Proposition 98, which, as revised, may require
approximately 40% of the State's General Fund budget and 50% of revenues
collected in excess of the State spending limit to be spent on public schools
and community colleges. Such guaranteed spending is often cited as one of the
causes of the State's recurring budget problems.
In December 1994, Orange County, California filed for protection from creditors
under federal bankruptcy law. In June 1995, Orange County negotiated a rollover
of its short-term debt originally due at such time. The major rating agencies
considered the rollover a default. In June 1996, the investors in such overdue
notes were paid and the Orange County bankruptcy ended. The California Fund did
not hold such Orange County obligations. However, the Orange County bankruptcy
and such default have had a serious effect upon the market for California
municipal obligations.
During the recession that began in 1990, the State depleted its available cash
resources and became increasingly dependent on external borrowings to meet its
cash needs. California is authorized to borrow funds by issuing such revenue
anticipation notes, revenue anticipation warrants or other short-term
instruments under legislation passed in 1983. All required payments on such
instruments issued by California have been timely made. (The difference between
revenue anticipation notes and revenue anticipation warrants is that revenue
anticipation notes must be paid back in the same fiscal year in which they are
issued and revenue anticipation warrants can be issued and redeemed in different
fiscal years.) Since 1983, California consistently has issued revenue
anticipation notes. The State had not issued revenue anticipation warrants
(other than $400 million of revenue anticipation warrants issued in 1982) until
1992 but has since issued revenue anticipation warrants four times. The State
was highly criticized by the major credit rating agencies for the State's
reliance on such external borrowings during the recession. The State was also
criticized for its issuance of registered warrants (promissory notes with no
specific maturity) to suppliers and other State payees during a two-month delay
that took place in enacting the State's budget for fiscal 1992-1993. Such
registered warrants had not been issued by the State since the 1930s. It is not
presently possible to determine the extent to which California will issue
additional revenue anticipation warrants, additional short-term interest-bearing
notes or other instruments in future fiscal years.
Because of the complex nature of Articles XIIIA and XIIIB, the possible
ambiguities and inconsistencies in their respective terms, and the applicability
of their respective exemptions and exceptions and the impossibility of
predicting future appropriations, it is not presently possible to determine the
impact of Article XIIIA or Article XIIIB or any implementing or related
legislation on the securities in the Fund's portfolio or the ability of State or
local governments to pay the interest on, or repay the principal of, such
securities. Article XIIIA and its implementing and related legislation have been
subject to legal challenges based on various State and federal constitutional
grounds. In 1979, the California Supreme Court held unconstitutional as an
impairment of contract that part of legislation distributing a portion of the
State's General Fund surplus to local public agencies which purported to
eliminate certain cost of living salary increases provided for by agreement with
certain local public agency employees. With that exception, to date the courts
either have upheld the constitutionality of Article XIIIA and its implementing
and related legislation or have interpreted them in such a manner as to avoid
the necessity for a direct determination of constitutional issues. In June 1992,
the U.S. Supreme Court upheld the constitutionality of Article XIIIA. However,
Articles XIIIA and XIIIB and their respective implementing and related
legislation may be subject to continuing or future legal challenges. It is not
presently possible to predict the outcome of any such litigation with respect to
the ultimate scope, impact or constitutionality of either Article XIIIA or
Article XIIIB, or their respective implementing or related legislation, or the
impact of any such determinations upon State agencies and local governments, or
upon the abilities of such entities to pay the interest on, or repay the
principal of, the securities in the California Fund's portfolio.
FLORIDA FUND
The information contained in this statement is being given to investors in view
of the Florida Fund's policy of concentrating its investments in Florida
issuers. The information should provide investors with a brief summary, as
opposed to a complete description, of the information discussed herein. It has
been derived from sources that are generally available to investors and is
believed to be accurate. The information has not been independently verified by
the Trust or the Fund.
Florida's financial operations are considerably different than most other states
as Florida does not impose an individual income tax. Specifically, Florida's
constitution prohibits the levy, under the authority of the State, of an
individual income tax upon the income of natural persons who are residents or
citizens of Florida in excess of amounts which may be credited against or
deducted from any similar tax levied by the United States or any other state.
Accordingly, a constitutional amendment would be necessary to impose a state
individual income tax in excess of the foregoing constitutional limitations. The
lack of an individual income tax exposes total State tax collections to
considerably more volatility than would otherwise be the case and, in the event
of an economic downswing, could affect the State's ability to pay principal and
interest in a timely manner.
Financial operations of the State of Florida covering all receipts and
expenditures are maintained through the use of four funds (the General Revenue
Fund, Trust Funds, the Working Capital Fund and the Budget Stabilization Fund).
The General Revenue Fund receives the majority of State tax revenues. The Trust
Funds consist of monies received by the State which under law or trust agreement
are segregated for a purpose authorized by law. Revenues in the General Revenue
Fund which are in excess of the amount needed to meet appropriations may be
transferred to the Working Capital Fund.
The Florida Constitution and Statutes mandate that the State budget as a whole,
and each separate fund within the State budget, be kept in balance from
currently available revenues each State fiscal year (July 1 - June 30). Pursuant
to a constitutional amendment which was ratified by the voters on November 8,
1994, the rate of growth in state revenues in a given fiscal year is limited to
no more than the average annual growth rate in Florida personal income over the
previous five years (revenues collected in excess of the limitation are
generally deposited into the Budget Stabilization Fund).
For fiscal year 1995-96, the estimated General Revenue plus Working Capital and
Budget Stabilization funds available total $15.3 billion, a 3.3% increase over
fiscal year 1994-95. With combined General Revenue, Working Capital Fund and
Budget Stabilization Fund appropriations at $14.8 billion, unencumbered reserves
at the end of fiscal year 1995-96 are estimated at $0.5 billion. For fiscal year
1996-97, the estimated General Revenue plus Working Capital and Budget
Stabilization funds available total $16.0 billion, a 4.5% increase over fiscal
year 1995-96. The Florida and United States unemployment rates for 1995 were
5.4% and 5.6%, respectively. The estimated Florida and United States
unemployment rates for 1996 and 1997 are 5.9% and 5.8%, respectively.
In 1993, the State constitution was amended to limit the annual growth in the
assessed valuation of residential property. This amendment may, over time,
constrain the growth in property taxes, a major revenue source for local
governments. While no immediate ratings implications are expected, the amendment
could have a negative impact on the financial performance of local governments
over time and lead to ratings revisions which may have a negative impact on the
prices of affected bonds.
Florida's general obligation bonds have been rated Aa/AA by both rating agencies
for over two decades.
Florida's economy is characterized by a large service sector, a dependence on
the tourism and construction industries, and a large retirement population. The
management of rapid growth has been the major challenge facing state and local
governments. While attracting many senior citizens, Florida also offers a
favorable business environment and growing employment opportunities that have
continued to generate working-age population immigration. As this growth
continues, particularly within the retirement population, the demand for both
public and private services will increase, which may strain the service sector's
capacity and impede the State's budget balancing efforts.
Florida has a proportionally greater number of persons of retirement age; a
factor that makes Florida's property and transfer payment taxes a relatively
more important source of state funding. Because transfer payments are typically
less sensitive to the business cycle than employment income, they may act as a
stabilizing force in weak economic periods.
Florida tourism appears to be suffering the effects of negative publicity
regarding crime against tourists in the state, "product maturity," higher prices
and more aggressive marketing by competing vacation destinations. Tourist
arrivals are expected to decrease 4.7% this fiscal year (1995-96) and rebound by
4.5% in fiscal year 1996-97. The total number of visiting tourists is expected
to reach 39.4 million and 41.2 million during fiscal years 1995-96 and 1996-97,
respectively.
There has been a decline in Florida's dependency on highly cyclical construction
and construction-related manufacturing sectors. For example, the total contract
construction employment as a share of total non-farm employment reached a peak
of over 10% in 1973. In 1980, the share was roughly 7.5%, and in 1995, the share
had edged downward to nearly 5%. This trend is expected to continue as Florida's
economy continues to diversify.
The Fund's investment values are expected to vary in accordance with the Fund's
investment ratings, the issuer's ability to satisfy interest and/or principal
payment obligations, the relative interest rates payable on similar investments,
and the legal environment relating to creditor's rights. In addition to the
foregoing risk factors, the Fund's policy of concentrating its investments in
Florida tax-exempt securities may make it more susceptible to risks of adverse
economic, political or regulatory developments than would be the case if the
Fund were more diversified as to geographic region and/or source of revenue.
GEORGIA FUND
Since 1973, the State's long-term debt obligations have been issued in the form
of general obligation debt or guaranteed revenue debt. The State may incur
guaranteed revenue debt by guaranteeing the payment of certain revenue
obligations issued by an instrumentality of the State. Prior to 1973, all of the
State's long-term debt obligations were issued by ten separate State authorities
and secured by lease rental agreements between such authorities and various
State departments and agencies ("Authority Lease Obligations"). The Georgia
Constitution since 1973 has prohibited further Authority Lease Obligations. The
Georgia Constitution prohibits the incurring of any general obligation debt or
guaranteed revenue debt if the highest aggregate annual debt service requirement
for the then-current year or any subsequent fiscal year for outstanding general
obligation debt and guaranteed revenue debt, including the proposed debt, and
the highest aggregate annual payments for the then-current year of any
subsequent fiscal year of the State for all remaining Authority Lease
Obligations, exceed 10% of the total revenue receipts, less refunds, of the
State treasury in the fiscal year immediately preceding the year in which any
such debt is to be incurred. As of June, 1996, the total indebtedness of the
State of Georgia consisting of general obligation debt, guaranteed revenue debt
and remaining Authority Lease Obligations totalled $4,872,675,000 and the
highest aggregate annual payment for such debt equalled 5.35% of fiscal year
1996 estimated State treasury receipts.
The Georgia Constitution also permits the State to incur public debt to supply a
temporary deficit in the State treasury in any fiscal year created by a delay in
collecting the taxes of that year. Such debt must not exceed, in the aggregate,
5% of the total revenue receipts, less refunds, of the State treasury in the
fiscal year immediately preceding the year in which such debt is incurred. The
debt incurred must be repaid on or before the last day of the fiscal year in
which it is to be incurred out of the taxes levied for that fiscal year. No such
debt may be incurred in any fiscal year if there is then outstanding unpaid debt
from any previous fiscal year which was incurred to supply a temporary deficit
in the State treasury. No such short-term debt has been incurred under this
provision since the inception of the constitutional authority permitting it.
Virtually all of debt obligations of the State of Georgia and its counties,
municipalities and other political subdivisions and public authorities are
required by law to be validated and confirmed in a judicial proceeding prior to
issuance.
The State operates on a fiscal year beginning July 1 and ending June 30.
Estimated treasury receipts for the fiscal year 1996 showed an increase of 3.75%
over collections for the similar period in the previous fiscal year.
Based on data of the Georgia Department of Revenue for fiscal year 1995, income
tax receipts and sales tax receipts of the State for fiscal year 1995 comprised
approximately 43.7% and 39%, respectively, of the total State tax revenues.
The unemployment rate of the civilian labor force in the State as of February
1996 was 4.5% according to data provided by the Georgia Department of Labor. The
Metropolitan Atlanta area, which is the largest employment center in the area,
comprised of Georgia and its five bordering states and which accounts for
approximately 46% of the State's population, has for some time enjoyed a lower
rate of unemployment than the State considered as a whole. In descending order,
wholesale and retail trade, services, manufacturing, government and
transportation comprise the largest sources of employment within the State.
Moody's, S&P's and Fitch have given outstanding State of Georgia debt ratings of
"Aaa", "AA+" and "AAA", respectively. In April 1995, S&P's revised its outlook
on Georgia's outstanding general obligation bonds to positive from stable. The
rating agency cited the State's economic expansion, population growth, and
corporate relocations in explaining its outlook revision. The rating agency said
recent financial statistics rank Georgia among the top five states nationally in
employment and population growth and said that increased State spending on
education, particularly in the area of technical schools, has stimulated job
growth in environmental technology, biotechnology and telecommunications
industries, and has encouraged businesses to relocate to Georgia. A 1996 report
by Fitch said that Georgia's two-decade adherence to the sole use of general
obligation or guaranteed bonds has led to a sound debt structure and is just one
part of the State's bright economic outlook. The report stated that Georgia also
had conservative financial operations with reserves maintained at 3% as well as
an undesignated surplus which reached almost $174,000,000 in fiscal year 1996
out of a balanced budget of $10.7 billion. The report went on to estimate that
tax revenue growth in Georgia will rise only 2.9% in fiscal year 1997 with the
reduced growth attributable to gradual elimination of sales tax on food.
Daniel Ratajczak, Director of the Economic Forecasting Center at Georgia State
University, has forecast that over 92,000 jobs will be created in 1996 in the
20-county metro Atlanta area owing in part to the centennial Olympic Games being
staged in Atlanta. He estimates job creation will fall to approximately 35,000
in the area in 1997 as the area's economy assimilates the displaced Olympics
workers.
Several lawsuits were filed against the State of Georgia asserting that the
decision in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989),
invalidated Georgia's tax treatment of federal retirement benefits for years
prior to 1989. On December 6, 1994, the U.S. Supreme Court reversed the Georgia
Supreme Court's decision in Reich v. Collins, 263 Ga. 602 (1993), which had
determined that the plaintiff federal retiree was not entitled to a refund of
taxes paid on federal retirement pension benefits for tax years before 1989. The
plaintiff had sought refunds under the U.S. Supreme Court's decision in Davis.
The U.S. Supreme Court in Reich remanded the case to the Georgia Supreme Court
for "the provision of meaningful backward-looking relief consistent with due
process and the McKesson line of cases." On February 1, 1995, the Governor
signed H.B. 90 into law, which provides for the payment of refunds to federal
retirees who timely filed claims for any of the tax years 1985 through 1988,
inclusive. The total amount payable is estimated at approximately $110 million,
to be paid in four roughly equal annual installments which began on October 15,
1995. Based on this legislation, Reich has been dismissed.
Age International, Inc. v. State and Age International, Inc. v. Miller are two
suits (one for refund and one for declaratory and injunctive relief) which have
been filed against the State of Georgia by foreign producers of alcoholic
beverages seeking $96,000,000 in refunds of alcohol import taxes. These claims
constitute 99% of all such taxes paid during the preceding three years. In
addition, the claimants have filed administrative claims for an additional
$23,000,000 for apparently later time periods. These cases encompass all known
or anticipated claims for refund of such type within the apparently applicable
statute of limitations. The two Age cases are still pending in the trial court.
The Age declaratory/injunctive relief case was dismissed by the District Court.
That dismissal was affirmed by the Eleventh Circuit Court of Appeals.
In DeKalb County v. State of Georgia, the DeKalb School Board claimed that the
State should finance the major portion of cost of its desegregation program. The
Plaintiffs sought appriximately $67,500,000 in restitution. The Federal District
Court ruled that the State's formula for pupil transportation was contrary to
state law. This ruling would require a State payment of a state law funding
entitlement in the amount of approximately $34,000,000 computed through June 30,
1994. Motions to reconsider and amend the Court's judgment were filed by both
parties. The State's motion was granted in part, which reduced the required
state payment to approximately $28,000,000. Notices of appeal to the Eleventh
Circuit Court of Appeals have been filed. There are approximately five other
school districts which might file similar claims.
Buskirk and Estill v. State of Georgia, et al. is a civil action filed in the
Superior Court of Fulton County, Georgia, on behalf of all "classified employees
of the State of Georgia or its agencies and departments during all or part of
fiscal years 1992 through 1995 who are eligible to receive within grade pay
increases and who would have received the same were it not for a freeze of
within grade pay increases." Presently pending before the court are the parties'
cross motions for summary judgment. If the plaintiffs prevail, the parties will
conduct separate discovery on the issue of damages. The State believes it has
good and adequate defenses to the claim made but, should the plaintiffs prevail
in every aspect of their claims, the liability of the State in this matter could
be as much as $295,000,000, based on best estimates currently available.
Many factors affect and could have an adverse impact on the financial condition
of the State and other issuers of long-term debt obligations which may be held
in the portfolio of the Georgia Fund, including national, social, environmental,
economic and political policies and conditions, many of which are not within the
control of the State or such issuers. It is not possible to predict whether or
to what extent those factors may affect the State and other issuers of long-term
debt obligations which may be held in the portfolio of the Georgia Fund and the
impact thereof on the ability of such issuers to meet payment obligations.
MARYLAND FUND
The State's total expenditures for the fiscal years ending June 30, 1993, 1994
and 1995 were $11.786 billion, $12.351 billion and $13.528 billion,
respectively. As of February 14, 1996, it was estimated that total expenditures
for fiscal year 1996 would be $14.611 billion. The State's General Fund,
representing approximately 54% - 60% of each year's total budget, had an
unreserved deficit of $56 million in fiscal year 1992, and unreserved surpluses
of $11 million, $60 million and $132.5 million in fiscal years 1993, 1994 and
1995, respectively. The Governor of Maryland reduced fiscal year 1993
appropriations by approximately $56 million to offset the fiscal year 1992
deficit. The State Constitution mandates a balanced budget.
In April 1995, the General Assembly approved the $14.429 billion 1996 fiscal
year budget, which as of February 14, 1996, was estimated to have grown to
$14.611 billion. The budget as originally approved includes $2.8 billion in aid
to local governments (reflecting a $161 million increase in funding over 1994
that provides for substantial increases in education, health and police aid),
and $134.1 million in general fund deficiency appropriations for fiscal year
1995, of which $60 million is a legislatively mandated appropriation to the
Revenue Stabilization Account of the State Reserve Fund. The Revenue
Stabilization Account was established in 1986 to retain State revenues for
future needs and to reduce the need for future tax increases. The 1996 budget
does not include any proposed expenditures dependent on additional revenue from
new or broad-based taxes.
When the 1996 budget was enacted, it was estimated that the general fund surplus
on a budgetary basis at June 30, 1996, would be approximately $7.8 million. As
of February 14, 1996, it is estimated that the general fund surplus on a
budgetary basis at June 30, 1996, will be $1.0 million. At its December 12,
1995, meeting, the Board of Revenue Estimates lowered the estimate of fiscal
year 1996 general fund revenues by $92 million. The Governor has proposed a plan
to address this shortfall by reducing general fund appropriations by $26
million, and by obtaining additional money for the general fund from appropriate
sources (including use of the 1995 surplus and from a transfer from the Revenue
Stabilization Account).
In January 1996, the Governor submitted his proposed fiscal year 1997 budget to
the General Assembly. The budget includes $2.8 billion in aid to local
governments (reflecting a $121.5 million increase over 1996 that provides
substantial increases in education, health and police aid), and $7.7 million in
general fund deficiency appropriations for fiscal year 1996. As of February 14,
1996, it is estimated that the general fund surplus on a budgetary basis at June
30, 1997, will be $500 thousand. In addition, it is estimated that the balance
in the Revenue Stabilization Account of the State Reserve Fund at June 30, 1997,
will be $538 million.
The public indebtedness of Maryland is divided into three basic types. The State
issues general obligation bonds for capital improvements and for various
State-sponsored projects. The Department of Transportation of Maryland issues
limited special obligations bonds for transportation purposes payable primarily
from specific, fixed-rate excise taxes and other revenues related mainly to
highway use. Certain authorities issue obligations solely from specific non-tax
enterprise fund revenues and for which the State has no liability and has given
no moral obligation assurance.
While the factors mentioned above indicate that Maryland and its
instrumentalities are addressing the current economic concerns and issues and,
overall, are in satisfactory economic health, there can, of course, be no
assurance that this will continue or that particular Maryland Municipal
Obligations may not be adversely affected by changes in State or local economic
or political conditions.
MASSACHUSETTS FUND
Investments in Massachusetts Municipal Obligations may be affected by a variety
of factors, including the general economic health of the state and local
governments and the availability of federal funding.
Economic growth in the Commonwealth has slowed since 1988, particularly in the
construction, real estate, financial and manufacturing sectors (including high
technology). Economic conditions have improved somewhat since 1993. The
unemployment rate in Massachusetts averaged 6.9% during 1993, after rising
steadily during the previous three years, from 3.4% at the beginning of 1989. As
of April 1996, the Commonwealth's unadjusted unemployment rate was 4.8%, as
compared to a national average of 5.4%. The Commonwealth's per capita personal
income is currently higher than the national average.
Ending fund balances in the budgeted operating funds for fiscal 1991 were $237.1
million. Fiscal 1992 ended with positive fund balances of $549.4 million, after
carrying forward the fund balances from fiscal 1991. Fiscal 1993 ended with
positive fund balances of $562.5 million.
In fiscal year 1994, which ended June 30, 1994, the revenues of the budgeted
operating funds of the Commonwealth increased by approximately 5.7% over the
prior fiscal year, to approximately $15.550 billion. Expenditures also increased
by 5.6% over the prior year to approximately $15.523 billion. As a result, in
fiscal year 1994 the Commonwealth experienced a surplus of revenues and other
souces over expenditures of approximately $26.8 million. The Commonwealth ended
fiscal year 1994 with a positive closing fund balance of $589.3 million.
In fiscal 1995, which ended June 30, 1995, the total revenues of the budgeted
operating funds of the Commonwealth during such fiscal year increased by
approximately 5.4% over the prior fiscal year to $16.387 billion. Expenditures
increased by 4.7% over the prior fiscal year to $16.251 billion. As a result,
the Commonwealth ended fiscal 1995 with a positive closing fund balance of
$726.0 million. Budgeted revenues and other sources in fiscal 1996, which ended
June 30, 1996, were estimated as of June 5, 1996, by the Executive Office for
Administration and Finance to be approximately $16.850 billion, including tax
revenues of $11.684 billion. It is estimated that fiscal 1996 budgeted
expenditures will be $16.963 billion.
S&P and Moody's have rated general obligation bonds issued by the Commonwealth
as A+ and A-1, respectively. In response to budgetary matters or other economic
indicators, the rating agencies may change their ratings from time to time.
In Massachusetts the tax on personal property and real estate is virtually the
only source of tax revenues available to cities and towns to meet local costs.
"Proposition 2 1/2," an initiative petition adopted by the voters of the
Commonwealth in November 1980, limits the power of Massachusetts cities and
towns and certain tax-supported districts and public agencies to raise revenue
from property taxes to support their operations, including the payment of
certain debt service. Proposition 2 1/2 required many cities and towns to reduce
their property tax levies to a stated percentage of the full and fair cash value
of their taxable real estate and personal property, and it limits the amount by
which the total property taxes assessed by all cities and towns might increase
from year to year.
The reductions in local revenues and anticipated reductions in local personnel
and services resulting from Proposition 2 1/2 created strong demand for
substantial increases in state-funded local aid, which increased significantly
from the fiscal 1981 level of $1.632 billion to the 1991 level of $2.608
billion. The effect of this increase in local aid was to shift a major part of
the impact of Proposition 2 1/2 to the Commonwealth, but this did not require an
increase in Massachusetts state taxes. Direct local aid decreased from fiscal
1991 to $2.359 billion in fiscal 1992, increased to $2.547 billion in fiscal
1993 and increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures
for direct local aid were $2.976 billion, which is an increase of approximately
9.1% above the fiscal 1994 level. It is estimated that fiscal 1996 expenditures
for direct local aid will be $3.242 billion, an increase of approximately 8.9%
above the fiscal 1995 level.
Limitations on Commonwealth tax revenues have been established both by
legislation enacted in 1986 and by public approval of an initiative petition in
1986. The two measures are inconsistent in several respects, including the
methods of calculating the limits and the exclusions from the limits. The
initiative petition, which took effect in 1986, contains no exclusion for debt
service on Municipal Obligations of the Commonwealth. Commonwealth tax revenues
in fiscal years 1990 through 1995 were lower than the limit set by either the
initiative petition or the legislative enactment. The Executive Office for
Administration and Finance of the Commonwealth has estimated that Commonwealth
tax revenues will not reach the limit imposed by either the initiative petition
or the legislative enactment in fiscal year 1996.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability for the Commonwealth related to local
retirement systems are significant -- estimated to be approximately $9.651
billion as of January 1, 1993, on the basis of certain actuarial assumptions
regarding, among other things, future investment earnings and annual inflation
rates, wage increases and cost of living increases. No assurance can be given
that these assumptions will be realized. The legislature adopted a comprehensive
pension bill addressing the issue in January 1988, which requires the
Commonwealth, beginning in fiscal 1989, to fund future pension liabilities
currently and amortize the Commonwealth's unfunded liabilities over 40 years, in
accordance with funding schedules proposed by the Secretary of Administration
and Finance and approved by new legislation. The amounts required for funding of
current pension liabilities in fiscal years 1995, 1996, 1997 and 1998 are
estimated to be $959.9 million, $1.007 billion, $1.061 billion and $1.128
billion, respectively.
MISSISSIPPI FUND
Mississippi's unemployment rate for 1994 was 6.6%. Preliminary figures for 1995
show unemployment at a 16 year low of 5.9%, and projections for 1996 place the
rate at 6.2%. The growth rate of State product for 1994 was 6.7%, but growth is
projected to have slowed to 4.3% during 1995. Mississippi continued to close the
per capita income gap between the State and the average for the country. Per
capita incomes increased 7.3% in 1994.
Approximately 27,400 new jobs were created in 1993, with half of that growth due
to the gaming industry. Total employment in Mississippi increased by 4.5% in
1994. In the U.S. as a whole, total employment grew more slowly at 2.3%.
Manufacturing accounts for 23% of employment in Mississippi but considerably
less in total U.S. employment. In Mississippi, about 56% of manufacturing
employment is in durable goods, with the remainder in nondurable goods.
Mississippi's employment growth is expected to continue in such sectors as
services, finance, insurance, real estate and construction.
Although growth slowed in 1995, and the State did not outperform national
averages, the Mississippi economy has consistently outpaced the rest of the
nation in recent years, with growth rates of income and employment well above
the national average. U.S. News and World Report (11/8/93) ranked Mississippi
number one in the nation, based on six indicators of economic health. The
strength of Mississippi's economy is evident by the 9.8% rise in the corporate
profits during 1992, a similar growth rate for 1993, and strong growth in 1994
due to further expansion of the gaming industry. U.S. News and World Report
(11/7/94) continued to rank Mississippi in the top ten states for economic
growth with its number eight ranking for the past year.
In recent years, the State has successfully expanded its economy through
technology-based research and education, and the Mississippi banking system has
exhibited strength and stability over the past several years, a period
characterized by a growing number of bank failures nationwide.
The gaming industry started up in Mississippi in August 1992, and as of November
1993, it had already become a $500 million industry, providing more than 12,000
jobs in direct employment and contributing over $60 million in State and local
tax revenues annually. By December 1994, employment in the gaming industry
stabilized at 28,000 jobs. During 1995 employment remained at 29,000 and monthly
revenues averaged $144 million.
While the number of workers involved directly in agriculture has declined, it
remains a significant factor in the State's economy. Cotton was the number one
producer of farm income in 1990, poultry and eggs were second while forestry was
third. Research and promotion have provided the State with a number of new
farming alternatives. The production of catfish, poultry, rice, blueberries and
muscadines have grown dramatically in recent years. Timber continues to be
Mississippi's largest natural resource, with the State leading the nation in the
number of tree farms. Of Mississippi's total land area 56% (approximately 17
million acres) is classified as commercial forest.
All or part of 20 states and 136 metropolitan areas lie within 550 miles of
Mississippi. Mississippi is in an excellent location to service this market area
with four interstate highways, which provide access in every direction, 19
railroads, including four of the nation's largest carriers, and seven commercial
airports. International and domestic waterborne commerce is served by
Mississippi's nine major ports.
The population of the State is estimated to be 2,660,000. The population
increased an estimated 2.1% from 1980-1990; however, population projections
suggest a more dramatic growth in the 1990's. The projected increase is 7.7% for
a total population of 2,770,802. Mississippi has a relatively young population,
with 29% of its total population below 18 years of age.
Employment in the service industries rose 12.9% during 1994, but employment in
service industries slowed its growth sharply in 1995 with an increase of only
0.7%. The leading gainer in 1995 was the construction segment which saw an
increase in employment of 11% as compared to 1994. The other large employment
sectors are manufacturing, government, retail trade and construction. The
leading employer by product category remains the apparel industry, followed by
food, furniture and fixtures, and lumber. Although its importance has declined,
agriculture continues to contribute significantly to the State's economy. With
the diversification into livestock, soybeans, aquaculture, rice and other
alternative crops, there is now less dependence on cotton as the major crop.
Total personal income in Mississippi increased 8.5% in 1994 compared to a 6.1%
increase in the U.S. over the same period. Projections for 1996 again show the
State outperforming the national average with a 4.7% increase as compared to a
4.3% increase for the nation. Manufacturing, services and government employment
comprise the largest components of earned personal income in Mississippi.
Mississippi continues to rank 50th among the 50 states in per capita total
personal income. However, between 1970 and 1990, per capita total personal
income in Mississippi increased at a compound annual rate of 8.8% while U.S. per
capita total personal income increased at an 8.4% compound annual rate.
In the State of Mississippi, all State indebtedness must be authorized by
legislation governing the specific programs or projects to be financed. Such
debt may include short- and long-term indebtedness, self-supporting general
obligation bonds, highway bonds and other types of indebtedness. The amount of
bonded indebtedness that may be incurred by the State or any of its direct
agencies is limited by the Mississippi Constitution to an amount equal to one
and one-half times the sum of all revenue collected by the State during any one
of the preceding four fiscal years, whichever year may be higher.
For the fiscal year ended June 30, 1992, State General Fund receipts were
budgeted at approximately $2,000,397,000 and State General Fund Disbursements
were budgeted at approximately $1,999,675,700, and State Special Fund Receipts
and Disbursements were estimated to be approximately $3.47 million and $3.52
million, respectively. With the rise in industry, employment and the gaming
industry, the State General Fund receipts are increasing rapidly. For the fiscal
years ended June 30, 1994 and June 30, 1995, General Fund receipts had increased
to approximately $2,335,400,000 and 2,555,200,000, respectively.
NEW YORK FUND
The fiscal stability of New York State is related, at least in part, to the
fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. If any State agencies, authorities or
localities were to default on any of their financial obligations, or were to
require State assistance to meet their financial obligations, the ability of the
State to meet its own obligations as they become due or to obtain additional
financing, as well as market price of the State's outstanding debt, could be
materially adversely affected.
Constitutional challenges to State laws have limited the amount of taxes which
political subdivisions can impose on real property, which may have an adverse
effect on the ability of issuers to pay obligations supported by such taxes. A
variety of additional court actions have been brought against the State and
certain agencies and municipalities relating to financings, amount of real
estate tax, use of tax revenues and other matters, which could adversely affect
the ability of the State or such agencies or municipalities to pay their
obligations.
Both the State and New York City face potential economic problems which could
seriously affect the ability of both the State and City to meet their respective
financial obligations. The City has had to face greater competition from other
major cities and the State economy has grown more slowly than that of the nation
as a whole, in part as a result of international and national trends beyond the
State's or City's control. Moreover, the current high level of New York State
and New York City taxes limits the ability of the State and the City to impose
higher taxes in the event of future difficulties. The federal and State
governments have proposed various programs to alleviate these trends but no
immediate reversal can be expected. Further, various proposals relating to
Federal tax and spending policies that are currently being discussed and debated
could, if enacted, have a significant impact on the current and future financial
condition of the State and its localities.
New York is the third most populous state in the nation and has a relatively
high level of personal wealth. The State's economy is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. The State has a declining proportion of its workforce engaged in
manufacturing, and an increasing proportion engaged in service industries.
This transition reflects a national trend.
Although industry and commerce are broadly spread across the State, particular
activities are concentrated in certain areas. Westchester County is headquarters
for several major corporations. Buffalo's economy relies on a diverse
manufacturing base. Rochester leads the nation in the manufacture of
photographic and optical equipment. Syracuse and the Utica-Rome area produce
machinery and transportation equipment. The Albany-Troy-Schenectady area is a
governmental and educational center and produces electrical products. Binghamton
is the original site of the International Business Machines Corporation and
continues to have a concentration of employment in computer and other high
technology manufacturing.
New York City, which is the most populous city in the State and nation and is
the center of the nation's largest metropolitan area, accounts for a large
portion of both the State's population and personal income. It is headquarters
for the nation's securities business, and for a major portion of the nation's
major commercial banks, diversified financial institutions and life insurance
companies. In addition, the City houses the home offices of the three major
radio and television broadcasting networks, most of the national magazines and a
substantial portion of the nation's book publishers. The City also retains
leadership in the design and manufacture of men's and women's apparel.
The State has historically been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic position. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. The City has also
had to face greater competition as other major cities have developed financial
and business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
During calendar years 1982 and 1983 the State's economy in most respects
performed better than that of the nation. However, in the calendar years 1984
through 1991, the State's rate of economic expansion was somewhat slower than
that of the nation. The unemployment rate in the State dipped below the national
rate in the second half of 1981 and remained lower until 1991. The total
employment growth rate in the State has been below the national average since
1984. According to data published by the U.S. Bureau of Economic Analysis,
during the past 10 years, total personal income in the State rose faster than
the national average only from 1986 through 1988, and then only slightly.
Overall economic activity declined less than that of the nation as a whole
during the 1982-1983 recession. In the 1990-1991 recession, however, the State
and the rest of the Northeast was more heavily impacted than the nation as a
whole and has been slower to recover.
The State has for many years had a very high State and local tax burden relative
to other states. The State and its localities have used these taxes to develop
and maintain their transportation networks, public schools and colleges, public
health systems, other social services and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State.
NORTH CAROLINA FUND
General obligations of a city, town or county in North Carolina are payable from
the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue bonds,
college and hospital revenue bonds and other "private activity bonds" which are
essentially non-governmental debt issues and which are payable exclusively by
private entities such as non-profit organizations and business concerns of all
sizes. State and local governments have no obligation to provide for payment of
such private activity bonds and in many cases would be legally prohibited from
doing so. The value of such private activity bonds may be affected by a wide
variety of factors relevant to particular localities or industries, including
economic developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any city,
town, school district, county or other taxing district to avail itself of the
provisions of Chapter 9 of the United States Bankruptcy Code, but only with the
consent of the Local Government Commission of the State and of the holders of
such percentage or percentages of the indebtedness of the issuer as may be
required by the Bankruptcy Code (if any such consent is required). Thus,
although limitations apply, in certain circumstances political subdivisions
might be able to seek the protection of the Bankruptcy Code.
STATE BUDGET AND REVENUES. The North Carolina State Constitution requires that
the total expenditures of the State for the fiscal period covered by each budget
not exceed the total of receipts during the fiscal period and the surplus
remaining in the State Treasury at the beginning of the period. The State's
fiscal year runs from July 1st through June 30th.
In 1990 and 1991 the State had difficulty meeting its budget projections. The
General Assembly responded by enacting a number of new taxes and fees to
generate additional revenue and reduce allowable departmental operating
expenditure and continuation funding. The spending reductions were based on
recommendations from the Governor, the Government Performance Audit Committee
and selected reductions identified by the General Assembly.
The State, like the nation, has experienced economic recovery since 1991. In the
opinion of the State Controller, the growth in the economy and the legislative
actions taken in 1991 had a positive effect on the State's revenue collections
over the past several years. The State had a budget surplus of approximately
$865 million at the end of fiscal 1993-94. After review of the 1994-95
continuation budget adopted in 1993, the General Assembly approved spending
expansion funds, in part to restore certain employee salaries to budgeted
levels, which amounts had been deferred to balance the budgets in 1989-1993, and
to authorize funding for new initiatives for economic development, education,
human services and environmental programs. (The cutback in funding for
infrastructure and social development projects had been cited by agencies rating
State obligations, following the 1991 reductions, as cause for concern about the
long-term consequences of those reductions on the economy of the State and the
State's fiscal prospects).
Because of growth in State tax and fee revenues, the General Fund balance at the
end of the 1994-95 fiscal year was reported at approximately $300 million.
The State budget is based upon estimated revenues and a multitude of existing
and assumed State and non-State factors, including State and national economic
conditions, international activity and federal government policies and
legislation. The Congress of the United States is considering a number of
matters affecting the Federal government's relationship with state governments
that, if enacted into law, could affect fiscal and economic policies of the
states, including North Carolina.
In April 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning on or after January 1, 1995, the tax levied on various
forms of intangible personal property. The intangibles tax revenues receivable
by counties and municipalities will no longer be received. Instead, the
legislature has provided for specific appropriations to counties and
municipalities.
It is unclear what effect these developments at the State level may have on the
value of the Debt Obligations in the North Carolina Fund.
LITIGATION. Litigation against the State includes the following.
Leandro, et al. v. State of North Carolina and State Board of Education -- In
May, 1994 students and boards of education in five counties in the State filed
suit in state court requesting a declaration that the public education system of
North Carolina, including its system of funding, violates the State constitution
by failing to provide adequate or substantially equal educational opportunities
and denying due process of law, and violates various statutes relating to public
education. The suit is similar to a number of suits in other states, some of
which resulted in holdings that the respective systems of public education
funding were unconstitutional under the applicable state law. The defendants in
such suit have filed a motion to dismiss, which was denied. After trial at the
Superior Court level, the plaintiff petitioned the North Carolina Supreme Court
for discretionary review prior to a determination by the Court of Appeals; this
motion was denied. The North Carolina Attorney General's Office believes that
sound legal arguments support the State's position, but no significant financial
impact is expected to result from the ultimate resolution of this case, even if
adverse to the State.
Francisco Case -- In August 1994, a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and has
failed to supervise local school systems in administering programs for them. The
complaint does not allege an amount in controversy, but asks the Court to order
the defendants to fund a comprehensive program to ensure equal educational
opportunities for children with limited English proficiency. The North Carolina
Attorney General's Office believes that sound legal arguments support the
State's position, but no significant financial impact is expected to result from
the ultimate resolution of this case, even if adverse to the State.
Faulkenbury v. Teachers' and State Employees' Retirement System; Peele v.
Teachers' and State Employees' Retirement System; Woodard v. Local Governmental
Employees' Retirement System -- Plaintiffs are disability retirees who brought
class actions in state court challenging changes in the formula for payment of
disability retirement benefits and claiming impairment of contract rights,
breach of fiduciary duty, violation of other federal constitutional rights, and
violation of state constitutional and statutory rights. The State estimates that
the cost in damages and higher prospective benefit payments to class members
would probably amount to $50 million or more in Faulkenbury, $50 million or more
in Peele, and $15 million or more in Woodward, all ultimately payable, at least
initially, from the state retirement systems funds.
Upon review in Faulkenbury, the North Carolina Court of Appeals and Supreme
Court have held that claims made in Faulkenbury substantially similar to those
in Peele and Woodward -- for breach of fiduciary duty and violation of federal
constitutional rights brought under the federal Civil Rights Act -- either do
not state a cause of action or are barred by the statute of limitations. In
1994, plaintiffs took voluntary dismissals of their claims for impairment of
contract rights in violation of the United States Constitution and filed new
actions in federal court asserting the same claims, along with claims for
violation of constitutional rights in the taxation of retirement benefits. The
remaining state court claims in all cases are yet to be heard. The federal court
actions have been stayed pending the trial in state court. The North Carolina
Attorney General's Office believes that sound legal arguments support the
State's position.
Fulton Corporation v. Justus, Secretary of Revenue -- The State's intangible
personal property tax levied on certain shares of stock (repealed as of the tax
year beginning January 1, 1995) was challenged by the plaintiff on grounds that
it violates the Commerce Clause of the United States Constitution by
discriminating against stock issued by corporations that do all or part of their
business outside the State. The plaintiff, a North Carolina corporation, paid
the intangibles tax on stock it owns in other corporations. The plaintiff sought
to invalidate the tax in its entirety and to recover the intangibles taxes it
paid for the 1990 tax year.
The North Carolina Court of Appeals invalidated the taxable percentage deduction
and excised it from the statute beginning with the 1994 tax year. The effect of
this ruling was to increase collections by rendering all stock taxable on 100%
of its value. The North Carolina Supreme Court reversed the Court of Appeals and
held that the tax is valid and constitutional. The plaintiff appealed to the
U.S. Supreme Court which agreed with plaintiff that the tax was
unconstitutionally discriminatory. The U.S. Supreme Court remanded the case for
the State Supreme Court to decide whether to issue refunds or to levy a similar
tax retroactively on holdings in North Carolina firms.
In response, the State's Revenue Secretary has proposed that taxpayers who paid
the tax under protest in compliance with State law be issued refunds. The
estimated $123 million in refunds would be paid from a State reserve fund. This
proposal is currently being considered by the State Supreme Court as a possible
remedy, but the State legislature would also have to approve this expenditure of
funds.
OTHER TAX CASES: In Davis v. Michigan (1989), the United States Supreme Court
ruled that a Michigan income tax statute which taxed federal retirement benefits
while exempting those paid by state and local governments violated the
constitutional doctrine of intergovernmental tax immunity. At the time of the
Davis decision, North Carolina law contained similar exemptions in favor of
state and local retirees. Those exemptions were repealed prospectively,
beginning with the 1989 tax year. All public pension and retirement benefits are
now entitled to a $4,000 annual exclusion.
The Swanson Cases -- Following Davis, federal retirees filed a class action suit
in federal court in 1989 seeking damages equal to the North Carolina income tax
paid on federal retirement income by the class members. A companion suit was
filed in state court in 1990. The complaints alleged that the amount in
controversy exceeded $140 million. The North Carolina Department of Revenue
estimated refunds and interest liability of $280.89 million as of June 30, 1994.
The North Carolina Supreme Court ultimately held in favor of the State in the
case brought in State court, and the United States Supreme Court denied the
plaintiffs' request for review of that decision, thereby concluding the State
litigation. Plaintiffs also were unsuccessful in the federal court action. The
federal retirees continue to seek relief through State legislation.
Patton v. State -- In connection with the legislature's repeal of the tax
exemption for state retirees in 1989, certain adjustments were adopted that
reduced the state retirees' tax burden. In May 1995, federal retirees filed a
lawsuit in State court for tax refunds for the years 1989 through 1994 alleging
that these adjustments also constitute unlawful discrimination against federal
retirees. The amount of the claim has not been set forth. This case is still
pending in superior court.
The Bailey Cases -- State and local government retirees filed a class action
suit in 1990 as a result of the repeal of the income tax exemptions for state
and local government retirement benefits. The original suit was dismissed after
the North Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to
comply with state law requirements for challenging unconstitutional taxes and
the United States Supreme Court denied review.
In 1992, many of the same plaintiffs filed a new lawsuit alleging essentially
the same claims, including breach of contract, unconstitutional impairment of
contract rights by the State in taxing benefits that were allegedly promised to
be tax-exempt, and violation of several state constitutional provisions.
Although the Superior Court ruled largely in the plaintiffs' favor, appeals are
expected from both sides. Additional suits have been filed to recover taxes
subsequently paid. The North Carolina Attorney General's Office estimates that
the amount in controversy is approximately $40-$45 million annually for the tax
years 1989 through 1992. The North Carolina Attorney General's Office believes
that sound legal arguments support the State's position.
GENERAL. The population of the State has increased 13% from 1980, from 5,880,095
to 6,657,106 as reported by the 1990 federal census and the State rose from
twelfth to tenth in population. The State's estimate of population as of June
30, 1995, is 7,165,298. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only five municipalities with
populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
State has moved from an agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to the wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the period
1980 to 1994, the State labor force grew about 26% (from 2,855,200 to
3,609,000). Per capita income during the period 1980 to 1993 grew from $7,999 to
$18,702, an increase of 133.8%.
The current economic profile of the State consists of a combination of industry,
agriculture and tourism. As of November 1994, the State was reported to rank
ninth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward trend since
1991. The following table reflects the fluctuations in certain key employment
categories.
<TABLE>
<CAPTION>
CATEGORY (ALL SEASONALLY ADJUSTED) JUNE 1991 JUNE 1992 JUNE 1993 JUNE 1994 JUNE 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,228,000 3,495,000 3,504,000 3,560,000 3,578,000
Nonagricultural Employment 3,059,000 3,135,000 3,203,400 3,358,700 3,419,100
Goods Producing Occupations (mining, construction and manufacturing) 973,600 980,800 993,600 1,021,500 1,036,700
Service Occupations 2,085,400 2,154,200 2,209,800 2,337,200 2,382,400
Wholesale/Retail Occupations 704,100 715,100 723,200 749,000 776,900
Government Employees 496,700 513,400 515,400 554,600 555,300
Miscellaneous Services 596,300 638,300 676,900 731,900 742,200
Agricultural Employment 88,700 102,800 88,400 53,000 53,000
</TABLE>
The seasonally adjusted unemployment rate in October 1995 was estimated to be
3.9% of the labor force as compared with 5.5% nationwide.
As of 1994, the State was ninth in the nation in gross agricultural income, of
which nearly the entire amount (approximately $5.5 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1994 the
State ranked first in the nation in the production of flue-cured tobacco, total
tobacco, turkeys and sweet potatoes; second in hog production, trout and the
production of cucumbers for pickles; third in the value of poultry and egg
products, peanuts and net farm income; fourth in commercial broilers,
blueberries and strawberries; fifth in burley tobacco; and sixth in peaches.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production, which had been the leading source of agricultural income in
the State, declined in 1994, based on preliminary figures. For 1994, commercial
broiler production and pork production surpassed tobacco among sources of
agricultural income, providing 30% and 15%, respectively, of gross agricultural
income compared to 14.8% for tobacco. Tobacco farming in North Carolina has been
and is expected to continue to be affected by major Federal legislation and
regulatory measures regarding tobacco production and marketing and by
international competition. Measures adverse to tobacco farming could have
negative effects on farm income and the North Carolina economy generally.
The number of farms has been decreasing; in 1995 there were approximately 58,000
farms in the State, down from approximately 72,000 in 1987 (a decrease of about
19% in eight years). However, a strong agribusiness sector supports farmers with
farm inputs (fertilizer, insecticide, pesticide and farm machinery) and
processing of commodities produced by farmers (vegetable canning and cigarette
manufacturing). North Carolina's agriculture industry, including food, fiber and
forest products, contributes over $42 billion annually to the State's economy.
The State Department of Commerce, Travel and Tourism Division reports that, in
1993, more than $8 billion was spent on tourism in the State. The Department
estimates that two-thirds of total expenditures came from out-of-state
travelers, and that approximately 250,000 people were employed in tourism-
related jobs.
BOND RATINGS. Currently, Moody's rates North Carolina general obligation bonds
as Aaa and S&P rates such bonds as AAA. S&P also reaffirmed its stable outlook
for the State in October 1993.
S&P reports that North Carolina's rating reflects the State's strong economic
characteristics, sound financial performance, and low debt levels.
PENNSYLVANIA FUND
STATE ECONOMY. Pennsylvania has been historically identified as a heavy-
industry state although that reputation has changed recently as the industrial
composition of the Commonwealth diversified when the coal, steel and railroad
industries began to decline. The major new sources of growth in the Commonwealth
are in the service sector, including trade, medical and the health services,
education and financial institutions. The Commonwealth's agricultural industries
are also an important component of its economic structure, accounting for more
than $3.6 billion in crop and livestock products annually while agribusiness and
food related industries support $39 billion in economic activity annually.
Employment within the Commonwealth increased steadily from 1984 to 1990. From
1991 to 1994, employment in the Commonwealth declined 1.2%. The growth in
employment experienced in the Commonwealth during such periods is comparable to
the growth in employment in the Middle Atlantic region of the United States.
Non-manufacturing employment in the Commonwealth has increased steadily since
1980 to its 1994 level of 82.0% of total Commonwealth employment. Manufacturing,
which contributed 18.0% of 1994 non-agricultural employment, has fallen behind
both the services sector and the trade sector as the largest single source of
employment within the Commonwealth. In 1994, the services sector accounted for
29.9% of all non-agricultural employment in the Commonwealth while the trade
sector accounted for 22.9%.
The Commonwealth recently experienced a slowdown in its economy. Moreover,
economic strengths and weaknesses vary in different parts of the Commonwealth.
In general, heavy industry and manufacturing have been facing increasing
competition from foreign producers. During 1995, the annual average unemployment
rate in the Commonwealth was 5.9%, compared to 5.6% for the United States. For
March 1996, the unadjusted unemployment rate was 5.9% in the Commonwealth and
5.8% in the United States, while the seasonally adjusted unemployment rate for
the Commonwealth was 5.6% and for the United States was 5.8%.
STATE BUDGET. The Commonwealth operates under an annual budget that is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, that
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All funds received by the Commonwealth are subject to appropriation in specific
amounts by the General Assembly or by executive authorization by the Governor.
Total appropriations enacted by the General Assembly may not exceed the ensuing
year's estimated revenues, plus (less) the unappropriated fund balance (deficit)
of the preceding year, except for constitutionally authorized debt service
payments. Appropriations from the principal operating funds of the Commonwealth
(the General Fund, the Motor License Fund and the State Lottery Fund) are
generally made for one fiscal year and are returned to the unappropriated
surplus of the fund if not spent or encumbered by the end of the fiscal year.
The Constitution specifies that a surplus of operating funds at the end of a
fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an independent
fiscal and accounting entity with a self-balancing set of accounts, recording
cash and/or other resources together with all related liabilities and equities
that are segregated for the purpose of carrying on specific activities or
attaining certain objectives in accordance with the fund's special regulations,
restrictions or limitations. In the Commonwealth, over 150 funds have been
established by legislative enactment or in certain cases by administrative
action for the purpose of recording the receipt and disbursement of money's
received by the Commonwealth. Annual budgets are adopted each fiscal year for
the principal operating funds of the Commonwealth and several other special
revenue funds. Expenditures and encumbrances against these funds may only be
made pursuant to appropriation measures enacted by the General Assembly and
approved by the Governor. The General Fund, the Commonwealth's largest fund,
receives all tax revenues, non-tax revenues and federal grants and entitlements
that are not specified by law to be deposited elsewhere. The majority of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. Debt service on all bond indebtedness of the Commonwealth, except
that issued for highway purposes or for the benefit of other special revenue
funds, is payable from the General Fund.
Financial information for the principal operating funds of the Commonwealth are
maintained on a budgetary basis of accounting, which is used for the purpose of
ensuring compliance with the enacted operating budget. The Commonwealth also
prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Budgetary basis financial reports are based on a
modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by GAAP. Financial information is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
RECENT FINANCIAL RESULTS. From fiscal 1984, when the Commonwealth first prepared
its financial statements on a GAAP basis, through fiscal 1989, the Commonwealth
reported a positive unreserved-undesignated fund balance for its governmental
fund types at each fiscal year end. Slowing economic growth during 1990, leading
to a national economic recession beginning in fiscal 1991, reduced revenue
growth and increased expenditures and contributed to negative
unreserved-undesignated fund balances at the end of the 1990 and 1991 fiscal
years. The negative unreserved-undesignated fund balance was due largely to
operating deficits in the General Fund and the State Lottery Fund during those
fiscal years. Actions taken during fiscal 1992 to bring the General Fund back
into balance, including tax increases and expenditure restraints, resulted in a
$1.1 billion reduction to the unreserved- undesignated fund deficit for combined
governmental fund types at June 30, 1993, as a result of a $420.4 million
increase in the balance. These gains were produced by continued efforts to
control expenditure growth. The Combined Balance Sheet as of June 30, 1995,
showed total fund balance and other credits for the total governmental fund
types of $1,709 million, a $273 million decrease from the balance at June 30,
1994. During fiscal 1995, total government fund assets increased by $131 million
to $5,127 million, while government fund liabilities increased by $185 million
to $3,200 million.
FISCAL 1991 FINANCIAL RESULTS. The Commonwealth experienced a $453.6 million
General Fund deficit as of the end of its 1991 fiscal year. The deficit
reflected higher than budgeted expenditures, below-estimate economic activity
and growth rates of economic indicators and total tax revenue shortfalls below
those assumed in the enacted budget. Rising demands on State programs caused by
the economic recession, particularly for medical assistance and cash assistance
programs, and the increased costs of special education programs and correction
facilities and programs, contributed to increased expenditures in fiscal 1991,
while tax revenues for the 1991 fiscal year were severely affected by the
economic recession. Total corporation tax receipts and sales and use tax
receipts during fiscal 1991 were, respectively, 7.3% and 0.9% below amounts
collected during fiscal 1990. Personal income tax receipts also were affected by
the recession but not to the extent of the other major General Fund taxes,
increasing only 2.0% over fiscal 1990 collections. A number of actions were
taken throughout the fiscal year by the Commonwealth to mitigate the effects of
the recession on budget revenues and expenditures. The Commonwealth initiated a
number of cost-saving measures, including the firing of 2,000 state employees,
deferral of paychecks and reduction of funds to state universities, which
resulted in approximately $871 million cost savings.
FISCAL 1992 FINANCIAL RESULTS. Actions taken during fiscal 1992 to bring the
General Fund budget back into balance, including tax increases and expenditure
restraints resulted in a $1.1 billion reduction for the unreserved- undesignated
fund deficit for combined governmental fund types and a return to a positive
fund balance. Total General Fund revenues for fiscal 1992 were $14,516.8 million
which is approximately 22% higher than fiscal 1991 revenues of $11,877.3 million
due in large part to tax increases. The increased revenues funded substantial
increases in education, social services and corrections programs. As a result of
the tax increases and certain appropriation lapses, fiscal 1992 ended with an
$8.8 million surplus after having started the year with an unappropriated
General Fund balance deficit of $453.6 million.
FISCAL 1993 FINANCIAL RESULTS. Fiscal 1993 closed with revenues higher than
anticipated and expenditures approximately as projected, resulting in an ending
unappropriated balance surplus of $242.3 million. A deduction in the personal
income tax rate in July 1992 and the one-time receipt of revenues from
retroactive corporate tax increases in fiscal 1992 were responsible, in part,
for the low growth in fiscal 1993.
FISCAL 1994 FINANCIAL RESULTS. Commonwealth revenues during the 1994 fiscal year
totaled $15,210.7 million, $38.6 million above the fiscal year estimate, and
3.9% over Commonwealth revenues during the 1993 fiscal year. The sales tax was
an important contributor to the higher than estimated revenues. The strength of
collections from the sales tax offset the lower than budgeted performance of the
personal income tax that ended the 1994 fiscal year $74.4 million below
estimate. The shortfall in the personal income tax was largely due to shortfalls
in income not subject to withholding such as interest, dividends and other
income. Expenditures, excluding pooled financing expenditures and net of all
fiscal 1994 appropriation lapses, totaled $14,934.4 million representing a 7.2%
increase over fiscal 1993 expenditures. Medical assistance and prison spending
contributed to the rate of spending growth for the 1994 fiscal year. The
Commonwealth maintained an operating balance on a budgetary basis for fiscal
1994 producing a fiscal year ending unappropriated surplus of $335.8 million.
FISCAL 1995 FINANCIAL RESULTS. Commonwealth revenues for the 1995 fiscal year
were above estimate and exceeded fiscal year expenditures and encumbrances.
Fiscal 1995 was the fourth consecutive fiscal year the Commonwealth reported an
increase in the fiscal year-end unappropriated balance. Prior to reserves for
transfer to the Tax Stabilization Reserve Fund, the fiscal 1995 closing
unappropriated surplus was $540.0 million, an increase of $204.2 million over
the fiscal 1994 closing unappropriated surplus prior to transfers. Commonwealth
revenues during the 1995 fiscal year were $459.4 million, 2.9%, above the
estimate of revenues used at the time the 1995 fiscal year budget was enacted.
Corporation taxes contributed $329.4 million of the additional receipts largely
due to higher receipts from the corporate net income tax. Fiscal 1995 revenues
from the corporate net income tax were 22.6% over collections in fiscal 1994 and
include the effects of the reduction of the tax rate from 12.25% to 11.99% that
became effective with tax years beginning on and after January 1, 1994. The
sales and use tax and miscellaneous revenues also showed strong year-over-year
growth that produced above-estimate revenue collections. Sales and use tax
revenues were $5,526.9 million, $128.8 million above the enacted budget estimate
and 7.9% over fiscal 1994 collections. Tax receipts from both motor vehicle and
non-motor vehicle sales contributed to the higher collections. Miscellaneous
collections for fiscal 1995 were $183.5 million, $44.9 million above estimates
and were largely due to additional investment earnings, escheat revenues and
other miscellaneous revenues.
FISCAL 1996 BUDGET. On June 30, 1995, the Governor signed a $16.2 billion
General Fund budget, an increase of approximately 2.7% increase from the fiscal
1995 budget. The appropriations increase for fiscal 1996 is one of the lowest
rates in recent years. Areas receiving the largest budgetary increases are
medical assistance and basic education. In addition, that budget accelerated
corporate net income tax rate reductions, eliminated the inheritance tax paid by
a surviving spouse on jointly owned property, and made other business tax
reductions.
FISCAL 1997 BUDGET. For the fiscal year ended June 30, 1997, the Governor
proposed a $16.19 billion General Fund budget, a 0.2% decrease from the fiscal
1996 budget. The proposed fiscal 1997 budget represents the first time since
1970 that a Pennsylvania Governor has proposed a budget with less spending than
the prior year. The proposed fiscal 1997 budget contains modest business tax
reductions.
DEBT LIMITS AND OUTSTANDING DEBT. The Pennsylvania Constitution permits the
issuance of the following types of debt: (i) debt to suppress insurrection or
rehabilitate areas affected by disaster; (ii) electorate approved debt; (iii)
debt for capital projects subject to an aggregate outstanding debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years; and
(iv) tax anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required to certify
to the Governor and the General Assembly certain information regarding the
Commonwealth's indebtedness. According to the February 29, 1996, Auditor General
certificate, the average annual tax revenues deposited in all funds in the five
fiscal years ended June 30, 1995, was approximately $17.7 billion, and,
therefore, the net debt limitation for the 1996 fiscal year is $30.9 billion.
Outstanding net debt totaled $3.9 billion at June 30, 1995, approximately equal
to the net debt at June 30, 1994. At February 29, 1996, the amount of debt
authorized by law to be issued, but not yet incurred, was $16.5 billion.
DEBT RATINGS. All outstanding general obligation bonds of the Commonwealth are
rated AA- by S&P and A1 by Moody's.
CITY OF PHILADELPHIA. The City of Philadelphia (the "City" or "Philadelphia") is
the largest city in the Commonwealth. Philadelphia experienced a series of
general fund deficits for fiscal years 1988 through 1992 which have culminated
in the City's present serious financial difficulties. In its 1992 Comprehensive
Annual Financial Report, Philadelphia reported a cumulative general fund deficit
of $71.4 million for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board, to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual findings and
recommendations to Philadelphia concerning its budgetary and fiscal affairs. The
legislation empowers PICA to issue notes and bonds on behalf of Philadelphia,
and also authorizes Philadelphia to levy a 1% sales tax the proceeds of which
would be used to pay off the bonds. In return for PICA's fiscal assistance,
Philadelphia is required, among other things, to establish five-year financial
plans that include balanced annual budgets. Under the legislation, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain State funding. At this time, the City is operating under a
five-year fiscal plan approved by PICA on April 17, 1995. Technical
modifications were made to that plan as of July 12, 1995, and the revised plan,
incorporating such technical modifications, was approved by PICA on July 18,
1995. As of November 15, 1995, PICA has issued approximately $1,418.7 million of
its Special Tax Revenue Bonds.
In January 1993, Philadelphia anticipated a cumulative general fund budget
deficit of $57 million for the 1993 fiscal year. In response to the anticipated
deficit, the Mayor unveiled a financial plan eliminating the budget deficit for
the 1993 budget year through significant service cuts that included a plan to
privatize certain city-provided services. Due to an upsurge in tax receipts,
cost-cutting and additional PICA borrowings, Philadelphia completed the 1993
fiscal year with a balanced general fund budget. The audit findings for fiscal
year 1993 show a cumulative general fund surplus of approximately $3 million for
the fiscal year ended June 30, 1993.
In January 1994, the Mayor proposed a $2.3 billion City general fund budget that
included no tax increases, no significant service cuts and a series of modest
health and welfare program increases. At that time, the Mayor also unveiled a
$2.2 billion program (the "Philadelphia Economic Stimulus Program") designed to
stimulate Philadelphia's economy and stop the loss of 1,000 jobs a month. In its
1994 Comprehensive Annual Financial Report, Philadelphia reported a cumulative
general fund surplus of approximately $15.4 million for the fiscal year ended
June 30, 1994, up from approximately $3 million as of June 30, 1993.
Philadelphia's preliminary unaudited General Fund financial statements at June
30, 1995, project a surplus approximating $59.6 million.
S&P's rating on Philadelphia's general obligation bonds is "BBB-." Moody's
rating is currently "Baa."
LITIGATION. The Commonwealth is a party to numerous lawsuits in which an adverse
final decision could materially affect the Commonwealth's governmental
operations and consequently its ability to pay debt service on its obligations.
The Commonwealth also faces tort claims made possible by the limited waiver of
sovereign immunity effected by Act 152, approved September 28, 1978, as amended.
Under Act 152, damages for any loss are limited to $250,000 per person and $1
million for each accident.
SOUTH CAROLINA FUND
Article X, Section 7(a) of the South Carolina Constitution requires that the
General Assembly provide for a budgetary process to ensure that annual
expenditures of State government may not exceed annual State revenues.
Subsection (c) of Section 7 of Article X requires that the General Assembly
prescribe by law a spending limitation on appropriations for the operation of
State government such that annual increases in appropriations may not exceed the
annual growth rate of the economy of the State; provided, however, that this
limitation is subject to suspension by an affirmative vote in each House of the
General Assembly by two-thirds of the members present and voting, but not less
than three-fifths of the total membership in each House. Subsection (d) of
Section 7 of Article X requires that the General Assembly shall prescribe by law
a limitation on the number of State employees such that the annual increase in
such number may not exceed the average growth rate of the population of the
State; provided, however, that this limitation is subject to suspension by an
affirmative vote in each House of the General Assembly by two-thirds of the
members present and voting, but not less than three-fifths of the total
membership in each House.
Article III, Section 36 of the South Carolina Constitution requires the
establishment of a General Reserve Fund for the purpose of covering operating
deficits of State Government and a separate and distinct Capital Reserve Fund
for the purpose of providing capital improvements or for retiring State bonds
previously issued. Amounts in the Capital Reserve Fund may, as hereinafter
described, be used to fund a year end deficit. The General Reserve Fund is
required to be funded in an amount equal to 3% of the general fund revenue of
the latest completed fiscal year. Funds may be withdrawn from the General
Reserve Fund only for the purpose of covering operating deficits. The General
Assembly is required to provide for the orderly restoration of funds withdrawn
from the General Reserve Fund. The Constitutional provisions with respect to the
General Reserve Fund require that the General Assembly provide for a procedure
to survey the progress of the collection of revenue and the expenditure of funds
and require the General Assembly to authorize and direct reduction of
appropriations as may be necessary to prevent a deficit. Such provisions require
that, should a year end operating deficit occur, so much of the General Reserve
Fund as may be necessary must be used to cover the deficit. The amount so used
must be restored to the General Reserve Fund within three fiscal years until the
3% requirement is again reached.
The Capital Reserve Fund is required to be funded in an amount equal to 2% of
the prior fiscal year's general fund revenues. The South Carolina Constitution
requires that the General Assembly provide that, if revenue forecasts before
March 1 project that revenues for the current fiscal year will be less than
expenditures authorized by appropriation for that fiscal year, the current
fiscal year's appropriation to the Capital Reserve Fund shall be reduced to the
extent necessary before any reduction is made in operating appropriations. If it
is determined that the fiscal year has ended with an operating deficit, the
South Carolina Constitution requires that funds in the Capital Reserve Fund
shall be applied, to the extent necessary, to the fiscal year's end operating
deficit before withdrawing monies from the General Reserve Fund for such
purpose.
Fiscal responsibility in the State lies with the Budget and Control Board. The
Governor is required to submit an Executive Budget to the General Assembly
within five days after the beginning of each regular session. Such budget is
required to conform to the funding requirements contained in Article III,
Section 36 of the South Carolina Constitution. Regular sessions of the General
Assembly begin on the second Tuesday of January in each year. In order to enable
the Governor to present his budget to the General Assembly at the time required,
the Governor is required, by law, to complete a survey of all departments,
bureaus, divisions, offices, boards, commissions, institutions and other
agencies to obtain information upon which to base his budget recommendations no
later than November 1 of each year. In this connection, each of several State
departments, bureaus, divisions, offices, boards, commissions, institutions and
other agencies receiving or requesting financial aid from the State are required
to report to the Governor in itemized form, no later than November 1, of each
year, the amount needed or requested in the succeeding fiscal year. In addition,
on or before November 1 of each year the State Comptroller General is required
to furnish to the Governor detailed statements as to appropriations and
expenditures for certain prior fiscal years and appropriation years. The State
Comptroller General is also required to furnish to the Governor on or before
December 1 of each year an estimate of the financial needs of the State itemized
in accordance with the budget classifications adopted by the Budget and Control
Board.
The budget presented to the General Assembly by the Governor must be accompanied
by detailed statements of prior year's revenues and expenditures, a statement of
current assets and liabilities and other information with respect to the State's
finances and economic condition. The General Assembly is authorized by law to
increase or decrease items in the budget bill. The South Carolina Constitution
mandates the General Assembly to provide a balanced budget and provides that if
there be a casual deficit, such deficit shall be provided for in the succeeding
fiscal year.
As noted above, the South Carolina Constitution requires a procedure for the
monitoring of revenues and expenditures with a view to a reduction of
appropriations as may be necessary to prevent a deficit. For the purpose of
providing projections and forecasts of revenues and expenditures and advising
the Budget and Control Board on economic trends, the General Assembly
established the Board of Economic Advisors. In particular with respect to the
Constitutional requirement of monitoring revenues, statutory provisions require
that the Board of Economic Advisors provide to the Budget and Control Board
quarterly estimates of State revenues. If at the end of the first or second
quarter of any fiscal year quarterly revenue collections are 4% or more below
the amount projected for such quarter by the Board of Economic Advisors, the
Budget and Control Board is required, within 15 days of such determination, to
take action to avoid a fiscal year end deficit.
In 1993, the General Assembly provided that beginning with appropriations for
fiscal year 1994-95, appropriations in the annual general appropriations act may
not exceed the base revenue estimate. The base revenue estimate is defined as
the lesser of (i) the total of recurring general fund revenues collected in the
latest completed fiscal year before the General Assembly first considers the
annual general appropriations bill plus an increase of 75% of the difference
between the general fund revenue estimate of the Board of Economic Advisors for
the upcoming fiscal year and the actual revenue collections from the latest
completed fiscal year; or (ii) the Board of Economic Advisors general fund
revenue estimate for the upcoming fiscal year.
For many years, each annual Appropriations Act has contained a provision
requiring the Budget and Control Board to monitor the collection of revenues and
the expenditure of funds. The Appropriations Act for Fiscal Year 1994-95, Act
497 of 1994, Part I, Section 17G.36, provides that if, because of an inaccurate
estimate of revenues, a deficit appears likely, the Budget and Control Board
shall effect such reductions of appropriations as may be necessary to prevent a
deficit.
Actions taken by the Budget and Control Board in the fiscal year ended June 30,
1992, reflect the required process of monitoring revenues and making adjustments
to avoid a deficit. The fiscal year 1991-92 budget adopted in June 1991 was
based on estimated revenues of $3.588 billion. On July 26, 1991, the Board of
Economic Advisors advised the Budget and Control Board that it projected
revenues to be $148.3 million less than estimated in the 1991-92 Appropriations
Act. In response, on July 30, 1991, the Budget and Control Board eliminated the
Capital Reserve Fund appropriation of $65.8 million, reduced agency
appropriations by $33.6 million and required agencies to set aside additional
appropriations of $67.3 million. On February 10, 1992, the Board of Economic
Advisors advised the Budget and Control Board that it had again revised its
estimate of revenues downward by an additional $55 million. In response to this
revised estimate, on February 11, 1992, the Budget and Control Board permanently
reduced the $67.3 million in appropriations which were set aside on July 30,
1991, and further reduced appropriations by $27.2 million. Despite such actions,
expenditures exceeded revenues by $38.2 million and, as required by the South
Carolina Constitution, such amount was withdrawn from the General Reserve Fund
to cover the shortfall.
For the fiscal year ended June 30, 1993, the Board of Economic Advisors on
August 19, 1992, advised the Budget and Control Board that it projected revenues
to be $195 million less than estimated in the 1992-93 Appropriations Act. On
August 22, 1992, the Budget and Control Board responded by sequestering the
Capital Reserve Fund of $86.1 million, reducing certain agency appropriations by
$88.1 million based on each agency's fiscal year 1992-93 appropriation growth
and requiring certain agencies to set aside an additional $88.1 million, also
based on each agency's fiscal year 1992-93 appropriation growth. The method of
reducing agency appropriations based on growth was challenged and the State
Supreme Court deemed that such method was inappropriate. In response, the Budget
and Control Board, on September 15, 1992, reduced agency appropriations on an
across-the-board method by 4%. On November 10, 1992, the Budget and Control
Board permanently reduced the $88.1 million in appropriations which were set
aside on September 15, 1992. This action along with improved actual revenue
collections created a budgetary surplus of $100,993,615.
For the fiscal year ended June 30, 1994, the State had a budgetary surplus of
$273.48 million. The General Assembly has designated the application of most of
this surplus, including a transfer to the Capital Reserve Fund in the amount of
$66.83 million.
Legislation recently adopted by the General Assembly provides for the exemption
of the value of residential real property up to a certain level (approximately
$100,000 fair market value) from school district ad valorem property taxes
levied for other than debt service and payments pursuant to lease-purchase
agreements. The legislation provides for a Property Tax Relief Fund from which
reimbursements will be made to local governments for revenues not collected as a
result of the residential exemption. The precise level of the exemption is to be
established by the Director, Department of Revenue, based on the amount
approximate to the Property Tax Relief Fund for that year.
For the fiscal year ended June 30, 1995, the Board of Economic Advisors
projected a surplus of $290.9 million. Of this amount $54.6 million is
appropriated to the Property Tax Relief Fund. (An additional $140.4 million from
recurring revenues is also appropriated to the Property Tax Relief Fund.) Also,
$73.4 million of the surplus is for transfer to the Capital Reserve Fund, from
which it will be allocated pursuant to the project designations of the General
Assembly to various state agencies and institutions. The remaining $163 million
of the surplus was appropriated through the 1994-95 Supplemental Appropriations
Act. The Governor has vetoed appropriations of $2.5 million from the
Supplemental Appropriations Act and $230,775 from the Capital Reserve Fund. The
General Assembly has not yet acted on these vetoes. The Comptroller General has
now reported an actual surplus for the fiscal year ended June 30, 1995, of $393
million.
For the fiscal year that began July 1, 1995, the General Assembly determined to
continue the receipt of low-level nuclear waste at the facility in Barnwell
County. The capacity of that facility is expected to be fully consumed in
approximately seven years. Tax receipts from Barnwell were forecast to be
approximately $137,000,000 per year. Receipts for the first six months of fiscal
year 1995-1996 were approximately $63,000,000. Receipts from that tax are to be
allocated, in accordance with a permanent amendment to the South Carolina Code,
to various educational purposes of the State with an amount up to 5% of the
revenues so collected to be remitted to Barnwell County for further
distribution. That permanent allocation, however, has been modified for fiscal
year 1995-1996 by provisions contained in the budget act, by the designation of
particular amounts to particular educational projects, and, during the first six
months, approximately 17% of receipts from waste generated by the southeastern
states going to the State's general fund.
South Carolina is primarily a manufacturing state. In 1994, nearly one-quarter
of all jobs in the State were in the manufacturing industry, compared to 15%
nationally. While the textile industry is still the major industrial employer in
the State, since 1950, the State's economy has undergone a gradual transition to
other activities. The economic base of the State has diversified into other
areas such as trade, services and durable goods manufacturing. This development
was assisted by the State's lowering of its Corporate Income Tax rate and the
providing of improved tax incentives to encourage business development in the
State during the 1980's. Now South Carolina's economy tends to resemble more
closely that of the United States.
During all of 1993, personal income grew at an average annual rate of 5.9% in
South Carolina. During the same period the nation's income grew 5.3% and
personal income in the Southeast region grew 6.3%. Over the last five years
(1989-1994) personal income in South Carolina rose at a compounded annual rate
of 6.2%, outpacing the 6.1% growth in the Southeast region and the 5.3% annual
income growth in the United States for the same period.
1994 was the third best year for announced capital investment in new plants and
expansions in the State. The South Carolina Development Board reported that
manufacturers invested $2.881 billion in economic development projects during
1994. Total investment was nearly equally split between plant expansions of
existing facilities and investment in the creation of new manufacturing
facilities. This investment is expected to create 16,715 new jobs.
Through August 1995, the State's economy has added 18,600 jobs compared to the
same period in 1994. In 1994, employment in the State increased 2.4% while the
rate of employment growth in the United States was 2.6%. Monthly unemployment
rates in the State have been below comparable national rates during all of 1995.
The unemployment rate for September 1995, the latest month available for South
Carolina, was 5.1%, one-half percentage point lower than the 5.6% nationwide.
TENNESSEE FUND
In 1978, the voters of the State of Tennessee approved an amendment to the State
Constitution requiring that (1) the total expenditures of the State for any
fiscal year shall not exceed the State's revenues and reserves, including the
proceeds of debt obligations issued to finance capital expenditures and (2) in
no year shall the rate of growth of appropriations from State tax revenues
exceed the estimated rate of growth of the State's economy. That amendment also
provided that no debt obligation may be authorized for the current operation of
any State service or program unless repaid within the fiscal year of issuance.
The state's fiscal year runs from July 1 through June 30.
In response to public demand for better public education throughout the State,
the 1992 Tennessee General Assembly temporarily raised the State sales tax by
one-half of one percent to 6%, effective April 1, 1992. This increase became
permanent as a result of the 1993 legislative session. This increase establishes
the maximum total State and local sales tax rate at 8.75%. Although the issue of
instituting a new State income tax scheme remains a matter of discussion among
legislators, most political observers in Tennessee doubt such a proposal will be
passed within the next two to three years.
The Tennessee economy generally tends to rise and fall in a roughly parallel
manner with the U.S. economy. Like the U.S. economy, the Tennessee economy
entered recession in the last half of 1990 and continued throughout 1991 and
into 1992 as the Tennessee indexes of coincident and leading economic indicators
trended downward throughout the period. However, the Tennessee economy gained
strength during the latter part of 1992 and this renewed vitality steadily
continued through 1993, 1994 and into 1995. Although some of the most recent
economic data reveal some downward movement in the leading economic index, most
experts believe that the state will continue the moderate economic gains it has
achieved in 1993, 1994 and the first half of 1995.
The Tennessee index of coincident economic indicators, which gauges current
economic conditions throughout the State, has steadily risen each quarter since
the third calendar quarter of 1991. For calendar year 1994, the coincident index
rose approximately 6.20% over 1993 figures, while 1993 figures increased
approximately 4.29% over 1992 figures and 1992 figures showed a 2.45% increase
over the previous year's figures. In 1995, figures for the coincident index are
up over 1994 figures for every month from January through September, the most
recent monthly period for which data is available.
Tennessee taxable sales were approximately $44.16 billion in 1991, approximately
$46.96 billion in 1992, approximately $50.65 billion in 1993 and approximately
$55.34 billion in 1994, representing percentage increases of approximately 1.4%,
6.4%, 7.9% and 9.3%, respectively, over the previous year's total. Tennessee
taxable sales for the first nine months of 1995 were as follows: approximately
$4.78 billion in January; $4.78 billion in February; $5.12 billion in March;
$4.98 billion in April; $4.90 billion in May; $5.04 billion in June; $4.89
billion in July; $5.14 billion in August; and $5.07 billion in September. These
figures represent the following percentage increases over figures for the same
months in 1994; January, 15.39%; February, 8.68%; March, 7.33%; April, 10.83%;
May, 8.03%; June, 9.26%; July, 6.02%; August, 7.33%; and September, 8.42%.
Current data indicate that seasonally-adjusted personal income in Tennessee has
grown approximately $5.34 billion from calendar year 1992 averages to calendar
year 1993 averages, representing an approximate 5.90% increase, and grown
approximately $6.89 billion from calendar year 1993 averages to calendar year
1994 averages, representing an approximate 7.03% increase. Comparative figures
for 1994 to 1995 are not currently available. From 1983 to 1993, Tennessee's per
capita income has increased approximately 87.1% to $18,434, compared to the
national per capita income of $20,817 which translates into a ten-year increase
of approximately 70.3%. By 1994, Tennessee per capita income registered $19,482,
which equals approximately 89% of the national level of $21,899. For the fiscal
year ended June 30, 1993, however, Tennessee still led the nation in household
bankruptcy filings (1 in every 49) with a rate twice the national average (1 in
102).
Tennessee's unemployment rate stood at 4.0% for December 1994, the lowest figure
since the 1980s. The unemployment rate has slowly risen over the December 1994
low, and at September 1995, the State's unemployment rate stood at 5.2% with the
national rate at 5.6%. By December 1993, only one Tennessee county had an
unemployment rate over 10% for the first time since 1974, but by the end of
calendar year 1995, nine counties in Tennessee had an unemployment rate over
10%. Over the past four years, average annual unemployment in Tennessee has
steadily decreased from 6.6% in 1991 to 6.4% in 1992 to 5.7% in 1993 and to 4.8%
in 1994. Figures for 1995 are not currently available, but it appears that the
1995 average will be slightly higher than the 1994 average of 4.8%. The
Tennessee Department of Employment Security has projected minimum growth of
approximately 23% in Tennessee's total employment by the year 2005, with an
increase of approximately 550,000 - 600,000 new jobs as compared to the
projection for national employment growth of 20.5% over the same period.
Historically, the Tennessee economy has been characterized by a slightly greater
concentration in manufacturing employment than the U.S. as a whole. The
Tennessee economy, however, has been undergoing a structural change in the last
15-20 years through increase in service sector and trade sector employment.
Service sector employment has climbed steadily since 1973, increasing its share
of overall state non-agricultural employment from 14.5% to 24.7% in 1993. Over
the same period, employment in manufacturing has declined from 33.9% to 22.7%,
and employment in the trade sector has increased from 1973 to 1993 from 20.4% to
23.0% of non-agriculture employment. Recently, overall Tennessee
non-agricultural employment has grown in the period from 1991 to 1994 from
approximately 2.18 million persons to approximately 2.42 million persons,
representing percentage increases of approximately 2.8%, 3.7% and 4.0% for 1992,
1993 and 1994, respectively, over the previous year's figure. Accordingly,
non-agricultural employment in Tennessee is relatively uniformly diversified
today with approximately 23% in the manufacturing sector, approximately 25% in
each of the trade and service sectors and approximately 15% in government.
Figures for 1995 are not currently available.
Manufacturing employment is one component of non-agricultural employment.
Tennessee manufacturing employment averaged approximately 503,000 persons in
1991; 515,000 persons in 1992; 529,000 persons in 1993; and 538,000 persons in
1994, with the 1992, 1993 and 1994 figures representing percentage increases of
approximately 2.4%, 2.7% and 1.9%, respectively, over the previous year's
average. Figures for 1995 are not currently available.
The Tennessee index of leading economic indicators acts as a signal of the
health of the State's economy six to nine months ahead. In 1994, figures for the
leading index rose approximately 2.40% over 1993 figures while 1993 figures were
up approximately 1.38% over 1992 figures. Thus far in 1995, monthly figures for
the leading index rose in January (2.42%), February (1.67%), March (.48%), April
(.61%) and May (.09%), as compared to figures for the same months in 1994.
However, with respect to the most recent four months for which 1995 data is
available, the leading index has shown a negative trend with each month
reflecting a decrease in the index as compared to the 1994 figures for those
same months: June (-.34%); July (-.16%); August (-.12%); and September (-.73%).
Monthly figures for the leading index for the remainder of 1995 are not
currently available.
Tennessee Department of Revenue collections for calendar year 1995 increased to
approximately $5.91 billion, an increase of approximately $410 million, or 6.84%
over 1994 figures. The State's rainy-day fund remained constant from December
1994 to December 1995 at $101 million.
Tennessee's population increased approximately 6.2% from 1980 to 1990, less than
the national increase of 10.2% for the same period. As of July 1, 1995, the
State's population was estimated at approximately 5.3 million. A U.S. census
study projects that Tennessee will be the fifth most popular destination for new
residents coming from other states during the period from 1990-2020. Population
growth in Tennessee is expected to come mostly in the major metropolitan areas
(Memphis, Nashville, Knoxville and Chattanooga) over the next 10-15 years. The
overall state population is expected to grow 5.5% between 1990 and 2000, then
4.6% for the period between 2000 and 2010. Greatest growth is expected to occur
in the Nashville MSA, which, in 1995, and for the first time, passed the Memphis
MSA as the largest metropolitan population center in Tennessee. The largest
population decline is expected in the rural counties of northwest Tennessee.
This declining rate of the rural population, coupled with the structural changes
in the Tennessee economy and the increased competition from domestic and
international trading partners, comprise three trends that are likely to
influence the State's long-term outlook.
VIRGINIA FUND
The Constitution of Virginia limits the ability of the Commonwealth to create
debt. An amendment to the Constitution requiring a balanced budget was approved
by the voters on November 6, 1984.
General obligations of cities, towns or counties are payable from the general
revenues of the entity, including ad valorem tax revenues on property within the
jurisdiction. The obligation to levy taxes could be enforced by mandamus, but
such a remedy may be impracticable and difficult to enforce. Under the Code of
Virginia, a holder of any general obligation bond in default may file an
affidavit setting forth such default with the Governor. If, after investigating,
the Governor determines that such default exists, he is directed to order the
State Comptroller to withhold State funds appropriated and payable to the entity
and apply the amount so withheld to unpaid principal and interest.
The economy of the Commonwealth of Virginia is based primarily on manufacturing,
the government sector, agriculture, mining and tourism. The government sector
includes defense and could be affected adversely by military base closings and
other reductions in defense spending.
The Commonwealth has maintained a high level of fiscal stability for many years
due in large part to conservative financial operations and diverse sources of
revenue. No significant new taxes or increases in the scope or amount of
existing taxes were passed at the 1994 session of the General Assembly.
WEST VIRGINIA FUND
West Virginia's economy is heavily dependent upon the coal mining industry.
Notwithstanding the importance of the coal mining industry on the West Virginia
economy, West Virginia's economy has come to benefit from a developing tourism
industry. Tourism, directly and indirectly, accounts for a large portion of the
West Virginia economy. The Governor's Office and the State Legislature have
placed great emphasis upon developing the tourism industry in the State and the
Legislature has enacted a number of statutes designed to foster the growth in
tourism.
Real and personal property has been reappraised on a statewide basis for ad
valorem property tax purposes which has generally increased property tax
revenues. The methodology used by the West Virginia Department of Tax and
Revenue to value coal properties for ad valorem property tax purposes has in
recent years undergone challenges by citizens and some State officials. The
challengers claim that coal properties are being valued below their fair market
value, and therefore, coal companies are not paying sufficient property taxes.
Data compiled by the State of West Virginia Bureau of Employment Programs
indicates that unemployment in West Virginia during 1995 (annual average) was
7.9%. This represents the lowest annual rate in the last ten years. The State's
economic development efforts were aided by the announcement in May 1996 that
Toyota Motor Corp. will build a $400 million engine plant in Putnam County which
is expected to employ approximately 300 people.
West Virginia's economy should be enhanced by the West Virginia Highway System
Improvements Initiative which is anticipated to involve the expenditure of
approximately $4.62 billion of federal and State funds over the next several
years to construct new roadways in the State. Federally funded construction of
several federal administrative facilities in the State is also expected to
enhance the State's economy. In 1996, the State began sales of infrastructure
bonds as part of a $300 million program aimed at local water and sewer projects
as well as economic development projects.
In 1995, the State Legislature substantially reformed the State's workers'
compensation program. The reform, aimed primarily at enforcing employers'
premium obligations and strengthening requirements for permanent total
disability awards, is intended to decrease the program's unfunded liability and
make the State's business climate more attractive.
State pension plans have drawn the attention of the courts in recent years. In
March 1994, the West Virginia Supreme Court of Appeals issued its opinion in
Booth v. Sims, 456 S.E.2d 167, (W. Va. 1995) which will likely affect various
State pension plans. In this case, the Court ruled that the State Legislature
could not reduce the state troopers' retirement annual cost of living
adjustment. The Legislature had approved such reductions in 1994 due to concerns
regarding the actuarial soundness of the troopers' pension plan. The Court found
the Legislature's reduction of benefits unconstitutional as applied to troopers
who have participated in the plan long enough to have detrimentally relied on
expected pension benefits. State lawmakers speculate that the Court's ruling may
affect the State's budget by restricting the Legislature's ability to amend
State pension plans which are inadequately funded. In May 1995, the West
Virginia Supreme Court of Appeals ruled in the matter of State of West Virginia
ex rel. Gainer v. West Virginia Board of Investments, 459 S.E.2d 531 (W. Va.
1995) that a state statute granting the West Virginia Board of Investments
authority to invest a portion of public employee pension funds in corporate
stocks violated a state constitution prohibition against the State becoming a
stockholder in any company or association.
<PAGE>
Investment Adviser Shareholder Servicing Agent
Massachusetts Financial Services Company MFS Service Center, Inc.
500 Boylston Street 500 Boylston Street
Boston, MA 02116 Boston, MA 02116
(617) 954-5000 Toll-free: (800) 225-2606
Distributor Mailing Address:
MFS Fund Distributors, Inc. P.O. Box 2281
500 Boylston Street Boston, MA 02107-9906
Boston, MA 02116
(617) 954-5000 Independent Auditors
Deloitte & Touche LLP
Custodian and Dividend Disbursing Agent 125 Summer Street
State Street Bank and Trust Company Boston, MA 02110
225 Franklin Street
Boston, MA 02110
<TABLE>
<S> <C>
MFS(R) ALABAMA MUNICIPAL BOND FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
</TABLE>
[MFS Logo]
THE FIRST NAME IN MUTUAL FUNDS
500 Boylston Street
Boston, MA 02116
MST-1-8/96/150M
<PAGE>
[logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) MUNICIPAL STATEMENT OF
SERIES TRUST ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) August 1, 1996
- ------------------------------------------------------------------------------
Page
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1 The Trust ..................................................... 2
2. Investment Objective, Policies and Restrictions .............. 2
3. Performance Information ...................................... 9
4. Determination of Public Offering Price and Net Asset Value;
Valuation of Portfolio Securities .......................... 10
5. Management of the Trust ...................................... 11
Trustees ................................................... 11
Officers ................................................... 11
Investment Adviser ......................................... 13
Custodian .................................................. 14
Shareholder Servicing Agent ................................ 14
Distributor ................................................ 14
6. Taxation ..................................................... 15
7. Shareholder Services ......................................... 16
8. Description of Shares, Voting Rights and Liabilities ......... 19
9. Portfolio Transactions ....................................... 19
10. Distribution Plans ........................................... 20
11. Independent Auditors and Financial Statements ................ 21
Appendix A -- Performance Results and Quotations ............. A-1
Appendix B -- Sales Charges .................................. B-1
Appendix C -- Amounts Paid Under the Distribution Plans ...... C-1
Appendix D -- Trustee Compensation Tables .................... D-1
MFS MUNICIPAL SERIES TRUST
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Trust's Prospectus dated
August 1, 1996. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. THE TRUST
MFS Municipal Series Trust (the "Trust") is an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1984. On August 27, 1993, the Trust changed its
name from "MFS Multi-State Municipal Bond Trust." On August 3, 1992 the Trust
changed its name from "MFS Managed Multi-State Municipal Bond Trust." The Trust
was known as "MFS Managed Multi-State Tax-Exempt Trust" until its name was
changed effective August 12, 1988. The Trust presently consists of 16 separate
series, including: the Alabama Fund, the Arkansas Fund, the California Fund, the
Florida Fund, the Georgia Fund, the Maryland Fund, the Massachusetts Fund, the
Mississippi Fund, the New York Fund, the North Carolina Fund, the Pennsylvania
Fund, the South Carolina Fund, the Tennessee Fund, the Virginia Fund and the
West Virginia Fund, each of which is referred to as a "Fund." Shares of MFS
Municipal Income Fund, the sixteenth series of the Trust, are offered and sold
pursuant to a separate prospectus and statement of additional information. The
California Fund was organized as a series of the Trust on June 3, 1993. Prior
thereto, the California Fund was organized as a separate Massachusetts business
trust.
Massachusetts Financial Services Company, a Delaware corporation ("MFS" or the
"Adviser"), is the Trust's investment adviser. References in this SAI to the
"Prospectus" are to the Prospectus dated August 1, 1996, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE -- The investment objective of each Fund is to provide
current income exempt from federal income taxes and from the personal income
taxes, if any, of the State to which its name refers. There can be no assurance
that any Fund will achieve its investment objective. Shareholder approval is not
required to change the investment objective of any Fund.
INVESTMENT POLICIES -- As a fundamental policy, each Fund seeks to achieve its
investment objective by investing its assets primarily (i.e., at least 80% of
its assets under normal conditions) in municipal bonds and notes and other debt
instruments the interest on which is exempt from federal income taxes and from
the personal income taxes, if any, of the State to which its name refers. These
obligations are issued primarily by such States, their political subdivisions,
municipalities, agencies, instrumentalities or public authorities. Each Fund may
purchase municipal bonds the interest on which may be subject to an alternative
minimum tax. (For purposes of the 80% test described above, the interest thereon
is nonetheless considered to be tax-exempt.) The investment policies of the
Funds are described in detail in the Prospectus.
"WHEN-ISSUED" SECURITIES: As described in the Prospectus under "Investment
Objective and Policies," each Fund may purchase new issues of tax-exempt
securities on a "when-issued" basis. In order to invest the Funds' assets
immediately, while awaiting delivery of securities purchased on a "when-issued"
basis, short-term obligations that offer same day settlement and earnings will
normally be purchased. Although short-term investments will normally be in
tax-exempt securities, short-term taxable securities may be purchased if
suitable short-term tax-exempt securities are not available. When a commitment
to purchase a security on a "when-issued" basis is made, procedures are
established consistent with the General Statement of Policy of the Securities
and Exchange Commission (the "SEC") concerning such purchases. Since that policy
currently recommends that an amount of the Funds' assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
cash, short-term money market instruments or high quality debt securities
sufficient to cover any commitments are always expected to be available.
However, although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a "when-issued" basis may
involve more risk than other types of purchases. For example, when the time
comes to pay for a "when-issued" security, portfolio securities of the Fund may
have to be sold in order for the Fund to meet its payment obligations, and a
sale of securities to meet such obligations carries with it a potential for the
realization of capital gain, which is not tax-exempt. Also, if it is necessary
to sell the "when-issued" security before delivery, the Fund may incur a loss
because of market fluctuations since the time the commitment to purchase the
"when-issued" security was made. Moreover, any gain resulting from any such sale
would not be tax-exempt. Additionally, because of market fluctuations between
the time of commitment to purchase and the date of purchase, the "when-issued"
security may have a lesser (or greater) value at the time of purchase than the
Fund's payment obligations with respect to the security.
INDEXED SECURITIES: Each Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices or other financial
indicators. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity (i.e., principal value) or coupon rate is
determined by reference to a specific instrument or statistic.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. government agencies.
SWAPS AND RELATED TRANSACTIONS: Each Fund may enter into interest rate swaps and
other types of available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotitated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), corporate
borrowing rates, or other factors such as securities prices or inflation rates.
Swap agreements can take many different forms and are known by a variety of
names. A Fund is not limited to any particular form or variety of swap agreement
if MFS determines it is consistent with the Fund's investment objective and
policies.
Each Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If a Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
Custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate or other factor that
determines the amount of payments to be made under the arrangement. If MFS is
incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
sellers who are member firms or a subsidiary thereof of the New York Stock
Exchange (the "Exchange") or members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that a Fund
purchases and holds through its agent are U.S. Government securities, the values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If, at the
time the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
VARIABLE AND FLOATING RATE OBLIGATIONS: Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime rate
at a major commercial bank, and that a bondholder can demand payment of the
obligations on behalf of the Fund on short notice at par plus accrued interest,
which amount may be more or less than the amount the bondholder paid for them.
The maturity of floating or variable rate obligations (including participation
interests therein) is deemed to be the longer of (i) the notice period required
before the Fund is entitled to receive payment of the obligation upon demand or
(ii) the period remaining until the obligation's next interest rate adjustment.
If not redeemed by the Fund through the demand feature, the obligations mature
on a specified date which may range up to thirty years from the date of
issuance.
INVERSE FLOATING RATE OBLIGATIONS: Each Fund may invest in so called "inverse
floating rate obligations" or "residual interest bonds" or other obligations or
certificates relating thereto structured to have similar features. In creating
such an obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short-term
obligations, the interest rate of which is reset at short intervals, typically
35 days. The other half of the debt is issued as inverse floating rate
obligations, the interest rate of which is calculated based on the difference
between a multiple of (approximately two times) the interest paid by the issuer
and the interest paid on the short-term obligation. Under usual circumstances,
the holder of the inverse floating rate obligation can generally purchase an
equal principal amount of the short-term obligation and link the two obligations
in order to create long-term fixed-rate bonds. Because the interest rate on the
inverse floating rate obligation is determined by subtracting the short-term
rate from a fixed amount, the interest rate will decrease as the short-term rate
increases and will increase as the short-term rate decreases. The magnitude of
increases and decreases in the market value of inverse floating rate obligations
may be approximately twice as large as the comparable change in the market value
of an equal principal amount of long-term bonds which bear interest at the rate
paid by the issuer and have similar credit quality, redemption and maturity
provisions.
OPTIONS: Each Fund may, subject to any applicable laws, write covered put and
call options and purchase put and call options on fixed income securities that
are traded on U.S. securities exchanges and over-the-counter on behalf of the
Fund only for hedging purposes. Call options written by the Funds give the
holder the right to buy the underlying securities from the Fund at a fixed
exercise price; put options written by the Fund give the holder the right to
sell the underlying securities to the Fund at a fixed exercise price. A call
option written by a Fund is "covered" if the Fund owns the underlying security
covered by the call on the Fund or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) on behalf of a
Fund upon conversion or exchange of other securities held in its portfolio. A
call option is also covered if the Fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or high grade government securities in a
segregated account with its custodian. A put option written by a Fund is
"covered" if the Fund maintains in a segregated account with its custodian cash
or high grade government securities with a value equal to the exercise price, or
else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is equal to or greater than
the exercise price of the put written or less than the exercise price of the put
written if the difference is maintained by the Fund in cash or high grade
government securities in a segregated account with its custodian. Put and call
options written by a Fund may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded, and applicable laws and regulations. The
writer of an option may have no control over when the underlying securities must
be sold, in the case of a call option, or purchased, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Such transactions permit a Fund to generate additional premiums,
which will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired for that Fund. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If a Fund desires to sell a particular security on which it
has written a call option, it will effect a closing transaction for that Fund
prior to or concurrent with the sale of the security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; a Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the closing out of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result a Fund would have to exercise the options in order to realize any profit.
If the Fund is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
A Fund may write options in connection with buy-and-write transactions; that is,
the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by a Fund
in the same market environments that call options are used in equivalent
buy-and-write transactions.
A Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
A Fund may purchase put options to hedge against a decline in the value of the
Fund's portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs.
A Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing for the Fund's portfolio in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund, upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Fund. The Fund may also purchase put and call
options for hedging and non-hedging purposes.
A Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, up to a stated
time in the future or, in some cases, on a future date. A Fund may purchase
detachable call options either in connection with its purchase of the underlying
municipal securities or in separate transactions unrelated to purchases of the
underlying municipal securities. In general, however, a Fund will only purchase
detachable call options that are issued at the same time as the underlying
municipal securities. A Fund may or may not purchase the underlying municipal
securities. Because detachable call options may be long term instruments, their
value could be subject to greater volatility and, if the Fund seeks to sell an
option it has purchased, it could sustain a loss of all or a portion of the
amount paid to purchase the option. In this regard, detachable call options have
only recently been introduced and there is not yet an established market for the
sale of such instruments. In addition, depending on changes in the value of the
underlying municipal security, it may not be profitable for the Fund to exercise
an option it has purchased. In that event, the Fund will lose the amount of the
purchase price paid for the option.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets. Although the Adviser disagrees with this
position, the Adviser intends to limit each Fund's writing of over-the-counter
options in accordance with the following procedure. Except as provided below,
each Fund intends to write over-the-counter options only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York. Also, the contracts each Fund has in place with such primary dealers will
provide that the Fund has the absolute right to repurchase an option it writes
at any time at a price which represents the fair market value, as determined in
good faith through negotiation between the parties, but which in no event will
exceed a price determined pursuant to a formula in the contract. Although the
specific formula may vary between contracts with different primary dealers, the
formula will generally be based on a multiple of the premium received by the
Fund for writing the option, plus the amount, if any, of the option's intrinsic
value (i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the security
and the strike price of the option if the option is written out-of-the-money.
Each Fund will treat all or a portion of the formula amount as illiquid for
purposes of the 15% test imposed by the SEC staff. Each Fund may also write
over-the-counter options with non-primary dealers and will treat the assets used
to cover these options as illiquid for purposes of such 15% test.
FUTURES CONTRACTS: Each Fund intends to enter into Futures Contracts for hedging
purposes and for non-hedging purposes, to the extent permitted by applicable
law. A Futures Contract is a bilateral agreement providing for the purchase and
sale for future delivery of a fixed income security, a contract for the purchase
or sale for future delivery of Eurodollar deposits or a futures contract based
on municipal bond or other financial indices, including any index of fixed
income securities ("Futures Contract"). A "sale" of a Futures Contract means a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures Contracts have been designed by
exchanges which have been designated as "contract markets" by the Commodity
Futures Trading Commission (the "CFTC"), and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Presently, Futures Contracts are based on such debt securities
as long-term U.S. Treasury Bonds, Treasury Notes, three-month U.S. Treasury
Bills and bank certificates of deposit and on an index of municipal bonds and
Eurodollar deposits. Existing contract markets include the Chicago Board of
Trade and the International Monetary Market of the Chicago Mercantile Exchange.
Futures Contracts are traded on these markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
At the same time a Futures Contract is purchased or sold for a Fund, the Fund
must allocate cash or securities as a deposit payment ("initial deposit"). The
initial deposit varies but may be as low as 5% or less of the value of the
contract. Daily thereafter, the Futures Contract is valued on a marked-to-
market basis and the Fund may be required to pay or receive additional
"variation margin," based on any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment equal to the amount, if any,
by which the value of the index at maturity is above or below the value of the
index at the time the contract was entered into, times a fixed index
"multiplier." The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index and its composition is changed periodically. In addition, Futures
Contracts on Eurodollar deposits also provide for the payment and acceptance of
a cash settlement, based on changes in the value of the underlying instrument.
Although Futures Contracts call for the actual delivery or acquisition of
securities or, in the case of Futures Contracts based on an index, the making or
acceptance of a cash settlement at a specified future time, the contractual
obligation is usually fulfilled before such date by buying or selling, as the
case may be, on a commodities exchange, an identical Futures Contract calling
for settlement in the same month, subject to the availability of a liquid
secondary market. A Fund incurs brokerage fees when the Trust purchases and
sells Futures Contracts for it.
The purpose of the purchase or sale of a Futures Contract entered into for
hedging purposes, in the case of a portfolio such as that of each of the Funds
which holds or intends to acquire long-term fixed income securities, is to
attempt to protect the Funds from fluctuations in interest rates without
actually buying or selling long-term fixed income securities. For example, if a
Fund owns long-term bonds, and interest rates were expected to increase, the
Fund might enter into Futures Contracts for the sale of debt securities. Such a
sale would have much the same effect as selling an equivalent value of the
long-term bonds owned by the Fund. If interest rates did increase, the value of
the debt securities in the portfolio would decline, but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities
investing in bonds with short maturities when interest rates are expected to
increase. However, the use of Futures Contracts as an investment technique
allows the Fund to maintain a hedging position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent a Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts, on behalf of the
Fund, will consist of cash or short-term money market instruments from its
portfolio in an amount equal to the difference between the fluctuating market
value of such Futures Contracts and the aggregate value of the initial and
variation margin payments made by the Fund, with respect to such Futures
Contracts. The Funds also may enter into transactions in Futures Contracts for
non-hedging purposes, to the extent permitted by applicable law.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although each Fund believes that
use of such Contracts will benefit the Fund, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
Contract. For example, if a Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash, it may have to sell bonds
from its portfolio to meet daily variation margin requirements. Such sales of
bonds may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. Transactions entered into for non-hedging purposes
involve greater risk and could result in losses which are not offset by gains on
other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: Each Fund, subject to any applicable laws, may
purchase and write options on Futures Contracts ("Options on Futures Contracts")
for hedging purposes and for non-hedging purposes. An Option on a Futures
Contract provides the holder with the right to enter into a "long" position in
the underlying Futures Contract (i.e., a purchase of the Futures Contract), in
the case of a call option, or a "short" position in the underlying Futures
Contract (i.e., a sale of the Futures Contract), in the case of a put option, at
a fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. Such Options on Futures Contracts will be traded on
contract markets regulated by the CFTC. Depending on the pricing of the option
compared to either the price of the Futures Contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the Futures Contract or underlying debt securities. As with
the purchase of Futures Contracts, when a Fund's portfolio is not fully invested
the Fund may purchase a call Option on a Futures Contract on behalf of that Fund
to hedge against a market advance due to declining interest rates.
The writing of a call Option on a Futures Contract by a Fund may constitute a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the Futures Contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund portfolio holdings. The writing of a put Option on a
Futures Contract may constitute a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the options is higher than the exercise price,
the Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund may incur a loss which will be
reduced by the amount of the premium it receives, less related transaction
costs. Depending on the degree of correlation between changes in the value of
the portfolio securities of a Fund and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts, may to
some extent be reduced or increased by changes in the value of the Fund's
portfolio securities. The writer of an Option on a Futures Contract is subject
to the requirement of initial and variation margin payments.
Each Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
security or securities included in the index underlying the Futures Contract, or
(c) through the holding of a call on the same Futures Contract and in the same
principal amount as the call written where the exercise price of the call held
(i) is equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, cash equivalents or U.S. Treasury securities in
a segregated account with its custodian. The Trust may cover the writing of put
Options on Futures Contracts on behalf of a Fund (a) through sales of the
underlying Futures Contract, (b) through segregation of cash, cash equivalents
or U.S. Treasury securities in an amount equal to the value of the security or
index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held is (i) equal to or greater than the
exercise price of the put written or (ii) less than the exercise price of the
put written if the difference is maintained by the Fund in cash, cash
equivalents or U.S. Treasury securities in a segregated account with its
custodian. Put and call Options on Futures Contracts written by a Fund may also
be covered in such other manner as may be in accordance with the requirements of
the exchange on which they are traded and applicable laws and regulations.
Each Fund may purchase a put option on a Futures Contract to hedge its
portfolio. Purchases of such put options will therefore be made for the same
types of purposes as protective put options on portfolio securities. A Fund will
purchase a put option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk a Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the option
and close out the underlying Futures Contract, subject to the risks of futures
trading described herein. In addition to the correlation risks discussed above,
the purchase of an option also entails the risk that changes in the value of the
underlying Futures Contract will not be fully reflected in the value of the
option purchased. The writing of an Option on a Futures Contract, however,
involves all of the risks of futures trading, including the requirement to make
initial and variation margin payments. Transactions in Options on Futures
Contracts entered into for non-hedging purposes involve greater risk and could
result in losses which are not offset by gains on other portfolio assets.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS: Various additional risks exist with respect to the trading of
options, Futures Contracts and Options on Futures Contracts. For example, a
Fund's ability effectively to hedge all or a portion of its portfolio through
transactions in such instruments will depend on the degree to which price
movements in the underlying index or instrument correlate with price movements
in the relevant portion of the Fund's portfolio. The trading of Futures
Contracts and options entails the additional risk of imperfect correlation
between movements in the Futures or option price and the price of the underlying
index or obligation, while the writing of options also entails the risk of
imperfect correlation between securities used to cover options written and the
securities underlying such options. The anticipated spread between the prices
may be distorted because of various factors, which are set forth under
"Investment Objective, Policies and Restrictions -- Futures Contracts."
Transactions in options, Futures Contracts and Options on Futures Contracts
entered into for non-hedging purposes involve greater risk and may result in
losses which are not offset by gains on other portfolio assets.
A Fund's ability to engage in options and futures strategies will also depend on
the availability of liquid markets in such instruments. "Options" above sets
forth certain reasons why a liquid secondary market may not exist. Transactions
in these instruments are also subject to the risk of brokerage firm or clearing
house insolvencies.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit, which could
make it difficult or impossible to establish or liquidate positions. In
addition, the exchanges on which futures and options are traded may impose
limitations governing the maximum number of positions on the same side of the
market and involving the same underlying instruments which may be held by a
single investor, whether acting alone or in concert with others (regardless of
whether such contracts are held on the same or different exchanges or held or
written in one or more accounts or through one or more brokers).
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees. In addition, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost.
In order to assure that the Funds will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts and Options on Futures
Contracts only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the aggregate
initial margin and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Fund's assets. In addition, the Funds must comply
with the requirements of various state securities laws in connection with such
transactions. Neither of the restrictions would be changed by the Trust's Board
of Trustees without considering the policies and concerns of the various federal
and state regulatory agencies.
PORTFOLIO TRADING: The Funds intend to fully manage their portfolios by buying
and selling securities, as well as by holding securities to maturity. In
managing the portfolio of each Fund, the Trust seeks to take advantage of market
developments, yield disparities and variations in the creditworthiness of
issuers, which may include use of the following strategies:
(1) shortening the average maturity of a Fund's portfolio in anticipation
of a rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the
relative values of each; and
(4) changing from one debt security to an essentially similar debt security
when their respective yields are distorted due to market factors.
Distribution of gains, if any, realized from the sale of Municipal Obligations
(as defined in the Prospectus) or other securities are subject to federal
income taxes and state personal income taxes. (See "Taxation" in this SAI and
"Tax Status" in the Prospectus.) The Trust cannot predict the annual portfolio
turnover rate for any Fund, but it is anticipated that the annual turnover
rate of a Fund generally should not exceed 200% (excluding turnover of
obligations having a maturity of one year or less). A 200% annual turnover
rate would occur, for example, if all the securities in a Fund's portfolio
(excluding short-term obligations) were replaced twice in a period of a year.
A high turnover rate may involve greater expenses to a Fund.
SPECIAL FACTORS AFFECTING INVESTORS IN STATE OBLIGATIONS: Investors should be
aware of special factors affecting investments in each State's Municipal
Obligations. For a discussion of these special factors, which does not purport
to be complete, see Appendix E to the Prospectus which pertains to the
relevant Fund.
INVESTMENT RESTRICTIONS -- The Trust has adopted the following restrictions
which apply to each of the Funds and which cannot be changed with respect to
any Fund without the approval of the holders of a majority of the shares of
that Fund (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of that Fund (or the Trust or class, as applicable)
or (ii) 67% or more of the outstanding shares of that Fund (or the Trust or
class, as applicable) present at a meeting at which holders of more than 50%
of the Fund's outstanding shares (or the Trust or class, as applicable) are
represented in person or by proxy).
The Trust may not, on behalf of any Fund:
(1) borrow money or pledge, mortgage or hypothecate assets of the Fund,
except that as a temporary measure for extraordinary or emergency purposes it
may borrow in an amount not to exceed 1/3 of the current value of the net
assets of the Fund, including the amount borrowed, and may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings (it is
intended that the Trust would borrow money on behalf of a Fund only from banks
and only to accommodate requests for the repurchase of shares of the Fund
while effecting an orderly liquidation of portfolio securities) (for the
purpose of this restriction, collateral arrangements with respect to options,
Futures Contracts and Options on Futures Contracts and payment of initial and
variation margin in connection therewith are not considered a pledge of
assets). (For additional related restrictions, see clause (i) under the
caption "State and Federal Restrictions" below);
(2) purchase any security or evidence of interest therein on margin, except
that the Trust may obtain such short-term credit on behalf of a Fund as may be
necessary for the clearance of purchases and sales of securities and except
that the Trust may make deposits on behalf of a Fund on margin in connection
with Options, Futures Contracts and Options on Futures Contracts;
(3) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale
of Futures or the writing (in the case of each Fund except the California
Fund), purchasing and selling of puts, calls or combination thereof with
respect to securities and Futures Contracts;
(4) underwrite securities issued by other persons except insofar as the
Trust may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
(5) make loans to other persons except by purchase of debt instruments
consistent with a Fund's investment policies or except through the use of
repurchase agreements or the purchase of short-term obligations and provided
that not more than 10% of a Fund's total assets will be invested in repurchase
agreements maturing in more than seven days;
(6) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except in connection with Futures Contracts, Options on Futures Contracts
and, in the case of each Fund except the California Fund, options) in the
ordinary course of business (the Trust reserves the freedom of action to hold
for a Fund's portfolio and to sell real estate acquired as a result of that
Fund's ownership of securities);
(7) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be held
by any Fund; or
(8) issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "1940 Act")) if such issuance is specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder.
For purposes of the investment restrictions described above and the state and
federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security.
As a non-fundamental policy, each Fund will not knowingly invest in illiquid
securities including securities subject to legal or contractual restrictions on
resale or for which there is no readily available market (e.g., trading in the
security is suspended, or, in the case of unlisted securities, where no market
exists) if more than 15% of the Fund's assets (taken at market value) would be
invested in such securities. Securities that are not registered under the
Securities Act of 1933, as amended, and sold in reliance on Rule 144A
thereunder, but are determined to be liquid by the Trust's Board of Trustees (or
its delegee), will not be subject to this 15% limitation.
In addition, the Trust has adopted the following operating policy for each Fund
which is not fundamental and which may be changed without shareholder approval.
The Trust may enter into repurchase agreements (a purchase of and a simultaneous
commitment to resell a security at an agreed upon price on an agreed upon date)
on behalf of a Fund (other than the California Fund) only with member banks of
the Federal Reserve System and broker-dealers and only for U.S. Government
securities. The Trust may enter into repurchase agreements on behalf of the
California Fund with a vendor, which is usually a member bank of the Federal
Reserve or a member firm (or a subsidiary thereof) of the Exchange, and only for
U.S. Government securities. If the vendor of a repurchase agreement fails to pay
the sum agreed to on the agreed upon delivery date, the Trust would have the
right to sell the U.S. Government securities for that Fund, but might incur a
loss in so doing and in certain cases may not be permitted to sell the U.S.
Government securities. As noted in paragraph (5) above, the Trust may not invest
more than 10% of the total assets of any Fund in repurchase agreements maturing
in more than seven days.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain federal and
state statutes and regulatory policies, as a matter of operating policy of the
Trust, the Trust will not, on behalf of: (i) any Fund borrow money for any
purpose in excess of 10% of the Fund's total assets (taken at cost) (moreover,
the Trust will not purchase any securities for the portfolio of the Fund at any
time at which borrowings exceed 5% of the Fund's total assets (taken at market
value)); (ii) any Fund (except the California Fund) invest more than 5% of the
Fund's total assets at the time of investment in unsecured obligations of
issuers which, including predecessors, controlling persons, general partners and
guarantors, have a record of less than three years' continuous business
operation or relevant business experience; (iii) any Fund (except the California
Fund) purchase or retain in the Fund's portfolio any securities of an issuer any
of whose officers, directors, trustees or security holders is an officer or
Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser if, after the purchase of the securities of such issuer, one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, of such issuer and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5% of such shares or
securities, or both; (iv) any Fund sell any security which the Fund does not own
unless by virtue of its ownership of other securities the Fund has at the time
of sale a right to obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and provided that if such
right is conditional the sale is made upon the same conditions; (v) any Fund
invest for the purpose of exercising control or management; (vi) any Fund
purchase securities issued by any registered investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that the Trust will not purchase
on behalf of any Fund the securities of any registered investment company if
such purchase at the time thereof would cause more than 10% of the total assets
of the Fund (taken at the greater of cost or market value) to be invested in the
securities of such issuers or would cause more than 3% of the outstanding voting
securities of any such issuer to be held by the Fund; and provided, further,
that the Trust shall not purchase on behalf of any Fund securities issued by any
open-end investment company; (vii) any Fund (except the California Fund) invest
more than 15% of the Fund's total assets (taken at the greater of cost or market
value) in unmarketable securities (included under the 15% limit on investments
in illiquid securities are OTC options, repurchase agreements maturing in more
than seven days and unmarketable securities) or; (viii) any Fund (except the
California Fund) purchase securities (other than bonds, notes, and obligations
issued or guaranteed by the United States or any agency or instrumentality of
the United States, which may be purchased without limitation) if as a result, at
the close of any quarter in the Trust's taxable year, more than 25% of a Fund's
total assets would be invested in securities of any one issuer. In addition, the
Trust will not on behalf of the California Fund: (i) pledge, mortgage or
hypothecate for any purpose in excess of 15% of such Fund's net assets (taken at
market value); or (ii) invest more than 10% of such Fund's total assets (taken
at the greater of cost or market value) in securities that are not readily
marketable. These policies are not fundamental and may be changed by the Trust
with respect to any Fund without shareholder approval in response to changes in
the various state and federal requirements.
PERCENTAGE AND RATING RESTRICTIONS: Except for Investment Restriction (1), these
investment restrictions are adhered to at the time of purchase or utilization of
assets; a subsequent change in circumstances will not be considered to result in
a violation of policy.
3. PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Trust will calculate the total rate of return for each
class of shares of a Fund for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment of
$1,000 (made with all distributions reinvested and reflecting the contingent
deferred sales charge (the "CDSC") or maximum offering price) to reach the value
of that investment at the end of the periods. The Trust may also calculate on
behalf of each class of shares of a Fund (i) a total rate of return, which is
not reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class
C shares purchased after April 1, 1996) and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the sales charge applicable to Class A
shares (4.75% maximum), and/or (iii) total rates of return which represent
aggregate performance over a period or year-by-year performance, and which may
or may not reflect the effect of the maximum or other sales charge or CDSC.
Total rate of return quotations for each Class of each Fund are presented in
Appendix A attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results presented in Appendix A attached
hereto under the heading "Performance Results" assume an initial investment of
$10,000 in Class A shares and cover the period from the initial public offering
date of Class A shares, as indicated, to December 31, 1995. It has been assumed
that dividends and capital gain distributions for each Fund were reinvested in
additional shares. These performance results, as well as any yield,
tax-equivalent yield, current distribution rate or total rate of return
quotation provided by the Trust, on behalf of a Fund, and presented in Appendix
A, should not be considered as representative of the performance of the Fund in
the future since the net asset value and public offering price of shares of the
Fund will vary based not only on the type, quality and maturities of the
securities held in the Fund's portfolio, but also on changes in the current
value of such securities and on changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate performance
quotations should be considered when comparing performance quotations of a Fund
to performance quotations published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD: Any yield quotation for a class of shares of a Fund is based on the
annualized net investment income per share of the Fund attributable to that
class over a 30-day period. The yield for a class of shares of a Fund is
calculated by dividing the net investment income per share allocated to that
class earned during the period by the maximum offering price per share of that
class of shares on the last day of that period. The resulting figure is then
annualized. Net investment income per share of a class is determined by dividing
(i) the dividends and interest earned by the Fund allocated to that class during
the period, minus accrued expenses of that class for the period, by (ii) the
average number of shares of the class entitled to receive dividends during the
period multiplied by the maximum offering price per share on the last day of the
period. The yield calculations for Class A shares assume a maximum sales charge
of 4.75%. The yield calculations for Class B and Class C shares assume no CDSC
is paid. Yield quotations for each class of each Fund are presented in Appendix
A attached hereto under the heading "Performance Quotations."
TAX-EQUIVALENT YIELD: The tax-equivalent yield for a class of shares of a Fund
is calculated by determining the rate of return that would have to be achieved
on a fully taxable investment in such shares to produce the after-tax equivalent
of the yield of that class. In calculating tax-equivalent yield, a Fund assumes
certain federal tax brackets for shareholders and does not take into account
state taxes. Tax-equivalent yield quotations for each class of each Fund are
presented in Appendix A attached hereto under the heading "Performance Results
and Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 12 months by the maximum public offering price of that class at the end of
such period. Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the yield computation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains and return of invested capital, and is calculated over a different
period of time. The Fund's current distribution rate calculation for Class A
shares assumes a maximum sales charge of 4.75%. The Fund's current distribution
rate calculation for Class B and Class C shares assumes no CDSC is paid. Current
distribution rate quotations for each class of each Fund are presented in
Appendix A attached hereto under the heading "Performance Results and
Quotations."
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
From time to time, the Funds may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
The Funds may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Funds may also discuss or quote their views of their
distributor, investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); busines succession; ideas and information provided
through the MFS Heritage PlanningSM program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
The Funds may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders take capital gain distributions either in
additional shares or in cash.
-- 1976 -- MFS Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS World Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first mutual fund
to seek high tax-free income from lower-rated municipal
securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund
to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock
Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS World Total Return Fund is the first global
balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisors.
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust,
the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
4. DETERMINATION OF PUBLIC OFFERING PRICE AND NET ASSET VALUE; VALUATION OF
PORTFOLIO SECURITIES
Descriptions of the manner in which the shares of the Funds are offered to the
public, including the methods used in determining the public offering price of
shares in each Fund, appear in the Prospectus under the heading "Purchases."
The net asset value per share of each class of shares of each Fund is determined
each day during which the Exchange is open for trading. (As of the date of this
SAI, the Exchange is open for trading every weekday except for the following
holidays or the days on which they are observed: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.) This determination is made once during each such day as of
the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to a class from the value of the assets attributable to
the class and dividing the difference by the number of shares of the class
outstanding. As described in the Prospectus, debt securities (other than
short-term obligations) in each Fund's portfolio are valued on the basis of
valuations furnished by a pricing service since such valuations are believed to
reflect the fair value of such securities. In making such valuations, the
pricing service utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Use of the pricing service has
been approved by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued based upon dealer supplied
valuations. Other short-term obligations are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Positions in
listed options, Options on Futures Contracts and Futures Contracts will normally
be valued at the closing settlement price on the commodities exchange on which
they are primarily traded. Portfolio securities (other than short-term
obligations) for which there are no such valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
5. MANAGEMENT OF THE TRUST
The Trust's Board of Trustees provides broad supervision over the affairs of the
Trust. The Adviser is responsible for the investment management of the portfolio
of each Fund, and the officers of the Trust are responsible for its operations.
The Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery.
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; Bank of NT Butterfield & Son
Limited, Chairman.
Address: 21 Reid Street, Hamilton, Bermuda HM 12
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (financial consultants), President and Treasurer;
Benchmark Consulting Group, Inc. (office services), President; Landmark
Funds (mutual fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
CYNTHIA M. BROWN,* Vice President
Massachusetts Financial Services Company, Vice President -- Investments
ROBERT A. DENNIS,* Vice President -- Investments
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. SCHECHTER,* Vice President
Massachusetts Financial Services Company, Vice President (since June, 1993);
Liberty Mutual Insurance Company, Senior Investment Analyst (prior to June,
1993)
DAVID R. KING,* Vice President
Massachusetts Financial Services Company, Vice President
DAVID B. SMITH,* Vice President
Massachusetts Financial Services Company, Vice President
DANIEL E. McMANUS*, Assistant Vice President
Massachusetts Financial Services Company, Assistant Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary and Assistant Clerk
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
- ----------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD,
Messrs. Scott and Shames, Directors of MFD, and Mr. Cavan, the Secretary of
MFD, hold similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Trust pays, on behalf of the Funds, the compensation of non-interested
Trustees and Mr. Bailey (who currently receive a fee for each Fund, except the
California Fund, of $893 per year plus $71 per meeting and per committee meeting
attended (and $1,250 per year plus $225 per meeting and per committee meeting
attended for the California Fund), together with out-of-pocket expenses, as
incurred) and has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 75 and if the
Trustee has completed at least five years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 75 and receive
reduced payments if he has completed at least five years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. The Trust will accrue compensation expenses each year to cover current
year's service and amortize past service cost.
Set forth in Appendix D hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of July 1, 1996, officers and Trustees of the Trust owned less than 1% of the
outstanding shares of any class of any Fund of the Trust.
Listed in the chart below are the name, address and percentage of ownership of
each person who owns of record or is known by the Trust to own of record or
beneficially five percent or more of any class of any Fund's outstanding
securities as of July 1, 1996.
APPROXIMATE
FUND NUMBER % OF
OWNER & ADDRESS AND CLASS OF SHARES CLASS
- --------------- --------- --------- -----
Merrill Lynch Pierce Fenner & Smith, Alabama 2,016,835 25.98
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Alabama 204,278 32.09
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, Arkansas 3,479,376 20.70
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Stephens Inc. for the Exclusive Benefit Arkansas 959,915 5.71
of our Customers, Class A
P.O. Box 34127,
Little Rock, Arkansas
Merrill Lynch Pierce Fenner & Smith, Arkansas 239,563 29.49
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, California 5,174,242 11.35
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, California 985,089 15.50
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, California 358,942 45.83
Inc., P.O. Box 45286, Jacksonville, Class C
Florida
Audrey Cummings, TTEE, FBO Audrey California 40,123 5.12
Cummings Trust, Bakersfield, California Class C
Merrill Lynch Pierce Fenner & Smith, Florida 1,065,563 11.78
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Florida 273,702 18.77
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, Georgia 573,420 8.97
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Georgia 188,724 19.24
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, Maryland 1,222,847 9.99
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Maryland 111,325 8.39
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, Massachusetts 3,609,603 16.05
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Massachusetts 64,614 5.63
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, Mississippi 1,081,510 13.94
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Mississippi 289,057 22.92
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, New York 1,064,771 8.59
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, New York 181,316 6.93
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Smith Barney Shearson, Inc., North Carolina 122,205 14.42
388 Greenwich Street, Class C
New York, New York
Stephens, Inc. FBO North Carolina 43,696 5.16
P.O. Box 34127 Class C
Little Rock, Ar
James B. Lambeth & North Carolina 65,146 7.69
Margaret P. Lambeth Class C
Raleigh, North Carolina
William B. Nivison, North Carolina 68,185 8.05
Mildred L. Nivison, Class C
Ten. Com.,
Raleigh, North Carolina
Merrill Lynch Pierce Fenner & Smith, North Carolina 71,959 8.49
Inc., P.O. Box 45286, Jacksonville, Class C
Florida
R & R Investment Assoc., Pennsylvania 114,211 5.72
717 Canterbury Lane, Class A
Villanova, Pennsylvania
Merrill Lynch Pierce Fenner & Smith, Pennsylvania 147,758 5.50
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, South Carolina 1,141,158 8.33
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, South Carolina 148,723 9.22
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, Tennessee 1,036,511 9.64
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Tennessee 178,934 14.27
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Merrill Lynch Pierce Fenner & Smith, Virginia 2,547,889 6.94
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
Merrill Lynch Pierce Fenner & Smith, Virginia 711,857 27.49
Inc., P.O. Box 45286, Jacksonville, Class B
Florida
Robert E. Hawkins, Virginia 16,896 5.31
Lynchburg, Virginia Class C
Ronile Inc. Virginia 21,895 6.89
Rocky Mount, VA Class C
Lynn Spradlin Virginia 34,602 10.88
Bedford, VA Class C
Merrill Lynch Pierce Fenner & Smith, Virginia 32,235 10.14
Inc., P.O. Box 45286, Jacksonville, Class C
Florida
Merrill Lynch Pierce Fenner & Smith, West Virginia 640,854 5.50
Inc., P.O. Box 45286, Jacksonville, Class A
Florida
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition or by a reasonable determination pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Prospectus contains information with respect to the management of the
Adviser and to the investment companies for which MFS serves as investment
adviser.
The Adviser manages each Fund (except the Arkansas, California, Florida,
Mississippi and Pennsylvania Funds) pursuant to an Investment Advisory
Agreement, dated as of August 24, 1984 (the "Advisory Agreement"). The Adviser
manages the Arkansas and Florida Funds pursuant to a separate Investment
Advisory Agreement, dated as of February 1, 1992. The Advisor manages the
Mississippi Fund pursuant to a separate Investment Advisory Agreement, dated
August 1, 1992. The Adviser manages the Pennsylvania Fund pursuant to separate
Investment Advisory Agreements each dated February 1, 1993. The Adviser manages
the California Fund pursuant to an Investment Advisory Agreement dated August 1,
1993. The Adviser provides each Fund with overall investment advisory and
administrative services, and general office facilities and administrative
services for the Trust. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for each Fund. For these services and
facilities the Adviser receives a management fee from each Fund computed and
paid monthly at the annual rate of 0.55% of the average daily net assets of the
Fund for its then-current fiscal year. The Adviser has voluntarily reduced the
management fee for an indefinite period with respect to the California, Georgia,
Maryland, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee
and Virginia Funds. See "Management of the Trust -- Investment Adviser" in the
Prospectus.
For the Trust's fiscal years ended March 31, 1996, March 31, 1995 and the two
month fiscal period ended March 31, 1994, MFS received the following aggregate
fees and MFS waived the following fees, in whole or in part, for the same
periods:
For the fiscal year ended March 31, 1996:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ----------- ---------
Alabama ...................................... $ 500,417 $ --
Arkansas ..................................... 1,060,604 --
California ................................... 1,225,235 457,078
Florida ...................................... 536,315 38,724
Georgia ...................................... 458,694 --
Maryland ..................................... 863,230 --
Massachusetts ................................ 1,484,656 --
Mississippi .................................. 384,073 113,594
New York ..................................... 934,490 --
North Carolina ............................... 2,550,849 --
Pennsylvania ................................. 39,790 177,800
South Carolina ............................... 1,031,063 --
Tennessee .................................... 697,496 --
Virginia ..................................... 2,540,788 --
West Virginia ................................ 795,243 --
For the fiscal year ended March 31, 1995:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ----------- ---------
Alabama ...................................... $ 474,038 $
Arkansas ..................................... 941,231 152,542
California ................................... 1,269,573 476,700
Florida ...................................... 350,879 248,214
Georgia ...................................... 477,819 --
Maryland ..................................... 889,796 --
Massachusetts ................................ 1,495,879 --
Mississippi .................................. 195,245 283,718
New York ..................................... 873,267 21,059
North Carolina ............................... 2,592,068 --
Pennsylvania ................................. 1,952 117,301
South Carolina ............................... 1,001,540 --
Tennessee .................................... 692,926 --
Virginia ..................................... 2,504,233 --
West Virginia ................................ 741,684 --
For the fiscal period February 1, 1994 through March 31, 1994:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ----------- ---------
$
Alabama ...................................... $ 82,020 --
Arkansas ..................................... 122,881 69,078
California ................................... 246,792 90,679
Florida ...................................... 42,343 72,967
Georgia ...................................... 90,581 --
Maryland ..................................... 163,573 --
Massachusetts ................................ 277,734 --
Mississippi .................................. 14,310 66,782
New York ..................................... 138,429 30,263
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ----------- ---------
North Carolina ............................... 468,812 --
Pennsylvania ................................. -- 16,281
South Carolina ............................... 177,741 --
Tennessee .................................... 117,055 --
Virginia ..................................... 447,605 --
West Virginia ................................ 133,458 --
(1)After any applicable fee reduction.
See "Expenses" in the Prospectus.
The Adviser pays the compensation of the officers of the Trust and of any
Trustee who is an officer of MFS. The Adviser furnishes at its own expense all
necessary administrative services, office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the investments of the Funds, effecting the portfolio
transactions of the Funds and, in general, administering the Trust's affairs
(with the exception of the services, facilities and personnel provided by the
Shareholder Servicing Agent or the Custodian, see below). See "Expenses" in the
Prospectus for a description of expenses paid by the Trust and reimbursement
arrangements in effect between the Adviser and the Trust.
The Advisory Agreements will remain in effect until August 1, 1997 and will
continue in effect thereafter with respect to any Fund only if such continuance
is specifically approved at least annually by the Trustees or by vote of the
holders of a majority of the shares of that Fund (as defined in "Investment
Restrictions" above) and, in either case, by a majority of the Trustees who are
not parties to the Advisory Agreement or interested persons of any such party.
The Advisory Agreements terminate automatically if they are assigned and may be
terminated without penalty by vote of the holders of a majority of the shares of
that Fund (as defined in "Investment Restrictions") or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory
Agreements provide that if MFS ceases to serve as the Adviser for each Fund of
the Trust, the Trust will change its name so as to delete the term "MFS." The
Advisory Agreements further provide that MFS may render similar services to
others and may permit investment company clients in addition to the Trust to use
the term "MFS" in their names. The Advisory Agreements also provide that neither
the Adviser nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Trust, except for wilful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Advisory Agreements.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Trust's assets. The Custodian's responsibilities include safekeeping and
controlling the Trust's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Trust's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of each Fund. The Custodian does not
determine the investment policies of the Trust or decide which securities the
Trust will buy or sell. The Trust may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also serves as the dividend disbursing agent of the
Trust. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc., a wholly owned subsidiary of MFS (the "Shareholder
Servicing Agent"), is the Trust's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985 (the "Agency
Agreement") with the Trust. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records, in connection with the issuance, transfer
and redemption of each class of shares of each Fund. For these services, the
Shareholder Servicing Agent will receive a fee calculated as a percentage of the
average daily net assets of each class of shares at an 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. In addition, the Shareholder Servicing Agent will be
reimbursed by the Trust for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Trust.
State Street Bank and Trust Company, the dividend and distribution disbursing
agent of the Trust, has contracted with the Shareholder Servicing Agent to
administer and perform certain dividend and distribution disbursing functions
for the Trust.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of each Fund pursuant to a Distribution Agreement
dated January 1, 1995 (the "Distribution Agreement") with the Trust. Prior to
January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or periods
prior to January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling shares of the Trust to dealers. The
public offering price of Class A shares of each Fund is their net asset value
next computed after the sale plus a sales charge which varies based upon the
quantity purchased. The public offering price of Class A shares of each Fund is
calculated by dividing the net asset value of a Class A share of such Fund by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of each Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this SAI)
Class A shares of each Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Trust have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The commission paid
to the distributor is the difference between the total amount invested and the
sum of (a) the net proceeds to a Fund and (b) the dealer commission. Because of
rounding in the computation of offering price, the portion of the sales charge
paid to the distributor may vary and the total sales charge may be more or less
than the sales charge calculated using the sales charge expressed as a
percentage of offering price or as a percentage of the net amount invested as
listed in the Prospectus. In the case of the maximum sales charge, the dealer
retains 4% and MFD retains approximately 3/4 of 1% of the public offering price.
In addition, MFD pays a commission on purchases of $1 million or more as
described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Trust to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: On occasion, MFD may obtain brokers loans from various banks, including
the custodian banks for the MFS Funds, to facilitate the settlement of sales of
shares of the Fund to dealers. MFD may benefit from its temporary holding of
funds paid to it by investment dealers for the purchase of Fund shares. Neither
MFD nor dealers are permitted to delay placing orders to benefit themselves by a
price change.
See Appendix B attached hereto for information regarding the amount of sales
charges received by MFD, dealers, banks and certain other financial
institutions.
The Distribution Agreement will remain in effect until August 1, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
applicable Fund's shares and, in either case, by a majority of the Trustees who
are not parties to the Distribution Agreement or interested persons of any such
party. The Distribution Agreement terminates automatically if it is assigned and
may be terminated without penalty by either party on not more than 60 days' nor
less than 30 days' notice.
6. TAXATION
Each Fund has elected to be treated and intends to qualify each year as a
separate "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), by meeting all applicable
requirements of Subchapter M, including the requirements as to the nature of the
Fund's gross income, the amount of its distributions (as a percentage of both
overall income and tax-exempt income) and the composition and holding period of
its portfolio assets. Because each Fund intends to distribute all of its net
investment income and net realized capital gains to shareholders in accordance
with the timing requirements imposed by the Code, it is not expected that any
Fund will be required to pay any federal income or excise taxes. If any Fund
should fail to qualify as a "regulated investment company" in any year, such
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income to
the shareholders.
That part of a Fund's net investment income which is attributable to interest
from tax-exempt securities and which is distributed to shareholders will be
designated by the Trust as an "exempt-interest dividend" under the Code and will
generally be exempt from federal income tax in the hands of shareholders so long
as at least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as a tax preference item for purposes of the alternative
minimum tax, and all exempt-interest dividends may increase a corporate
shareholder's alternative minimum tax. The percentage of income designated as
tax-exempt will be applied uniformly to all distributions by a Fund during each
fiscal year and may differ from the actual tax-exempt percentage for any
particular month. Shareholders are required to report exempt-interest dividends
received from the Fund on their federal income tax returns.
A Fund may also recognize some net investment income that is not tax-exempt from
investments in taxable securities and from certain securities (including
Municipal Obligations) purchased at a market discount, as well as capital gains
and losses as a result of the disposition of securities and from certain options
and futures transactions. Shareholders of any such Fund will have to pay federal
income taxes on the non-exempt interest dividends and capital gain distributions
they receive from the Fund; however, the Funds do not expect that the
non-tax-exempt portion of their net investment income, if any, will be
substantial.
That portion of net investment income distributions not designated as tax-exempt
and any distributions from net short-term capital gains (whether paid in cash or
in additional shares) are taxable to shareholders as ordinary income.
Distributions from net capital gains (i.e., the excess of net long-term capital
gains over net short-term capital losses) are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time shareholders have owned their shares. Distributions will be
treated in the same manner for Federal income tax purposes whether paid in cash
or additional shares. No portion of a Fund's distributions will qualify for the
dividends received deduction. For dividends declared in October, November or
December payable to shareholders of record in such a month and paid the
following January will be taxable to shareholders as if received by shareholders
on December 31 of the year in which they are declared.
Any distribution of net capital gains or net short-term capital gains will have
the effect of reducing the per share net asset value of shares in a Fund by the
amount of the distribution. Shareholders purchasing shares shortly before the
record date of any such distribution may thus pay the full price for the shares
and then effectively receive a portion of the purchase price back as a taxable
distribution.
In general, any gain or loss realized upon a taxable disposition of shares of a
Fund by a shareholder that holds such shares as a capital asset will be treated
as long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise as short-term capital gain or loss. However, any
loss realized upon a disposition of shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with respect
to those shares and, if not disallowed, any such loss will be treated as a
long-term capital loss to the extent of any distributions of net capital gain
made with respect to those shares. Any loss realized upon a redemption of shares
may also be disallowed under rules relating to wash sales. Gain may be increased
(or loss reduced) upon a redemption of Class A shares of a Fund within 90 days
after their purchase followed by any purchase (including purchases by exchange
or by reinvestment) without payment of an additional sales charge of Class A
shares of any Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Trust's current dividend and accounting policies may affect the amount,
timing and character of distributions to shareholders, and may under certain
circumstances make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities, securities calling for deferred interest
and certain securities purchased at a market discount will cause a Fund to
realize income prior to the receipt of cash payments with respect to these
securities. In order to distribute this income, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund.
The Funds' transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held by
a Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on such day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by a Fund that substantially diminish its
risk of loss with respect to other positions on its portfolio may constitute
"straddles" and may be subject to special tax rules that would cause deferral of
Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles which may alter the effects of these rules. Each Fund will
limit its activities in options, Futures Contracts, and swaps and related
transactions to the extent necessary to meet the requirements of Subchapter M of
the Code.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Fund is not deductible for federal income tax purposes.
Exempt-interest dividends are taken into account in calculating the amount of
social security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by certain private activity bonds
should consult their tax advisers before purchasing shares of a Fund.
Federal income tax information will be reported to shareholders annually, as
described under "Tax Status" in the Prospectus and under "Shareholder Services
- -- Account and Confirmation Statements" below. Shareholders are required to
report their receipt of tax-exempt distributions on their federal income tax
returns.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Trust intends
to withhold tax at the rate of 30% on taxable dividends and other payments made
to Non-U.S. Persons that are subject to such withholding regardless of whether a
lower treaty rate may be permitted. Any amounts over-withheld may be recovered
by such persons by filing a claim for refund with the U.S. Internal Revenue
Service within the time period applicable to such claims. The Trust is also
required in certain circumstances to apply backup withholding of 31% of taxable
dividends and redemption proceeds paid to any shareholder (including a Non-U.S.
Person) who does not furnish to the Trust certain information and certifications
or who is otherwise subject to backup withholding. However, backup withholding
will not be applied to payments which have been subject to 30% withholding.
Distributions received from the Trust by Non-U.S. Persons may also be subject to
tax under the laws of their own jurisdiction.
The Trust is organized as a Massachusetts business trust, and each Fund will not
be subject to any Massachusetts income or excise taxes so long as it qualifies
as a regulated investment company under the Code.
Fund distributions that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but generally not
from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. Each Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in any Fund.
7. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Trust makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Trust.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of a Fund alone
or in combination with shares of any class of other MFS Funds or MFS Fixed Fund
(a bank collective investment fund) within a 13-month period (or a 36-month
period in the case of purchases of $1 million or more), the shareholder may
obtain Class A shares of such Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase of Class A shares will be made at a public
offering price applicable to a single transaction of the dollar amount specified
in the Letter of Intent application. The shareholder or his dealer must inform
MFD that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of a Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month (or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. For example, if a shareholder owns
shares with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of a Fund, the sales charge for the $25,000
purchase would be at the rate of 4% (the rate applicable to single transactions
of $100,000). A shareholder must provide the Shareholder Servicing Agent (or his
investment dealer must provide MFD) with information to verify that the quantity
sales charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of net investment income and
capital gains made by a Fund with respect to a particular class of shares may be
automatically invested in the same class of shares of one of the other MFS Funds
if shares of the fund are available for sale. Such investments will be subject
to additional purchase minimums. Distributions will be invested at net asset
value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Option
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of the establishment
of the SWP. SWP payments are drawn from the proceeds of the redemption of shares
held in the shareholder's account (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B and Class C shares
will be made in the following order: (i) any "Free Amount"; (ii) to the extent
necessary, any "Reinvested Shares"; (iii) to the extent necessary, the "Direct
Purchase" subject to the lowest CDSC (as such terms are defined in "Contingent
Deferred Sales Charge" in the Prospectus). The CDSC will be waived in the case
of redemptions of Class B and Class C shares pursuant to a SWP, but will not be
waived in the case of SWP redemptions of Class A shares which are subject to the
CDSC. To the extent that redemptions for such periodic withdrawals exceed
dividend income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account. All
dividends and capital gain distributions for an account with a SWP will be
reinvested in additional full and fractional shares of a Fund at the net asset
value in effect at the close of business on the last day of the month for such
distributions. To initiate this service, shares generally having an aggregate
value of at least $5,000 either must be held on deposit by, or certificates for
such shares must be deposited with, the Shareholder Servicing Agent. With
respect to Class A shares, maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases and the imposition of a CDSC on certain redemptions.
The shareholder may deposit into the account additional shares of a Fund, change
the payee or change the dollar amount of each payment. The Shareholder Servicing
Agent may charge the account for services rendered and expenses incurred beyond
those normally assumed by the Trust with respect to the liquidation of shares.
No charge is currently assessed against the account, but one could be instituted
by the Shareholder Servicing Agent on 60 days' notice in writing to the
shareholder in the event that the Trust ceases to assume the cost of these
services. The Trust may terminate any SWP for an account if the value of the
account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of a Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Trust.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds (if available for sale) under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of transfers (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing --signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding Automatic Exchange Plan, including the treatment of any
CDSC, see "Exchange Privilege" below.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Trust directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
REINSTATEMENT PRIVILEGE: Shareholders of each Fund and shareholders of the
other MFS Funds (except the MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
shares of such funds are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of shares
reinvested in the MFS Money Market Fund, MFS Government Money Market Fund and
Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange such shares for shares of another MFS Fund at net asset value pursuant
to the exchange privilege described below. Such a reinvestment must be made
within 90 days of the redemption and is limited to the amount of the redemption
proceeds. If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, such
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of any loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE: Subject to the requirements set forth below, some or all
of the shares of any Fund for which payment has been received by the Fund (i.e.
an established account) may be exchanged for shares of the same class of any
other Fund or any of the other MFS Funds (if available for sale), at their net
asset value. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing, signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 (except that the minimum is $50 for accounts of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. Each exchange
involves the redemption of the shares of the Fund to be exchanged and the
purchase at net asset value (i.e., without a sales charge) of the shares of the
same class of the other Fund or the other MFS Fund. Any gain or loss on the
redemption of the shares exchanged is reportable on the shareholder's federal
income tax return, unless both the shares received and the shares surrendered in
the exchange are held in a tax-deferred retirement plan or other tax-exempt
account. If the Exchange Request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange, the
exchange usually will occur on that day if all the restrictions set forth above
have been complied with at that time. However, payment of the redemption
proceeds by the Trust, and thus the purchase of shares of the other MFS Fund,
may be delayed for up to seven days if the Trust determines that such a delay
would be in the best interest of all its shareholders. Investment dealers which
have satisfied criteria established by MFD may also communicate a shareholder's
Exchange Request to MFD by facsimile subject to the restrictions set forth
above. No more than five exchange requests may be made in any one telephone
Exchange Request.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers, or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except the MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of any Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each Fund may only
benefit residents of such states. Investors should consult with their own tax
advisers to be sure this is an appropriate investment, based on their residency
and each state's income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents and forms provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) if the retirement
plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar 401(a) or 403(b) recordkeeping program made available by
the Shareholder Servicing Agent.
8. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust presently has 16 series of shares and has reserved the right to create
additional series of shares. In addition to the Funds described in this SAI, the
Trust offers shares of MFS Municipal Income Fund pursuant to a separate
prospectus and statement of additional information. Each share of a class of a
series represents an equal proportionate interest in that series with each other
share of that series subject to any expenses attributable to that class. The
shares of a class of each series participate equally in the earnings, dividends
and assets of the particular series subject to any expenses attributable to that
class. Shares have no pre-emptive or conversion rights (except as set forth in
"Purchases -- Conversion to Class B Shares" in the Prospectus). Shares when
issued are fully paid and non-assessable. Shareholders are entitled to one vote
for each share held and may vote in the election of Trustees and on other
matters submitted to meetings of shareholders. Although Trustees are not elected
annually by the shareholders, shareholders have under certain circumstances the
right to remove one or more Trustees. Shareholders of each series would be
entitled to share pro rata in the net assets of that series available for
distribution to shareholders should the Trust or that series be liquidated. Any
series may be terminated (i) upon the merger or consolidation of the series with
another organization or upon the sale of all or substantially all of its assets
to another open-end management investment company, if approved by the vote of
the holders of two-thirds of the outstanding shares of the series, except that
if the Trustees recommend such merger, consolidation or sale of assets, the
approval by vote of the holders of a majority of the shares of the series (as
defined in "Investment Restrictions" above) will be sufficient, or (ii) upon
liquidation and distribution of the assets of the series, if approved by the
vote of the holders of a majority of the shares of the series (as defined in
"Investment Restrictions" above) or by the Trustees. Unless each series is so
terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for any
shareholder held personally liable for the obligations of the Trust. The Trust's
Declaration of Trust also provides that it shall maintain appropriate insurance
(for example, fidelity bonding and errors and omissions insurance) for the
protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to act,
but nothing in the Declaration of Trust protects a Trustee against any liability
to which he would otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
9. PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for each Fund are made by a
portfolio committee consisting of employees of the Adviser who are appointed and
supervised by its senior officers. Changes in the Funds' investments are
reviewed by the Board of Trustees. The portfolio committee or any of its members
may serve other Funds and other clients of the Adviser or any subsidiary of the
Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. Municipal
Obligations and other debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. The cost of securities purchased from underwriters
includes an underwriter's commission or concession, and the prices at which
securities are purchased and sold from and to dealers include a dealer's mark-up
or mark-down. Securities firms may receive brokerage commissions on transactions
involving futures. The Adviser attempts to negotiate with underwriters to
decrease the commission or concession for the benefit of the Fund. The Adviser
normally seeks to deal directly with the primary market makers unless, in its
opinion, better prices are available elsewhere. Securities firms or futures
commission merchants may receive brokerage commissions on transactions involving
Futures Contracts or Options on Futures Contracts. Consistent with the foregoing
primary consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of each Fund and of the other
investment company clients of MFD as a factor in the selection of broker-dealers
to execute the Trust's portfolio transactions. Also, subject to the requirement
of seeking execution at the best available price, securities may, as authorized
by the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser.
In certain instances there may be securities which are suitable for a Fund as
well as that of another Fund or one or more other clients of the Adviser or any
subsidiary of the Adviser. Investment decisions for the Trust and for such other
clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as any Fund is
concerned. In some cases, however, it is believed that the ability of a Fund to
participate in volume transactions will produce better executions for the Fund.
10. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
shares for each Fund and separate Distribution Plans for Class C shares for
certain Funds (the "Distribution Plans") pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is
a reasonable likelihood that each Distribution Plan would benefit each Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of each Fund. Such an increase
may reduce each Fund's expense ratio to the extent that each Fund's fixed costs
are spread over a larger net asset base. Also, an increase in net assets may
lessen the adverse effect that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance that
the net assets of the Fund will increase or that the other benefits referred to
above will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to each Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time); or
(ii) to any insurance company which has entered into an agreement with the Fund
and MFD that permits such insurance company to purchase Class A shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum amount
requirement from time to time. Dealers may from time to time be required to meet
certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for Its distribution services to the
Funds. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between each Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the relevant Fund's shares. None of the Distribution Plans may be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the relevant
Fund's shares (as defined in "Investment Restrictions") or may be materially
amended in any case without a vote of the Trustees and a majority of the
Distribution Plan Qualified Trustees. The selection and nomination of
Distribution Plan Qualified Trustees shall be committed to the discretion of the
non-interested Trustees then in office. No Trustee who is not an "interested
person" has any financial interest in any of the Distribution Plans or in any
related agreement.
Appendix C attached hereto contains information concerning amounts paid with
respect to each Class of each Fund under the Distribution Plans for the fiscal
year ended March 31, 1996.
11. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Funds' independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
For each Fund, the Portfolios of Investments at March 31, 1996, the Statements
of Assets and Liabilities at March 31, 1996, the Statements of Operations for
the year ended March 31, 1996, the Statements of Changes in Net Assets for the
years ended March 31, 1996 and March 31, 1995, the Notes to Financial Statements
and the Reports of Independent Auditors, each of which is included in the Annual
Reports to shareholders of the Trust, are incorporated by reference into this
SAI and have been so incorporated in reliance upon the report of Deloitte &
Touche LLP, independent auditors, as experts in accounting and auditing. A copy
of the Funds' Annual Reports accompany this SAI.
<PAGE>
APPENDIX A
PERFORMANCE RESULTS AND QUOTATIONS
The performance results and quotations below should not be considered as
representative of the performance of any Fund in the future since the net
asset value and public offering price of shares of the Funds will vary. See
"Performance Information" above.
PERFORMANCE RESULTS
CLASS A SHARES
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------- --------------- ------------- --------- -----
ALABAMA FUND
December 31, 1990(1) $ 9,620 $ 0 $ 516 $10,136
December 31, 1991 9,990 66 1,270 11,326
December 31, 1992 10,250 81 1,996 12,327
December 31, 1993 10,920 110 2,848 13,878
December 31, 1994 9,840 130 3,250 13,220
December 31, 1995 10,840 144 4,361 15,345
ARKANSAS FUND
December 31, 1992(2) $ 9,780 $ 0 $ 549 $10,329
December 31, 1993 10,400 2 1,209 11,611
December 31, 1994 9,200 49 1,659 10,908
December 31, 1995 10,040 53 2,447 12,540
CALIFORNIA FUND
December 31, 1986 $10,756 $ 45 $ 750 $11,551
December 31, 1987 9,979 68 1,383 11,430
December 31, 1988 10,388 71 2,213 12,672
December 31, 1989 10,715 73 3,130 13,918
December 31, 1990 10,695 73 4,044 14,812
December 31, 1991 11,186 124 5,330 16,640
December 31, 1992 11,451 151 6,558 18,160
December 31, 1993 12,085 229 8,183 20,497
December 31, 1994 10,490 214 8,141 18,845
December 31, 1995 11,697 239 10,303 22,239
FLORIDA FUND
December 31, 1992(2) $ 9,800 $ 0 $ 547 $10,347
December 31, 1993 10,540 25 1,322 11,887
December 31, 1994 9,020 96 1,727 10,843
December 31, 1995 10,150 108 2,615 12,873
GEORGIA FUND
December 31, 1988(3) $ 9,690 $ 0 $ 211 $ 9,901
December 31, 1989 9,860 20 919 10,799
December 31, 1990 9,790 44 1,638 11,472
December 31, 1991 10,270 78 2,539 12,887
December 31, 1992 10,480 80 3,373 13,933
December 31, 1993 11,210 86 4,425 15,721
December 31, 1994 9,860 121 4,659 14,640
December 31, 1995 10,840 133 5,989 16,962
MARYLAND FUND
December 31, 1986 $10,347 $ 0 $ 750 $11,097
December 31, 1987 9,689 16 1,386 11,091
December 31, 1988 10,056 17 2,216 12,289
December 31, 1989 10,281 26 3,087 13,394
December 31, 1990 10,244 36 3,962 14,242
December 31, 1991 10,563 65 5,133 15,761
December 31, 1992 10,639 87 6,172 16,898
December 31, 1993 11,024 182 7,447 18,653
December 31, 1994 9,765 226 7,521 17,512
December 31, 1995 10,667 247 9,245 20,159
MASSACHUSETTS FUND
December 31, 1986 $10,415 $ 10 $ 781 $11,206
December 31, 1987 9,716 11 1,449 11,176
December 31, 1988 10,009 11 2,317 12,337
December 31, 1989 10,103 11 3,211 13,325
December 31, 1990 10,047 11 4,133 14,191
December 31, 1991 10,500 12 5,437 15,949
December 31, 1992 10,689 12 6,605 17,306
December 31, 1993 11,020 281 7,944 19,245
December 31, 1994 9,773 297 8,089 18,159
December 31, 1995 10,718 326 10,027 21,071
MISSISSIPPI FUND
December 31, 1992(5) $ 9,290 $ 0 $ 205 $ 9,495
December 31, 1993 9,930 0 812 10,742
December 31, 1994 8,660 28 1,287 9,975
December 31, 1995 9,650 31 2,085 11,766
NEW YORK FUND
December 31, 1988(3) $ 9,740 $ 0 $ 189 $ 9,929
December 31, 1989 9,910 80 904 10,894
December 31, 1990 9,820 80 1,652 11,552
December 31, 1991 10,370 148 2,612 13,130
December 31, 1992 10,670 194 3,558 14,422
December 31, 1993 11,270 248 4,813 16,331
December 31, 1994 9,970 290 5,067 15,327
December 31, 1995 11,050 322 6,528 17,900
NORTH CAROLINA FUND
December 31, 1986 $10,276 $153 $ 744 $11,173
December 31, 1987 9,616 143 1,410 11,169
December 31, 1988 9,866 147 2,242 12,255
December 31, 1989 10,089 150 3,134 13,373
December 31, 1990 10,008 211 4,001 14,220
December 31, 1991 10,338 286 5,157 15,781
December 31, 1992 10,436 288 6,166 16,890
December 31, 1993 10,953 311 7,446 18,710
December 31, 1994 9,643 420 7,460 17,523
December 31, 1995 10,650 464 9,258 20,372
PENNSYLVANIA FUND
December 31, 1993(4) $10,050 $ 0 $ 488 $10,538
December 31, 1994 8,780 36 979 9,795
December 31, 1995 9,680 40 1,727 11,447
SOUTH CAROLINA FUND
December 31, 1986 $10,299 $ 26 $ 767 $11,092
December 31, 1987 9,836 70 1,497 11,403
December 31, 1988 10,172 72 2,405 12,649
December 31, 1989 10,408 74 3,317 13,799
December 31, 1990 10,345 142 4,193 14,680
December 31, 1991 10,726 213 5,388 16,327
December 31, 1992 10,844 281 6,436 17,561
December 31, 1993 11,498 319 7,813 19,630
December 31, 1994 10,208 408 7,902 18,518
December 31, 1995 11,235 449 9,778 21,462
TENNESSEE FUND
December 31, 1988(6) $ 9,650 $ 0 $ 117 $ 9,767
December 31, 1989 9,900 0 821 10,721
December 31, 1990 9,850 20 1,531 11,401
December 31, 1991 10,140 82 2,379 12,601
December 31, 1992 10,320 103 3,198 13,621
December 31, 1993 10,840 108 4,141 15,089
December 31, 1994 9,840 113 4,520 14,473
December 31, 1995 10,710 123 5,782 16,615
VIRGINIA FUND
December 31, 1986 $10,239 $ 3 $ 745 $10,987
December 31, 1987 9,640 69 1,414 11,123
December 31, 1988 9,999 71 2,296 12,366
December 31, 1989 10,230 73 3,224 13,527
December 31, 1990 10,220 73 4,153 14,446
December 31, 1991 10,589 75 5,366 16,030
December 31, 1992 10,699 81 6,439 17,219
December 31, 1993 11,040 361 7,705 19,106
December 31, 1994 9,705 396 7,729 17,830
December 31, 1995 10,736 438 9,639 20,813
WEST VIRGINIA FUND
December 31, 1986 $10,230 $ 31 $ 807 $11,068
December 31, 1987 9,447 114 1,509 11,070
December 31, 1988 9,788 118 2,448 12,354
December 31, 1989 10,000 120 3,376 13,496
December 31, 1990 10,018 121 4,303 14,442
December 31, 1991 10,368 136 5,521 16,025
December 31, 1992 10,516 146 6,619 17,281
December 31, 1993 11,032 282 8,022 19,336
December 31, 1994 9,870 275 8,166 18,311
December 31, 1995 10,755 300 10,001 21,056
- ----------
(1)Based on initial investment made on February 1, 1990, the initial public
offering date of Class A shares.
(2)Based on initial investment made on February 3, 1992, the initial public
offering date of Class A shares.
(3)Based on initial investment made on June 6, 1988, the initial public
offering date of Class A shares.
(4)Based on initial investment made on February 1, 1993, the initial public
offering date of Class A shares.
(5)Based on initial investment made on August 6, 1992, the initial public
offering date of Class A shares.
(6)Based on initial investment made on August 12, 1988, the initial public
offering date of Class A shares.
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for any income taxes, if
any, payable by shareholders.
<PAGE>
PERFORMANCE QUOTATIONS
All performance quotations are for the periods ended March 31, 1996.
<TABLE>
<CAPTION>
Actual
Average Annual Total Returns Actual Tax Equivalent Tax Equivalent
---------------------------- 30-Day 30-Day 30-Day Yield 30-Day Yield
10 Year Yield Yield (Including (Without
or Without (Without Any Waivers) Any Waivers) Current
Life of Any Any ------------- ------------ Distribution
Fund 1 Year 5 Year Fund Waivers) Waivers) Tax Brackets: Tax Brackets: Rate
- ---------------------------------------------------------------------------------------------------------------------------------
28% 31% 28% 31%
--- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama Fund Class A
with sales charge ........... 2.00% 6.90% 6.91(1)% 4.82% 4.72% 6.69% 6.99% 6.56% 6.84% 4.96%
Alabama Fund Class A
without sales charge ........ 7.13 7.95 7.75(1)
Alabama Fund Class B
with CDSC ................... 2.25 2.03(2)
Alabama Fund Class B
without CDSC ................ 6.25 3.11(2) 4.22 5.86 6.12 4.38
Arkansas Fund Class
A with sales charge .......... 1.16 5.16(3) 5.06 7.03 7.33 4.87
Arkansas Fund Class
A without sales
charge ....................... 6.19 6.40(3)
Arkansas Fund Class
B with CDSC ................. 1.43 0.89(2)
Arkansas Fund Class
B without sales CDSC ......... 5.43 1.96(2) 4.41 6.13 6.39 4.29
California Fund
Class A with sales charge ... 2.73 6.56 6.93(4) 5.02 4.88 6.97 7.28 6.78 7.07 5.30
California Fund Class A
without sales charge ........ 7.86 7.61 7.45(4)
California Fund
Class B with CDSC ........... 2.93 0.67(2)
California Fund
Class B without CDSC ........ 6.93 1.72(2) 4.34 4.19 6.03 6.29 5.82 6.07 4.69
California Fund
Class C without
CDSC(11) .................... 6.77 1.81(5) 3.99 3.84 5.54 5.78 5.33 5.57 4.54
Florida Fund Class A
with sales charge ........... 2.68 5.74(3) 5.00 6.94 7.25 5.00
Florida Fund Class A
without sales charge ........ 7.81 6.99(3)
Florida Fund Class B
with CDSC ................... 2.88 0.75(2)
Florida Fund Class B
without CDSC ................ 6.88 1.81(2) 4.34 6.03 6.29 4.37
Georgia Fund Class A
with sales charge ........... 1.39 6.17 6.69(6) 4.83 4.73 6.71 7.00 6.57 6.86 4.93
Georgia Fund Class A
without sales charge ........ 6.48 7.21 7.35(6)
Georgia Fund Class B
with CDSC ................... 1.52 0.70(2)
Georgia Fund Class B
without CDSC ................ 5.52 1.77(2) 4.24 5.89 6.14 4.36
Maryland Fund Class
A with sales charge ......... 1.09 5.35 6.40(4) 4.79 6.65 6.94 4.84
Maryland Fund Class
A without sales charge ...... 6.17 6.38 6.92(4)
Maryland Fund Class
B with CDSC ................. 1.41 1.02(2)
Maryland Fund Class
B without CDSC .............. 5.41 2.08(2) 4.31 5.99 6.25 4.35
Massachusetts Fund
Class A with sales charge ... 1.88 6.28 6.64(4) 4.99 6.93 7.23 5.22
Massachusetts Fund
Class A without
sales charge ................ 6.95 7.32 7.16(4)
Massachusetts Fund
Class B with CDSC ........... 2.27 1.62(2)
Massachusetts Fund
Class B without CDSC ........ 6.27 2.67(2) 4.51 6.26 6.54 4.75
Mississippi Fund
Class A with sales
charge ...................... 2.81 4.03(9) 5.23 4.83 7.26 7.58 6.71 7.00 5.29
Mississippi Fund
Class A without
sales charge ................ 7.99 5.43(9)
Mississippi Fund
Class B with CDSC ........... 3.11 1.56(2)
Mississippi Fund
Class B without CDSC ........ 7.11 2.63(2) 4.57 4.08 6.35 6.62 5.67 5.91 4.73
New York Fund Class
A with sales charge ......... 1.92 7.04 7.41(6) 4.78 4.68 6.64 6.93 6.50 6.78 4.90
New York Fund Class
A without sales charge ...... 6.98 8.09 8.08(6)
New York Fund Class
B with CDSC ................. 2.10 1.34(2)
New York Fund Class
B without CDSC .............. 6.10 2.40(2) 4.03 5.60 5.84 4.31
North Carolina Fund
Class A with sales charge ... 1.49 5.57 6.25(4) 4.76 6.61 6.90 4.85
North Carolina Fund
Class A without
sales charge................. 6.56 6.61 6.77(4)
North Carolina Fund
Class B with CDSC ........... 1.70 1.18(2)
North Carolina Fund
Class B without CDSC ........ 5.70 2.25(2) 4.26 5.92 6.17 4.37
North Carolina Fund
Class C without
CDSC(11) .................... 5.87 2.35(5) 4.32 6.00 6.26 4.44
Pennsylvania Fund
Class A with sales charge ... 1.81 3.77(7) 5.64 4.73 7.83 8.17 6.57 6.86 5.55
Pennsylvania Fund
Class A without
sales charge................. 6.85 5.38(7)
Pennsylvania Fund
Class B with CDSC ........... 2.23 1.28(2)
Pennsylvania Fund
Class B without CDSC ........ 6.23 2.34(2) 5.13 4.10 7.13 7.43 5.69 5.94 5.02
South Carolina Fund
Class A with sales
charge ...................... 1.17 6.02 6.89(4) 4.85 6.74 7.03 4.88
South Carolina Fund
Class A without
sales charge ................ 6.20 7.06 7.41(4)
South Carolina Fund
Class B with CDSC ........... 1.43 1.50(2)
South Carolina Fund
Class B without CDSC ........ 5.43 2.57(2) 4.35 6.04 6.30 4.40
Tennessee Fund Class
A with sales charge ......... 1.61 6.08 6.66(10) 5.05 7.01 7.32 4.98
Tennessee Fund Class
A without sales charge ...... 6.66 7.11 7.34(10)
Tennessee Fund Class
B with CDSC ................. 1.89 1.81(2)
Tennessee Fund Class
B without CDSC .............. 5.89 2.89(2) 4.57 6.35 6.62 4.50
Virginia Fund Class
A with sales charge ......... 1.49 5.59 6.55(4) 4.84 6.72 7.01 5.06
Virginia Fund Class
A without sales
charge ...................... 6.52 6.62 7.07(4)
Virginia Fund Class
B with CDSC ................. 1.85 1.02(2)
Virginia Fund Class
B without CDSC .............. 5.85 2.07(2) 4.34 6.03 6.29 4.58
Virginia Fund Class
C without CDSC(11) .......... 6.02 2.09(5) 4.51 6.26 6.54 4.65
West Virginia Fund
Class A with sales
charge ..................... 1.51 6.09 6.79(4) 4.97 6.90 7.20 5.11
West Virginia Fund
Class A without
sales charge................ 6.58 7.13 7.32(4)
West Virginia Fund
Class B with CDSC .......... 1.81 1.44(2)
West Virginia Fund
Class B without CDSC ....... 5.81 2.50(2) 4.49 6.24 6.51 4.63
</TABLE>
----------
(1)From the initial public offering date of Class A shares on February 1, 1990.
(2)From the initial public offering date of Class B shares on September 7, 1993.
(3)From the initial public offering date of Class A shares on February 3, 1992.
(4)For the 10-year period ended March 31, 1996.
(5)From the initial public offering date of Class C shares on January 3, 1994.
(6)From the initial public offering date of Class A shares on June 6, 1988.
(7)From the initial public offering date of Class A shares on February 1, 1993.
(9)From the initial public offering date of Class A shares on August 6, 1992.
(10)From the initial public offering date of Class A shares on August 12, 1988.
(11)CDSC on Class C shares was not imposed until April 1, 1996.
APPENDIX B
SALES CHARGES
<TABLE>
<CAPTION>
CDSC CDSC CDSC CDSC
IMPOSED ON IMPOSED ON IMPOSED ON IMPOSED ON CLASS A
REDEMPTION REDEMPTION REDEMPTION REDEMPTION SALES CHARGES
OF CLASS B OF CLASS B OF CLASS B OF CLASS A RECEIVED BY
SHARES SHARES SHARES SHARES MFD
12 MONTHS 12 MONTHS 2 MONTHS 12 MONTHS 12 MONTHS
FUND ENDED 3/31/96 ENDED 3/31/95 ENDED 3/31/94 ENDED 3/31/96 ENDED 3/31/96
- -------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama Fund........ $ 2,531 $ 22,060 $ -- $ 8 $ 20,941
Arkansas Fund ...... 4,215 12,360 -- -- 47,633
California Fund .... 96,292 137,206 6,816 4,819 62,858
Florida Fund ....... 52,478 26,736 1,154 4 36,111
Georgia Fund ....... 10,865 22,152 1,044 1 20,236
Maryland Fund ...... 59,233 28,095 2,127 -- 38,119
Massachusetts Fund . 14,743 31,362 -- -- 48,834
Mississippi Fund ... 24,336 14,243 -- 17,464 43,109
New York Fund ...... 29,930 37,704 864 186 29,107
North Carolina Fund 66,144 61,014 1,075 2,053 112,097
Pennsylvania Fund .. 18,579 10,091 367 3 13,598
South Carolina Fund 37,842 32,652 996 430 53,628
Tennessee Fund ..... 19,385 13,716 193 4 31,401
Virginia Fund ...... 46,610 56,011 492 -- 91,953
West Virginia Fund . 33,870 24,295 5,141 4 56,110
<CAPTION>
CDSC
CLASS A CLASS A IMPOSED ON
SALES CHARGES CLASS A FUND ASSETS REDEMPTION
RECEIVED GROSS SALES SOLD OF CLASS A
BY DEALERS(1) CHARGES 12 MONTHS SHARES
12 MONTHS 12 MONTHS ENDED 12 MONTHS
FUND ENDED 3/31/96 ENDED 3/31/96 3/31/96 ENDED 3/31/95
- -------------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Alabama Fund........ $111,575 $132,516 $ 6,180,746 $ 4
Arkansas Fund ...... 241,665 289,298 12,797,880 2,159
California Fund .... 479,564 542,422 25,864,991 15,182
Florida Fund ....... 179,736 215,847 10,930,910 4,332
Georgia Fund ....... 102,368 122,604 5,726,082 2,683
Maryland Fund ...... 186,547 224,666 9,023,095 --
Massachusetts Fund . 234,208 283,042 16,244,497 --
Mississippi Fund ... 182,722 225,831 10,037,301 1,770
New York Fund ...... 225,222 254,329 14,634,501 6,408
North Carolina Fund 542,002 654,099 35,984,389 70
Pennsylvania Fund .. 66,068 79,666 2,559,887 --
South Carolina Fund 256,423 310,051 14,027,135 7,826
Tennessee Fund ..... 144,547 175,948 7,191,545 --
Virginia Fund ...... 460,556 552,509 29,719,388 --
West Virginia Fund . 263,988 320,098 16,356,290 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CDSC
CLASS A CLASS A CLASS A IMPOSED ON
SALES CHARGES SALES CHARGES CLASS A FUND ASSETS REDEMPTION
RECEIVED BY RECEIVED GROSS SALES SOLD OF CLASS A
MFD BY DEALERS(1) CHARGES 12 MONTHS SHARES
12 MONTHS 12 MONTHS 12 MONTHS ENDED 2 MONTHS
FUND ENDED 3/31/95 ENDED 3/31/95 ENDED 3/31/95 3/31/95 ENDED 3/31/94
- -------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama Fund ....... $ 29,302 $158,463 $187,765 $ 9,763,525 --
Arkansas Fund ...... 100,116 470,358 570,474 29,001,659 --
California Fund .... 74,444 575,987 650,431 34,477,254 15,406
Florida Fund ....... 44,219 249,572 293,791 14,166,753 9,651
Georgia Fund ....... 39,551 209,120 248,671 10,440,522 11
Maryland Fund ...... 45,665 219,460 265,125 11,534,129 --
Massachusetts Fund . 53,182 248,636 301,818 19,252,318 --
Mississippi Fund ... 53,458 257,984 311,442 16,656,129 18
New York Fund ...... 35,466 298,728 334,194 16,810,290 8
North Carolina Fund 137,516 646,626 784,142 39,754,173 --
Pennsylvania Fund .. 14,379 98,601 112,980 3,547,968 --
South Carolina Fund 61,952 306,738 368,690 18,559,628 7,349
Tennessee Fund ..... 41,320 250,702 292,022 16,571,914 --
Virginia Fund ...... 128,244 606,377 734,621 33,148,823 11
West Virginia Fund . 57,411 269,466 326,877 13,277,508 --
<CAPTION>
CLASS A CLASS A
SALES CHARGES SALES CHARGES CLASS A
RECEIVED BY RECEIVED GROSS SALES CLASS A
MFD BY DEALERS(1) CHARGES FUND ASSETS
2 MONTHS 2 MONTHS 2MONTHS SOLD 2 MONTHS
FUND ENDED 3/31/94 ENDED 3/31/94 ENDED 3/31/94 ENDED 3/31/94
- -------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Alabama Fund ....... $ 4,832 $ 42,687 $47,519 $ 1,979,807
Arkansas Fund ...... 54,626 264,736 319,362 8,560,653
California Fund .... 31,401 223,591 254,992 13,687,013
Florida Fund ....... 16,273 77,536 93,809 4,747,434
Georgia Fund ....... 5,841 72,895 78,736 2,414,807
Maryland Fund ...... 27,087 124,584 151,671 5,026,959
Massachusetts Fund . 14,908 72,264 87,172 8,435,106
Mississippi Fund ... 23,926 112,398 136,324 4,200,243
New York Fund ...... 9,743 71,967 81,710 2,829,617
North Carolina Fund 40,207 193,342 233,549 10,070,734
Pennsylvania Fund .. 4,503 58,026 62,529 1,471,869
South Carolina Fund 15,264 75,005 90,269 4,197,995
Tennessee Fund ..... 9,709 85,685 95,394 2,965,078
Virginia Fund ...... 42,219 201,549 243,768 9,166,205
West Virginia Fund . 19,219 94,048 113,267 3,223,240
<FN>
- ----------
(1)Includes dealers, banks and other financial institutions.
</TABLE>
<PAGE>
APPENDIX C
AMOUNTS PAID UNDER THE DISTRIBUTION PLANS
FOR THE 12 MONTHS ENDED MARCH 31, 1996
TOTAL % OF
PAID(3) AVG.
UNDER DAILY AMOUNT AMOUNT PAID AMOUNT
DISTRIBUTION NET PAID TO DEALERS RETAINED
FUND PLAN ASSETS TO MFD (1) BY MFD
- ----------------- ------------ -------- ---------- ------------ ---------
Alabama Fund
Class A ......... $ 214,360 0.25% $ -- $ 209,684 $ 4,676
Alabama Fund
Class B ......... 52,407 1.00 39,305 18,853 249
Arkansas Fund
Class A ......... 153,664 0.08 -- 149,507 4,157
Arkansas Fund
Class B ......... 64,683 0.85 57,896 6,070 717
California Fund
Class A ......... -- -- -- -- --
California Fund
Class B ......... 262,715 0.80 246,588 16,127 --
California Fund
Class C ......... 39,494 1.00 -- 38,748 746
Florida Fund
Class A ......... -- -- -- -- --
Florida Fund
Class B ......... 111,506 0.80 104,266 7,240 --
Georgia Fund
Class A ......... 184,485 0.25 -- 179,625 4,860
Georgia Fund
Class B ......... 96,049 1.00 72,037 23,117 895
Maryland Fund
Class A ......... 505,240 0.35 144,773 341,000 19,467
Maryland Fund
Class B ......... 127,644 1.00 95,733 31,169 742
Massachusetts
Fund Class A .... 909,212 0.35 259,775 572,130 77,307
Massachusetts
Fund Class B .... 101,622 1.00 76,217 24,579 826
Mississippi Fund
Class A ......... -- -- -- -- --
Mississippi Fund
Class B ......... 87,645 0.79 82,909 4,736 --
New York Fund
Class A ......... 358,499 0.25 -- 337,181 21,318
New York Fund
Class B ......... 265,078 1.00 198,809 61,736 4,533
North Carolina
Fund Class A .... 1,487,814 0.35 425,089 1,034,896 27,829
North Carolina
Fund Class B .... 301,823 1.00 226,367 74,276 1,180
North Carolina
Fund Class C .... 85,187 1.00 -- 84,471 716
Pennsylvania Fund
Class A ......... -- -- -- -- --
Pennsylvania Fund
Class B ......... 174,424 0.75 169,161 5,263 --
South Carolina
Fund Class A .... 602,279 0.35 172,080 418,531 11,668
South Carolina
Fund Class B .... 153,865 1.00 115,399 36,498 1,968
Tennessee Fund
Class A ......... 403,330 0.35 115,237 277,766 10,327
Tennessee Fund
Class B ......... 115,801 1.00 86,851 28,099 851
Virginia Fund
Class A ......... 1,520,608 0.35 435,710 1,058,101 26,797
Virginia Fund
Class B ......... 253,832 1.00 190,373 61,962 1,496
Virginia Fund
Class C ......... 26,194 1.00 -- 23,980 2,214
West Virginia
Fund Class A .... 464,890 0.35 132,826 324,091 7,973
West Virginia
Fund Class B .... 117,640 1.00 88,230 29,206 204
- ----------
(1) Includes securities dealers, certain banks and other financial
institutions.
<PAGE>
APPENDIX D
TRUSTEE
COMPENSATION TABLES
The following is information for each Fund concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
<TABLE>
<CAPTION>
ALABAMA FUND
TRUSTEES FEE RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,382 $265 10 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 1,500 450 12 148,624
Lawrence H. Cohn ........... 1,382 135 18 135,874
J. David Gibbons ........... 1,382 409 12 135,874
Abby M. O'Neill ............ 1,324 193 10 129,499
Walter E. Robb, III ........ 1,500 225 9 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 1,500 147 20 148,624
Ward Smith ................. 1,500 222 13 148,624
</TABLE>
<TABLE>
<CAPTION>
ARKANSAS AND FLORIDA FUNDS
TRUSTEES FEE RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,382 $265 10 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 1,500 300 10 148,624
Lawrence H. Cohn ........... 1,382 135 18 135,874
J. David Gibbons ........... 1,382 273 10 135,874
Abby M. O'Neill ............ 1,324 193 10 129,499
Walter E. Robb, III ........ 1,500 225 9 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 1,500 147 20 148,624
Ward Smith ................. 1,500 222 13 148,624
</TABLE>
<TABLE>
<CAPTION>
GEORGIA AND NEW YORK FUNDS
TRUSTEES FEE RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,382 $265 10 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 1,500 600 14 148,624
Lawrence H. Cohn ........... 1,382 135 18 135,874
J. David Gibbons ........... 1,382 477 13 135,874
Abby M. O'Neill ............ 1,324 193 10 129,499
Walter E. Robb, III ........ 1,500 600 14 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 1,500 147 20 148,624
Ward Smith ................. 1,500 222 13 148,624
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
TRUSTEES FEE RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,382 $265 10 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 1,500 750 17 148,624
Lawrence H. Cohn ........... 1,382 135 18 135,874
J. David Gibbons ........... 1,382 477 13 135,874
Abby M. O'Neill ............ 1,324 193 10 129,499
Walter E. Robb, III ........ 1,500 750 17 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 1,500 147 20 148,624
Ward Smith ................. 1,500 222 13 148,624
</TABLE>
<TABLE>
<CAPTION>
MARYLAND, NORTH CAROLINA, SOUTH CAROLINA, VIRGINIA AND WEST VIRGINIA FUNDS
TRUSTEES FEE RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,382 $265 10 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 1,500 600 14 148,624
Lawrence H. Cohn ........... 1,382 135 18 135,874
J. David Gibbons ........... 1,382 477 13 135,874
Abby M. O'Neill ............ 1,324 193 10 129,499
Walter E. Robb, III ........ 1,500 750 17 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 1,500 147 20 148,624
Ward Smith ................. 1,500 222 13 148,624
</TABLE>
<TABLE>
<CAPTION>
MISSISSIPPI AND PENNSYLVANIA FUNDS
TRUSTEES FEE RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,382 $199 9 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 1,500 225 9 148,624
Lawrence H. Cohn ........... 1,382 135 18 135,874
J. David Gibbons ........... 1,382 204 9 135,874
Abby M. O'Neill ............ 1,324 193 10 129,499
Walter E. Robb, III ........ 1,500 225 9 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 1,500 147 20 148,624
Ward Smith ................. 1,500 222 13 148,624
</TABLE>
<TABLE>
<CAPTION>
TENNESSEE FUND
TRUSTEES FEE RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $1,382 $265 10 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 1,500 525 13 148,624
Lawrence H. Cohn ........... 1,382 135 18 135,874
J. David Gibbons ........... 1,382 477 13 135,874
Abby M. O'Neill ............ 1,324 193 10 129,499
Walter E. Robb, III ........ 1,500 525 13 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 1,500 147 20 148,624
Ward Smith ................. 1,500 222 13 148,624
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY EACH FUND
(EXCEPT THE CALIFORNIA FUND -- SEE BELOW) UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$1,191 $179 $298 $417 $596
1,283 192 321 449 641
1,375 206 344 481 687
1,466 220 367 513 733
1,558 234 390 545 779
1,650 247 412 577 825
<TABLE>
<CAPTION>
CALIFORNIA FUND
TRUSTEES
FEES RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEES FEES
FROM EACH ACCRUED AS PART OF EACH CREDITED YEARS OF FROM FUNDS AND
TRUSTEE FUND FUND'S EXPENSES(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------- ---------------- --------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .......... $3,725 $ 700 10 $263,815
A. Keith Brodkin ........... 0 0 N/A 0
Marshall N. Cohan .......... 4,175 1,670 14 148,624
Lawrence H. Cohn ........... 3,725 361 18 135,874
J. David Gibbons ........... 3,725 1,277 13 135,874
Abby M. O'Neill ............ 3,500 502 10 129,499
Walter E. Robb, III ........ 4,175 2,087 17 148,624
Arnold D. Scott ............ 0 0 N/A 0
Jeffrey L. Shames .......... 0 0 N/A 0
J. Dale Sherratt ........... 4,175 406 20 148,624
Ward Smith ................. 4,175 615 13 148,624
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY THE CALIFORNIA FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$3,150 $472 $ 787 $1,102 $1,575
3,438 516 860 1,203 1,719
3,727 559 932 1,304 1,863
4,015 602 1,004 1,405 2,008
4,304 646 1,076 1,506 2,152
4,592 689 1,148 1,607 2,296
- ------------
(1) For fiscal year ended March 31, 1996.
(2) Based on normal retirement age of 75.
(3) For calendar year 1995. All Trustees receiving compensation served as
Trustees of 36 funds within the MFS Fund complex (having aggregate net
assets at December 31, 1995, of approximately $12.5 billion) except Mr.
Bailey, who served as Trustee of 73 funds within the MFS Fund complex
(having aggregate net assets at December 31, 1995, of approximately $31.7
billion).
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
MUNICIPAL
SERIES TRUST
500 Boylston Street
Boston, MA 02116
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MST-13-8/96/520
<PAGE>
[front cover]
[logo]
MFS(r)
THE FIRST NAME IN MUTUAL FUNDS
Annual Report for
Year Ended
March 31, 1996
MFS(r) Municipal Series Trust
For the States of: Maryland, North Carolina, South Carolina, Tennessee,
Virginia and West Virginia
[photo of bridge]
<PAGE>
MFS MUNICIPAL SERIES TRUST
Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey*
Private Investor; Former Chairman and Director
(until 1991), Massachusetts Financial Services
Company; Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Marshall N. Cohan
Private Investor
Lawrence H. Cohn, M.D.
Chief of Cardiac Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE
Chief Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill
Private Investor;
Director, Rockefeller Financial Services, Inc.
(investment adviser)
Walter E. Robb, III
President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); Trustee,
Landmark Funds (mutual funds)
Arnold D. Scott*
Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames*
President and Director, Massachusetts Financial
Services Company
J. Dale Sherratt
President, Insight Resources, Inc.
(acquisition planning specialists)
Ward Smith
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Managers
David R. King*
Geoffrey L. Schechter*
David B. Smith*
*Affiliated with the Investment Adviser
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Deloitte & Touche llp
Investor Information
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458
anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
[DALBAR MFS #1 logo]
Top-Rated Service
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The
firm achieved a 3.49 overall score--on a scale of 1 to 4--in the 1995 survey.
A total of 71 firms responded, offering input on the quality of service they
received from 36 mutual fund companies nationwide. The survey contained
questions about service quality in 17 categories, including "knowledge of
phone service contacts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
<PAGE>
Letter to Shareholders
Dear Shareholders:
Declining interest rates and a favorable inflation outlook helped create
opportunities in the municipal market during the past 12 months. During the
fiscal year ended March 31, 1996, all classes of shares of the individual
state Funds available within the Trust generated positive total returns. For
the most part, these returns underperformed the 8.38% return of the Lehman
Brothers Municipal Bond Index (the Lehman Index), an unmanaged index of
municipal bond investments rated Baa or higher. However, although this index
is considered the benchmark for performance of municipal bonds, it is
comprised of municipal bonds issued nationwide, while each of the Funds in
the Trust is limited to investing in the bonds of a particular state. Because
individual indices do not exist for all of the states, we have provided a
discussion of each Fund's performance relative to the Lehman Index on the
following pages.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to
quarter. Thus, while one quarter may experience an annualized rate of growth
in Gross Domestic Product (GDP) of less than 1%, another quarter may see
annualized growth in excess of 3%--but, for the year, we believe growth could
stay within our expected range of 2% to 2-1/2%. While some increase in
consumer spending has taken place in the early months of this year,
consumers, who represent two-thirds of the economy, remain in a somewhat
weakened position, due in part to an increase in consumer installment debt in
excess of 30% over the past two years. Meanwhile, growth is also being
constrained by ongoing economic doldrums in Europe and Japan, important
markets for U.S. exports. Here again, we are seeing a few tentative signs,
particularly in Japan, of modest recoveries that could lead to improved
prospects for U.S. exporters. Also, the "lag effect" of increases in
short-term interest rates by the Federal Reserve Board in 1994 and into 1995
is helping to keep growth in check. This lag effect can last up to two years,
and although the Fed did reduce short-term rates late last year and earlier
this year, we expect it to continue its diligent anti-inflationary policies.
At the same time, it appears that inflation is likely to remain under control
this year, due in part to a continued moderation in wage pressures and the
subdued level of economic growth. Finally, we believe the current upward
pressure on energy prices bears close scrutiny, as energy is an important
component of the inflation outlook.
Municipal Bond Market
Interest rates on municipal bonds experienced dramatic swings during the
fiscal year ended March 31, 1996. Rates declined by approximately 70 basis
points (0.70%) during the first nine months of the fiscal year, as a
combination of slowing economic growth and reduced inflationary pressures
enabled the Federal Reserve to begin lowering interest rates. Positive news
out of Washington, D.C. regarding the possibility of a balanced budget
provided further impetus for the rally in fixed-income securities. In the
fourth quarter of the fiscal year, interest rates on municipal securities
increased by about 55 basis points (0.55%) as signs of a reemergence in
economic growth and rising commodity prices raised inflationary concerns.
Further driving interest rates higher was the apparent failure of the federal
government to reach agreement on a balanced budget.
The overall 15-basis point (0.15%) decline in tax-exempt yields during the
fiscal year ended March 31, 1996 was dwarfed by the approximate 70-basis
point (0.70%) decline in yields on long-term U.S. Treasury securities during
the same period, driving the yield ratio of 30-year AAA-rated municipals to
U.S. Treasuries from 79% to 86%. The dramatic underperformance by tax-exempt
securities can be attributed to investors' fears concerning major tax reform,
more specifically, the potential of the implementation of a flat tax and the
removal of municipal bonds' special tax status. While these fears have
subsided somewhat recently as it appears that major tax reform is improbable,
tax-exempt securities are still trading at levels reflective of some modest
prospect of tax reform.
Supply continues to provide a positive foundation for the municipal bond
market. In 1995, new issuance totalled approximately $156 billion, a decline
of 5% from the previous year and nearly one-half of 1993's record level. More
importantly, during 1995 the outstanding supply of municipal bonds declined
by approximately $45 billion. It is expected that new issuance will again be
in the range of $160 billion, barring any sharp decline in interest rates,
and that the outstanding supply will again decline, by approximately $30
billion. Given the favorable technical outlook for municipal bonds and their
current yield ratios compared to U.S. Treasuries, we believe that tax-exempt
securities represent good value (although principal value and interest on
Treasury securities are guaranteed by the U.S. government if held to
maturity).
Portfolio Strategy
Although the structure of each Fund is impacted by the unique market dynamics
of its state, we strive to manage all the Funds in a similar style. We are
generally constructive on the municipal market, although recent volatility
and the aforementioned signs of growth have raised some concerns. Therefore,
we have shortened the durations of some of the longer-term Funds to lessen
their interest-rate sensitivity. We have also sought to purchase bonds that
came to market at relatively high yields, which tend to be relatively more
defensive and help us maintain dividend levels.
1
<PAGE>
Letter to Shareholders -- continued
The focus on credit issues in the municipal market has grown with the
Orange County, California bankruptcy filing, the deterioration of Washington,
D.C.'s financial condition, and many other local problems. At the same time,
with the volatility in interest rates, we feel it is appropriate to maintain
very high quality across the Funds' portfolios. Finally, the rapidly changing
credit landscape may present many opportunities that, with our research team,
we hope to identify and take advantage of to enhance the value of the Funds.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A Keith Brodkin
A. Keith Brodkin
Chairman and President
/s/ David R. King /s/ Geoffrey L. Schechter /s/ David B. Smith
David R. King, Geoffrey L. Schechter, and David B. Smith
Portfolio Managers
April 12, 1996
The performance of the individual state Funds listed below and on the
following page includes the reinvestment of distributions but excludes the
effects of any sales charges. Each Fund's results have been compared to the
Lehman Index.
The portfolio of each Fund will tend to be structured with respect to
maturity and coupon and sector distribution, reflecting our views on interest
rates, credit quality, and financing trends. However, each Fund's performance
will differ because of supply/demand and credit quality conditions, which
vary from state to state.
Maryland
For the 12 months ended March 31, 1996, the Fund provided total returns of
6.17% on Class A shares and 5.41% on Class B shares, underperforming the
8.38% return for the Lehman Index. The average Maryland state tax-exempt
funds returned 7.19% over the same period, as reported by Lipper Analytical
Services. The primary reason for the underperformance was the relatively
short duration of the Fund, which helped reduce the Fund's interest rate
sensitivity, but also prevented it from appreciating with the market.
Conversely, this defensive position has served the Fund well over the past
two months as interest rates have risen.
North Carolina
During the fiscal year ended March 31, 1996, Class A shares of the Fund
provided a total return of 6.56%, Class B shares returned 5.70%, and Class C
shares 5.87%, all of which underperformed the 8.38% return of the Lehman
Index, as well as the 6.71% average return for North Carolina state
tax-exempt funds, as reported by Lipper Analytical Services. The
underperformance is primarily attributable to the defensive posture that the
Fund maintained during the first two months of the fiscal year, when interest
rates were generally declining, and the more aggressive posture that the Fund
maintained during the fourth quarter of the fiscal year, a period marked by
rising interest rates. Also contributing to the underperformance was the
Fund's large holdings of bonds with above-market coupons, whose returns
generally trail the market in periods of declining interest rates.
South Carolina
The Fund's total returns for the 12 months ended March 31, 1996 were 6.20% on
Class A shares and 5.43% on Class B shares, lower than the 8.38% return for
the Lehman Index and the 7.42% return for the average South Carolina state
tax-exempt funds, as reported by Lipper Analytical Services. The Fund's
defensive structure during the first and second quarters prevented it from
fully participating in the market rally, while combined performance for the
third and fourth quarters essentially matched the market.
Tennessee
The Fund had total returns of 6.66% on Class A shares and 5.89% on Class B
shares for the fiscal year ended March 31, 1996. This compares to an 8.38%
return for the Lehman Index and a 6.93% return for the average Tennessee
state tax-exempt funds, according to Lipper Analytical Services. The Fund's
defensive structure, including its holdings of many older, higher-coupon
bonds, caused its performance to lag during the market rally. Conversely, the
Fund tends to do relatively better in flat and down markets, and also has a
higher dividend yield than it would have if it were more aggressively
structured.
2
<PAGE>
Virginia
The Fund's total returns for the fiscal year ended March 31, 1996 of 6.52%
for Class A shares, 5.85% for Class B shares, and 6.02% for Class C shares
underperformed the 8.38% return of the Lehman Index, as well as the average
Virginia tax-exempt municipal bond fund's return of 7.43%, as reported by
Lipper Analytical Services, over the same period.
The Fund endeavored to increase its interest rate sensitivity during the
period of falling interest rates by emphasizing long-term discounts in its
purchasing decisions. The timing and availability of discount bonds in both
the primary and secondary markets became an issue in this historically
low-issuance state. Many attractively structured new issues came to market at
the end of 1995, which, in retrospect, was the peak of the market. The Fund
participated in many of these issues, using them as a sizable source of
discount bonds. Although these positions added to performance for the third
quarter of the fiscal year, they detracted from performance in the fourth
quarter as general market interest rates rose precipitously.
West Virginia
The Fund's total returns for the fiscal year ended March 31, 1996 of 6.58%
for Class A shares and 5.81% for Class B shares underperformed the 8.38%
return of the Lehman Index. However, the Fund's Class A shares outperformed
the average other state tax-exempt municipal bond fund's return of 6.99%, as
reported by Lipper Analytical Services, over the same period.
As the oldest and largest fund in a predominantly low-issuance state with low
secondary-market volume, the Fund has concentrated on maintaining its
dividend over the period by emphasizing call protection and quality in its
investment decisions. This strategy tends to dampen price volatility in
changing interest rate environments; it can also help the Fund provide
attractive returns in both up and down markets.
Portfolio Manager Profiles
David King has been a member of the MFS investment staff since 1985. A
graduate of the University of New Hampshire and the Babson College Graduate
School of Business Administration, he began his career at MFS as a member of
the Fixed Income Department and was named Assistant Vice President -
Investments in 1987. In 1988 he was named Vice President - Investments. Mr.
King is a Chartered Financial Analyst (C.F.A.) and currently has portfolio
management responsibility for the Maryland, South Carolina and Tennessee
state Funds.
Geoffrey Schechter joined MFS in 1993 as an Investment Officer in the Fixed
Income Department. A graduate of the University of Texas and the Boston
University Graduate School of Business Administration, he was named Assistant
Vice President - Investments in 1994, Vice President - Investments in 1995
and currently has portfolio management responsibilities for the North
Carolina state Fund. Mr. Schechter is a Certified Public Accountant (C.P.A.)
and a C.F.A.
David Smith has been a member of the MFS investment staff since 1988. A
graduate of Union College and the Babson College Graduate School of Business
Administration, he began his career at MFS as a Senior Treasury Analyst in
the Corporate Treasury Department. He was named a Research Analyst in the
Fixed Income Department in 1989, Investment Officer in 1990, Assistant Vice
President - Investments in 1991 and Vice President - Investments in 1993. Mr.
Smith is a C.F.A. and currently has portfolio management responsibilities for
the Virginia and West Virginia state Funds.
Objective and Policies
The investment objective for each state Fund is to provide current income
exempt from federal income taxes and from the personal income taxes, if any,
of that state.
Each state Fund seeks to achieve its investment objective by investing its
assets primarily in municipal debt instruments. Each Fund may purchase
instruments, the interest on which may be subject to an alternative minimum
tax. Generally, each state Fund will invest at least two-thirds of its assets
in tax-exempt securities in the three highest grades (A or above) of
recognized rating agencies or comparable unrated securities. Each state Fund
may also enter into options and futures transactions and purchase securities
on a "when-issued" basis.
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost.
3
<PAGE>
Performance
The following information illustrates the growth of a hypothetical $10,000
investment for each Fund's Class A shares during the periods indicated in
comparison to various market indicators. Fund results reflect the deduction
of the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do
not reflect any fees or expenses. You cannot invest in an index. All results
reflect the reinvestment of all dividends and capital gains.
Please note that effective September 7, 1993, Class B shares were offered and
on January 3, 1994, Class C shares were offered for certain funds.
Information on the performance of these classes of shares appears on the
following pages.
Please note that the performance of other classes will be greater than or
less than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
MFS MARYLAND MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 investment (For the 10-Year Period Ended
March 31, 1996)
[mountain chart]
Days MFS Maryland Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
4/1/86 0 9,525 10,000 10,000
3/31/87 365 10,638 11,097 10,304
3/31/88 731 10,681 11,376 10,705
3/31/89 1095 11,577 12,196 11,238
3/31/90 1460 12,562 13,482 11,826
3/31/91 1825 13,642 14,726 12,405
3/31/92 2191 14,808 16,197 12,800
3/31/93 2556 16,377 18,225 13,195
3/31/94 2921 16,437 18,648 13,526
3/31/95 3286 17,507 20,034 13,912
3/31/96 3652 18,588 21,713 14,307
[legend]
(solid rule) MFS Maryland Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MFS Maryland Municipal Bond Fund (Class A) including 4.75% sales charge +1.09% +2.26% +5.35% +6.40%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Maryland Municipal Bond Fund (Class A) at net asset value +6.17% +4.31% +6.38% +6.92%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Maryland Municipal Bond Fund (Class B) with CDSC+ +1.41% -- -- +1.02%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Maryland Municipal Bond Fund (Class B) without CDSC +5.41% -- -- +2.08%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Average Maryland tax-exempt municipal bond fund** +7.19% +5.13% +7.26% +6.74%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Lehman Brothers Municipal Bond Index** +8.38% +6.01% +8.08% +8.06%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Consumer Price Index(S)** +2.84% +2.73% +2.89% +3.65%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
</TABLE>
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Source: Lipper Analytical Services, Inc.
(S) The Consumer Price Index is a popular measure of change in prices.
4
<PAGE>
Performance -- continued
MFS NORTH CAROLINA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 10-Year Period Ended
March 31, 1996)
[mountain chart]
Days MFS North Carolina Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
4/1/86 0 9,525 10,000 10,000
3/31/87 365 10,540 11,097 10,304
3/31/88 731 10,511 11,376 10,705
3/31/89 1095 11,343 12,196 11,238
3/31/90 1460 12,319 13,482 11,826
3/31/91 1825 13,315 14,726 12,405
3/31/92 2191 14,393 16,197 12,800
3/31/93 2556 16,044 18,225 13,195
3/31/94 2921 16,253 18,648 13,526
3/31/95 3286 17,206 20,034 13,912
3/31/96 3652 18,335 21,713 14,307
[legend]
(solid rule) MFS North Carolina Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MFS North Carolina Municipal Bond Fund (Class A) including 4.75% sales
charge +1.49% +2.86% +5.57% +6.25%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS North Carolina Municipal Bond Fund (Class A) at net asset value +6.56% +4.55% +6.61% +6.77%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS North Carolina Municipal Bond Fund (Class B) with CDSC+ +1.70% -- -- +1.18%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS North Carolina Municipal Bond Fund (Class B) without CDSC +5.70% -- -- +2.25%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS North Carolina Municipal Bond Fund (Class C) +5.87% -- -- +2.35%#
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Average North Carolina tax-exempt municipal bond fund** +6.71% +4.88% +7.06% +6.66%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Lehman Brothers Municipal Bond Index** +8.38% +6.01% +8.08% +8.06%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Consumer Price Index(S)** +2.84% +2.73% +2.89% +3.65%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
</TABLE>
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Source: Lipper Analytical Services, Inc.
#For the period from the commencement of offering of Class C shares, January
3, 1994 to March 31, 1996. Class C shares have no initial sales charge or
CDSC but, along with Class B shares, have higher annual fees and expenses
than Class A shares. Class C share purchases made on or after April 1, 1996,
will be subject to a 1% CDSC if redeemed within 12 months of purchase.
(section) The Consumer Price Index is a popular measure of change in prices.
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 10-Year Period Ended
March 31, 1996)
[mountain chart]
Days MFS South Carolina Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
4/1/86 0 9,525 10,000 10,000
3/31/87 365 10,577 11,097 10,304
3/31/88 731 10,849 11,376 10,705
3/31/89 1095 11,759 12,196 11,238
3/31/90 1460 12,819 13,482 11,826
3/31/91 1825 13,846 14,726 12,405
3/31/92 2191 15,112 16,197 12,800
3/31/93 2556 16,884 18,225 13,195
3/31/94 2921 17,148 18,648 13,526
3/31/95 3286 18,337 20,034 13,912
3/31/96 3652 19,473 21,713 14,307
[legend]
(solid rule) MFS South Carolina Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MFS South Carolina Municipal Bond Fund (Class A) including 4.75% sales
charge +1.17% +3.18% +6.02% +6.89%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS South Carolina Municipal Bond Fund (Class A) at net asset value +6.20% +4.87% +7.06% +7.41%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS South Carolina Municipal Bond Fund (Class B) with CDSC+ +1.43% -- -- +1.50%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS South Carolina Municipal Bond Fund (Class B) without CDSC +5.43% -- -- +2.57%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Average South Carolina tax-exempt municipal bond fund** +7.42% +4.91% +7.36% +7.41%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Lehman Brothers Municipal Bond Index** +8.38% +6.01% +8.08% +8.06%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Consumer Price Index(S)** +2.84% +2.73% +2.89% +3.65%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
</TABLE>
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Source: Lipper Analytical Services, Inc.
(S) The Consumer Price Index is a popular measure of change in prices.
5
<PAGE>
Performance - continued
MFS TENNESSEE MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from September 1,
1988 to March 31, 1996)
[mountain chart]
Days MFS Tennessee Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
9/1/88 0 9,525 10,000 10,000
3/31/89 211 9,791 10,440 10,277
3/31/90 576 10,831 11,541 10,815
3/31/91 941 11,625 12,606 11,345
3/31/92 1307 12,727 13,865 11,706
3/31/93 1672 14,146 15,601 12,067
3/31/94 2037 14,498 15,963 12,370
3/31/95 2402 15,347 17,149 12,723
3/31/96 2768 16,368 18,587 13,084
[legend]
(solid rule) MFS Tennessee Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
<TABLE>
<CAPTION>
Average Annual Total Returns Life of
Class
through
1 Year 3 Years 5 Years 3/31/96
- ------------------------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MFS Tennessee Municipal Bond Fund (Class A) including 4.75% sales charge +1.61% +3.28% +6.08% +6.66%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Tennessee Municipal Bond Fund (Class A) at net asset value +6.66% +4.98% +7.11% +7.34%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Tennessee Municipal Bond Fund (Class B) with CDSC+ +1.89% -- -- +1.81%++
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Tennessee Municipal Bond Fund (Class B) without CDSC +5.89% -- -- +2.89%++
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Average Tennessee tax-exempt municipal bond fund +6.93% +4.51% +7.21% +7.67%**
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Lehman Brothers Municipal Bond Index +8.38% +6.01% +8.08% +8.52%**
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Consumer Price Index(S) +2.84% +2.73% +2.89% +3.65%**
- ------------------------------------------------------------------------- -------- -------- -------- ----------
</TABLE>
*For the period from the commencement of offering of Class A shares, August
12, 1988 to March 31, 1996.
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on September 1, 1988. Source: Lipper Analytical
Services, Inc.
(S) The Consumer Price Index is a popular measure of change in prices.
MFS VIRGINIA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 10-Year Period Ended
March 31, 1996)
[mountain chart]
Days MFS Virginia Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
4/1/86 0 9,525 10,000 10,000
3/31/87 365 10,509 11,097 10,304
3/31/88 731 10,568 11,376 10,705
3/31/89 1095 11,575 12,196 11,238
3/31/90 1460 12,625 13,482 11,826
3/31/91 1825 13,687 14,726 12,405
3/31/92 2191 14,901 16,197 12,800
3/31/93 2556 16,590 18,225 13,195
3/31/94 2921 16,754 18,648 13,526
3/31/95 3286 17,703 20,034 13,912
3/31/96 3652 18,858 21,713 14,307
[legend]
(solid rule) MFS Virginia Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MFS Virginia Municipal Bond Fund (Class A) including 4.75% sales charge +1.49% +2.69% +5.59% +6.55%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Virginia Municipal Bond Fund (Class A) at net asset value +6.52% +4.36% +6.62% +7.07%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Virginia Municipal Bond Fund (Class B) with CDSC+ +1.85% -- -- +1.02%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Virginia Municipal Bond Fund (Class B) without CDSC +5.85% -- -- +2.07%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS Virginia Municipal Bond Fund (Class C) +6.02% -- -- +2.09%#
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Average Virginia tax-exempt municipal bond fund** +7.43% +5.16% +7.37% +7.33%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Lehman Brothers Municipal Bond Index** +8.38% +6.01% +8.08% +8.06%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Consumer Price Index(S)** +2.84% +2.73% +2.89% +3.65%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
</TABLE>
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Source: Lipper Analytical Services, Inc.
#For the period from the commencement of offering of Class C shares, January
3, 1994 to March 31, 1996. Class C shares have no initial sales charge or
CDSC but, along with Class B shares, have higher annual fees and expenses
than Class A shares. Class C share purchases made on or after April 1, 1996,
will be subject to a 1% CDSC if redeemed within 12 months of purchase.
(S) The Consumer Price Index is a popular measure of change in prices.
6
<PAGE>
Performance - continued
MFS WEST VIRGINIA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 10-Year Period Ended
March 31, 1996)
[mountain chart]
Days MFS West Virginia Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
4/1/86 0 9,525 10,000 10,000
3/31/87 365 10,562 11,097 10,304
3/31/88 731 10,662 11,376 10,705
3/31/89 1095 11,603 12,196 11,238
3/31/90 1460 12,620 13,482 11,826
3/31/91 1825 13,678 14,726 12,405
3/31/92 2191 14,979 16,197 12,800
3/31/93 2556 16,702 18,225 13,195
3/31/94 2921 17,071 18,648 13,526
3/31/95 3286 18,107 20,034 13,912
3/31/96 3652 19,298 21,713 14,307
[legend]
(solid rule) MFS West Virginia Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MFS West Virginia Municipal Bond Fund (Class A) including 4.75% sales
charge +1.51% +3.25% +6.09% +6.79%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS West Virginia Municipal Bond Fund (Class A) at net asset value +6.58% +4.93% +7.13% +7.32%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS West Virginia Municipal Bond Fund (Class B) with CDSC+ +1.81% -- -- +1.44%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
MFS West Virginia Municipal Bond Fund (Class B) without CDSC +5.81% -- -- +2.50%*
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Average other state tax-exempt municipal bond fund** +6.99% +5.40% +6.79% +7.26%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Lehman Brothers Municipal Bond Index** +8.38% +6.01% +8.08% +8.06%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
Consumer Price Index(S)** +2.84% +2.73% +2.89% +3.65%
- ------------------------------------------------------------------------- -------- -------- -------- ----------
</TABLE>
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Source: Lipper Analytical Services, Inc.
(S) The Consumer Price Index is a popular measure of change in prices.
Federal Income Tax Information on Distributions (For the 10-Year Period Ended
March 31, 1996)
The Maryland Municipal Bond Fund has designated $154,720 as a long-term
capital gain distribution for tax purposes.
Tax Form Summary
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
Exempt-Interest Dividends
For federal income tax purposes, approximately 99% of the total dividends
paid by each Fund from net investment income during the year ended March 31,
1996 is designated as an exempt-interest dividend.
7
<PAGE>
Portfolio of Investments - March 31, 1996
MFS MARYLAND MUNICIPAL BOND FUND
Municipal Bonds - 97.5%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
General Obligation - 13.7%
AA+ Anne Arundel County, MD, 4.9s, 2011 $1,005 $ 940,840
AAA Baltimore, MD, Consolidated Public Improvement,
FGIC, 5.3s, 2009 700 693,560
AAA Baltimore, MD, Consolidated Public Improvement,
MBIA, 7s, 2009 1,000 1,163,370
A Baltimore, MD, Consolidated Public Improvement,
7.15s, 2009 2,000 2,336,380
AAA Balitmore, MD, Consolidated Public Improvement,
FGIC, 5.3s, 2010 815 803,191
AAA Baltimore, MD, Consolidated Public Improvement,
FGIC, 5.375s, 2011 900 884,232
AAA Baltimore, MD, Consolidated Public Improvement,
FGIC, 5.375s, 2013 770 746,353
AA+ Howard County, MD, Metropolitan District, 0s, 2008 1,975 1,019,377
AAA Montgomery County, MD, Public Improvement, 0s, 2009 4,000 1,959,840
AA- Prince George's County, MD, 0s, 2007 5,110 2,840,649
AAA Prince George's County, MD,Public Improvement,
AMBAC, 5.5s, 2013 2,000 1,966,760
AAA Puerto Rico Commonwealth, MBIA, 5.375s, 2022 2,000 1,893,820
AAA State of Maryland, 9s, 1999 350 402,252
AA Washington Suburban Sanitation District, 6.1s, 2015 1,070 1,105,931
AA Washington Suburban Sanitation District, 5.25s, 2016 2,400 2,254,368
---------------
$21,010,923
- ---------- ---------------------------------------------------- -------------- ---------------
State and Local Appropriation - 14.3%
NR Calvert County, MD, Community Lease Rev., 7.2s, 2010 $ 750 $ 822,300
AA+ Howard County, MD, Certificates of Participation,
8.15s, 2021 450 592,236
AA+ Howard County, MD, Certificates of Participation,
"A", 8s, 2019 805 1,037,862
AA+ Howard County, MD, Certificates of Participation,
"B", 8s, 2019### 385 496,369
AA+ Howard County, MD, Certificates of Participation,
"C", 8s, 2019 680 876,704
AAA Maryland Stadium Authority, Sports Facilities
Leasing Rev., AMBAC,
5.875s, 2012 1,000 1,015,280
AA- Maryland Stadium Authority, Sports Facilities
Leasing Rev., 7.6s, 2019 2,580 2,831,111
AAA Prince George's County, MD, Certificates of
Participation, MBIA, 0s, 2005 2,495 1,556,381
AAA Prince George's County, MD, Certificates of
Participation, MBIA, 0s, 2006 2,490 1,468,726
AAA Prince George's County, MD, Certificates of
Participation, MBIA, 0s, 2011 3,675 1,558,090
AAA Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2004 980 648,476
AAA Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2006 1,800 1,061,730
AAA Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2009 1,500 730,320
AAA Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2010 2,730 1,250,204
AAA Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2011 2,810 1,200,235
AAA Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2012 2,480 975,186
State and Local Appropriation - continued
AAA Prince George's County, MD, Industrial
Development Authority, MBIA, 5.25s, 2019 $1,000 $ 919,310
A Puerto Rico Public Buildings Authority, Education &
Health, 6.285s, 2016 3,000 2,788,260
---------------
$21,828,780
- ---------- ---------------------------------------------------- -------------- ---------------
Refunded and Special Obligation - 12.0%
AAA Baltimore, MD, Water Utility Rev., MBIA, 6.5s, 2000 $ 540 $ 581,256
AAA Commonwealth of Puerto Rico, Public Improvement,
6.8s, 2002 1,500 1,698,510
AAA Howard County, MD, Metropolitan District, 7.15s,
2000 500 553,415
AAA Maryland Health & Higher Education Facilities
Authority Rev. (Sinai Hospital/ Baltimore), 7s,
2000 2,000 2,224,160
AAA Maryland Health & Higher Education Facilities
Authority Rev. (University of
Maryland Medical System), FGIC, 6.5s, 2001 1,000 1,087,550
AAA Maryland Health & Higher Education Facilities
Authority Rev. (University of
Maryland Medical System), FGIC, 7s, 2001 1,840 2,072,502
AAA Montomery County, MD, Rev. Authority, Lease Rev.
(Regional Indoor Swim Center Project), 7.6s 1998 750 810,330
AAA Morgan State University, MD, Academic & Auxiliary
Facilities & Fees Rev., MBIA, 0s, 2006 1,135 672,737
AAA Morgan State University, MD, Academic & Auxiliary
Facilities & Fees Rev., MBIA, 0s, 2008 1,400 740,488
NR Prince George's County, MD, Hospital
Rev. (Dimensions Health Corp.), 7.25s, 2002 2,000 2,302,940
AAA Puerto Rico Aqueduct & Sewer Authority, 10.25s, 2009 500 688,760
AAA Puerto Rico Electric Power Authority Rev., 8s, 1998 500 551,055
A- Puerto Rico Electric Power Authority Rev., 7s, 2001 1,000 1,133,890
AAA St. Mary's County, MD, 7.75s, 1996 2,050 2,135,608
AA Washington Suburban Sanitation District, MD, 6.9s,
2001 1,045 1,170,745
---------------
$18,423,946
- ---------- ---------------------------------------------------- -------------- ---------------
Solid Waste Revenue - 8.4%
NR Maryland Energy Financing Administration (Solid
Waste), 9s, 2016 $1,000 $ 1,012,360
AAA Northeast Maryland, Waste Disposal Authority
(Harford County Resource Recovery), MBIA, 7.2s,
2005 1,000 1,143,900
NR Northeast Maryland, Waste Disposal
Authority (Montgomery County), 6s, 2006 1,000 1,053,000
NR Northeast Maryland, Waste Disposal
Authority (Montgomery County), 6.3s, 2016 5,400 5,423,382
AAA Prince George's County, MD, FSA, 5.25s, 2013 4,500 4,202,595
---------------
$12,835,237
- ---------- ---------------------------------------------------- -------------- ---------------
Single Family Housing Revenue - 7.2%
NR Maryland Community Development Administration,
7.75s, 2009 $1,500 $ 1,552,845
NR Maryland Community Development Administration, 7.7s,
2015 655 688,215
8
<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 Maryland Community Development Administration,
8.25s, 2017 $ 1,300 $ 1,356,355
NR Maryland Community Development Administration,
7.625s, 2020 2,400 2,491,008
NR Maryland Community Development Administration,
8.25s, 2020 500 523,485
NR Maryland Community Development Administration,
6.75s, 2026 2,250 2,303,505
NR Maryland Community Development Administration,
7.625s, 2029 940 973,633
NR Maryland Community Development Administration,
7.85s, 2029 640 673,875
NR Montgomery County, MD, Housing Opportunities
Commission, 7.5s, 2017 365 382,713
---------------
$10,945,634
- ---------- ---------------------------------------------------- -------------- ---------------
Multi-Family Housing Revenue - 5.0%
BBB Baltimore, MD, City Housing Corp. Rev., 7.75s, 2009 $ 1,025 $ 1,045,162
AAA Baltimore, MD, City Housing Corp. Rev., 7.25s, 2023 1,235 1,281,769
NR Maryland Community Development Administration,
7.375s, 2021 330 341,395
NR Maryland Community Development Administration, 8.4s,
2029 1,320 1,365,528
NR Maryland Community Development Administration, 7.5s,
2031 65 67,222
NR Maryland Community Development Administration, 0s,
2032 11,605 698,272
NR Maryland Community Development Administration, 7.8s,
2032 1,190 1,248,048
AA Montgomery County, MD, Housing Opportunities
Commission, 6s, 2020 500 491,780
NR Montgomery County, MD, Housing
Opportunities Commission, 7.375s, 2032 1,045 1,076,151
---------------
$ 7,615,327
- ---------- ---------------------------------------------------- -------------- ---------------
Insured Health Care Revenue - 6.5%
AAA Maryland Health & Higher Education Facilities
Authority Rev. (Francis Scott Key Medical Center),
FGIC, 5s, 2013 $ 1,000 $ 921,190
AAA Maryland Health & Higher Education Facilities
Authority Rev. (Frederick Memorial Hospital),
FGIC, 5.25s, 2013 2,250 2,160,203
AAA Maryland Health & Higher Education Facilities
Authority Rev. (Mercy Medical Center), AMBAC,
5.5s, 2022 1,000 939,260
AAA Maryland Health & Higher Educational Facilities
Authority Rev. (University of Maryland), FGIC,
5.375s, 2013 1,000 948,330
AAA Maryland Health & Higher Educational Facilities
Authority Rev. (University of Maryland), FGIC, 5s,
2020 2,000 1,787,920
AAA Maryland Industrial Development Finance Authority,
Economic Development Rev., FSA, 7.62s, 2022++++ 1,500 1,515,000
AAA Maryland Industrial Development Finance Authority,
Economic Development Rev. (Bon Secours), FSA,
5.5s, 2024 1,700 1,629,620
---------------
$ 9,901,523
- ---------- ---------------------------------------------------- -------------- ---------------
Health Care Revenue - 12.5%
NR Berlin, MD, Hospital Rev. (Atlantic General
Hospital), 8.375s, 2022 $ 1,375 $ 1,456,689
Health Care Revenue - continued
BBB- Maryland Health & Higher Education Facilities
Authority Rev. (Doctors Community Hopital), 5.5s,
2024 $ 2,000 $ 1,668,080
NR Maryland Health & Higher Education Facilities
Authority Rev. (Francis Scott Key), 5.625s, 2025 1,500 1,418,970
AA- Maryland Health & Higher Education Facilities
Authority Rev. (Johns Hopkins Hospital), 0s, 2010 2,000 891,900
AA- Maryland Health & Higher Education Facilities
Authority Rev. (Johns Hopkins Hospital), 5s, 2023 1,500 1,321,605
NR Maryland Health & Higher Education Facilities
Authority Rev. (Medlantic Hospital Care Corp.),
8.375s, 2014 3,635 3,825,656
A Maryland Health & Higher Education Facilities
Authority Rev. (Peninsula Regional Medical), 5s,
2023 1,000 850,980
AA- Maryland Industrial Development Finance Authority,
Economic Development Rev.
(Holy Cross Health Systems Corp.), 5.5s, 2015 1,000 936,840
A Maryland Health & Higher Education Facilities
Authority Rev. (Good Samaritan Hospital), 5.75s,
2019 1,000 974,840
NR Prince George's County, MD, Hospital
Rev. (Dimensions Health Corp.), 5.3s, 2024 3,500 3,103,100
NR Prince George's County, MD, Hospital Rev. (Southeast
Healthcare System), 6.375s, 2023 2,900 2,642,045
---------------
$19,090,705
- ---------- ---------------------------------------------------- -------------- ---------------
Water and Sewer Utility Revenue - 3.8%
AAA Baltimore, MD, Wastewater Revenue, MBIA, 6s, 2015 $ 1,000 $ 1,048,980
AAA Baltimore, MD, Wastewater Revenue, MBIA, 5.65s,
2020++++ 2,000 1,953,540
AAA Baltimore, MD, Wastewater Revenue, MBIA, 7.21s,
2020++++ 3,000 2,850,000
---------------
$ 5,852,520
- ---------- ---------------------------------------------------- -------------- ---------------
Sales and Excise Tax Revenue - 0.6%
A Puerto Rico Highway & Transportation Authority Rev.,
5.5s, 2019 $ 1,000 $ 934,020
- ---------- ---------------------------------------------------- -------------- ---------------
Industrial Revenue (Corporate Guarantee) - 3.6%
NR Baltimore, MD, Industrial Rev. Board (Weyerhaeuser
Co.), 9s, 2006 $ 3,150 $ 3,251,934
AA Baltimore, MD, Port Facilities Rev. (E.I. du Pont de
Nemours & Co.), 6.5s, 2011 1,500 1,609,260
A Upper Potomac River Commission, MD, Pollution
Control Rev. (Westvaco Corp.), 10.5s, 2004 150 157,057
A Upper Potomac River Commission, MD, Pollution
Control Rev. (Westvaco Corp.), 9.125s, 2015 500 520,100
---------------
$ 5,538,351
- ---------- ---------------------------------------------------- -------------- ---------------
Universities - 1.9%
NR Maryland Health & Higher Education Facilities
Authority Rev. (Mt. St. Mary's College), 6.5s,
2009 $ 755 $ 672,012
AAA Morgan State University, MD, Academic & Auxiliary
Facilities, MBIA, 6.05s, 2015 1,500 1,584,105
9
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Universities - continued
AA+ University of Maryland, Auxiliary Facilities &
Tuition Rev., 0s, 2004 $1,000 $ 656,670
---------------
$ 2,912,787
- ---------- ---------------------------------------------------- -------------- ---------------
Other - 8.0%
NR Baltimore County, MD, 5.375s, 2013 $1,600 $ 1,525,696
BBB Maryland Health & Higher Education Facilities
Authority Rev. (Kennedy Institute), 6.75s, 2022 500 502,180
BBB Maryland Industrial Development Finance Authority
(American Center for Physics), 6.625s, 2017 1,500 1,525,425
NR Maryland Industrial Development Finance Authority
(YMCA/Baltimore), 8s, 2012 2,825 2,918,310
NR Maryland Industrial Development Finance
Authority (YMCA/Baltimore), 8.25s, 2012 925 960,566
AAA Washington D.C., Metropolitan Area Transportation
Authority, Gross Rev., FGIC, 5.125s, 2009 1,100 1,065,988
AAA Washington D.C., Metropolitan Area Transportation
Authority, Gross Rev., FGIC, 5.25s, 2014 4,000 3,796,440
---------------
$ 12,294,605
- ---------- ---------------------------------------------------- -------------- ---------------
Total Municipal Bonds (Identified Cost, $141,631,650) $149,184,358
------------------------------------------------------------------------------------- -----------------
Floating Rate Demand Notes - 1.2%
Lincoln County, WY, Pollution Control Rev. (Exxon),
due 2014 $ 200 $ 200,000
Uinta County, WY, Pollution Control Rev. (Chevron
Corp.), due 2020 1,600 1,600,000
- ---------- ---------------------------------------------------- -------------- ---------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,800,000
------------------------------------------------------------------------------------- -----------------
Total Investments (Identified Cost, $143,431,650) $150,984,358
Other Assets, Less Liabilities - 1.3% 2,006,238
Net Assets - 100.0% $152,990,596
------------------------------------------------------------------------------------- -----------------
</TABLE>
(section) Indexed security.
++++Inverse floating rate security.
###Security segregated as collateral for an open futures contract.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS NORTH CAROLINA MUNICIPAL BOND FUND
Municipal Bonds - 98.1%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited)Issuer (000 Omitted) Value
----------------------------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
General Obligation - 3.4%
AAA Charlotte, NC, Water & Sewer, 5.8s, 2013### $1,780 $ 1,843,813
AAA Charlotte, NC, Water & Sewer, 5.8s, 2014 5,050 5,198,268
AAA Charlotte, NC, Water & Sewer, 5.9s, 2019 2,820 2,893,235
AAA Durham, NC, 5.9s, 2013### 2,400 2,500,248
AAA Durham, NC, 5.9s, 2014 2,400 2,491,656
BBB+ Hertford County, NC, 9.5s, 2000 100 102,492
BBB+ Hertford County, NC, 9.5s, 2001 100 103,991
BBB+ Hertford County, NC, 9.5s, 2002 100 102,492
---------------
$15,236,195
- ---------- ---------------------------------------------------- -------------- ---------------
State and Local Appropriation - 12.3%
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 0s, 2004 $3,435 $ 2,208,945
State and Local Appropriation - continued
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 0s, 2005 $4,810 $ 2,912,166
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 0s, 2006 1,075 611,578
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 0s, 2008 3,000 1,494,420
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 5.25s,
2013 3,750 3,550,650
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 5.25s,
2020 2,600 2,403,752
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 5s, 2021 3,500 3,115,350
AAA Cumberland County, NC, Certificates of Participation
(Civic Center), AMBAC, 6.375s, 2010 1,100 1,164,449
AAA Cumberland County, NC, Certificates of Participation
(Civic Center), AMBAC, 0s, 2011 425 172,261
AAA Cumberland County, NC, Certificates of Participation
(Civic Center), AMBAC, 0s, 2013 1,000 358,700
AAA Dare County, NC, MBIA, 6.6s, 2006 2,100 2,267,181
AA Durham, NC, Certificates of Participation
(Hospital & Office Facilities), 5.875s, 2009 1,460 1,517,699
AA Durham, NC, Certificates of Participation (New
Durham Corp.), 6.875s, 2009 1,750 1,919,663
AAA Franklin County, NC, Certificates of Participation
(Jail & School), FGIC, 6.625s, 2014 2,000 2,127,380
AA Greensboro, NC, Certificates of Participation
(Coliseum Arena Project), 6.25s, 2011 2,180 2,330,180
AAA Harnett County, NC, Certificates of Participation,
AMBAC, 6.2s, 2006 1,000 1,075,470
AAA Harnett County, NC, Certificates of Participation,
AMBAC, 6.2s, 2009 2,500 2,605,625
AAA Pasquotank County, NC, Certificates of
Participation, MBIA, 5s, 2015 3,000 2,730,270
BBB Puerto Rico Housing, Bank & Finance Agency, 7.5s,
2006 7,000 7,694,540
A Puerto Rico Public Buildings Authority, 5.5s, 2007 2,550 2,561,449
A Puerto Rico Public Buildings Authority, Education &
Health, 6.285s, 2016 6,500 6,041,230
AAA Randolph County, NC, Certificates of Participation,
MBIA, 5.3s, 2015 2,750 2,585,495
AAA Scotland County, NC, Certificates of Participation
(Jail/Courthouse Project), CGIC, 6.75s, 2011 1,000 1,066,720
AAA Union County, NC, Certificates of Participation,
FSA, 6.375s, 2012 1,000 1,052,920
---------------
$55,568,093
- ---------- ---------------------------------------------------- -------------- ---------------
Refunded and Special Obligation - 13.1%
NR Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.125s, 2000 $1,670 $ 1,941,292
NR Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.25s, 2000 3,305 3,859,050
10
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Refunded and Special Obligation - continued
AAA Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 6.75s,
2021 $ 4,250 $ 4,766,205
AAA Craven, NC, Regional Medical Authority, MBIA, 7.2s,
2000 1,500 1,687,695
AAA Dare County, NC, School Bonds, MBIA, 6.9s, 2000 800 881,552
AAA Dare County, NC, School Bonds, MBIA, 6.9s, 2000 800 881,552
AAA Dare County, NC, School Bonds, MBIA, 6.9s, 2000 500 550,970
AAA Fayetteville, NC, Public Works Rev., FGIC, 7s, 2000 2,000 2,210,980
AAA Greensboro, NC, 6.3s, 2011 4,165 4,568,547
BBB+ North Carolina Eastern Municipal Power Agency,
7.75s, 1999 2,900 3,211,692
BBB+ North Carolina Eastern Municipal Power Agency, 7.5s,
2010 2,595 3,109,770
A- North Carolina Eastern Municipal Power Agency, 5s,
2017 8,165 7,604,799
A+ North Carolina Medical Care Commission, Hospital
Rev. (Carolina Medicorp), 7.25s, 2019 1,400 1,534,946
A+ North Carolina Medical Care Commission, Hospital
Rev. (Gaston Health Care), 0s, 2007 500 246,220
NR North Carolina Medical Care Commission, Hospital
Rev. (Presbyterian Health), 7.3s, 2000 1,000 1,129,160
NR North Carolina Medical Care Commission, Hospital
Rev. (Presbyterian Health), 7.375s, 2000 12,315 13,942,797
AAA North Carolina Municipal Power Agency, No. 1 Catawba
Electric Rev., AMBAC, 7.625s, 1998 820 884,108
NR Pender County, NC, Certificates of Participation
(Pender County Prison), 7.6s, 2001 1,900 2,184,354
NR Pender County, NC, Certificates of Participation
(Pender County Prison), 7.7s, 2001 1,000 1,154,200
AAA Pitt County, NC, Hospital Rev. (Pitt Memorial
Hospital), 6.75s, 2001 2,800 3,147,564
---------------
$59,497,453
- ---------- ---------------------------------------------------- -------------- ---------------
Solid Waste Revenue - 0.3%
NR Iredell, NC, Solid Waste Systems Rev., 6.25s, 2012 $ 1,250 $ 1,278,013
- ---------- ---------------------------------------------------- -------------- ---------------
Single Family Housing Revenue - 4.3%
A+ North Carolina Housing Finance Agency, 6.7s, 2018 $ 1,800 $ 1,865,610
A+ North Carolina Housing Finance Agency, 8.125s, 2019 2,070 2,139,428
A+ North Carolina Housing Finance Agency, 7.7s, 2021 2,525 2,593,983
A+ North Carolina Housing Finance Agency, 7.8s, 2021 2,585 2,667,875
A+ North Carolina Housing Finance Agency, 7.85s, 2028 6,505 6,755,182
A+ North Carolina Housing Finance Agency, 7.6s, 2032 3,215 3,328,554
---------------
$19,350,632
- ---------- ---------------------------------------------------- -------------- ---------------
Multi-Family Housing Revenue - 4.2%
A Asheville, NC, Housing Authority
(Asheville Terrace Apartments), 7.1s, 2011 $ 5,000 $ 5,211,600
NR Charlotte, NC, Housing Authority (Merrywood Senior
Adult Project), 9.75s, 2019 6,710 6,575,800
AA North Carolina Housing Finance Agency, 6.9s, 2024 4,880 5,101,064
NR Salisbury, NC, Housing Corp., (Yadkin Senior
Citizens), 6.75s, 2022 2,140 2,162,898
---------------
$19,051,362
- ---------- ---------------------------------------------------- -------------- ---------------
Insured Health Care Revenue - 4.2%
AAA Cumberland County, NC, Hospital Facilities Rev.
(Cumberland County Hospital), MBIA, 0s, 2009 $ 1,800 $ 836,460
AAA Cumberland County, NC, Hospital Facilities Rev.
(Cumberland County Hospital), MBIA, 6s, 2021 4,000 4,069,760
AAA North Carolina Medical Care Commission, Hospital
Rev. (Moore Regional), FGIC, 5.2s, 2013 6,750 6,278,985
AAA North Carolina Medical Care Commission, Hospital
Rev. (Moore Regional), FGIC, 5s, 2018 4,800 4,309,296
AAA Wake County, NC, Hospital Rev., MBIA, 5.125s, 2013 4,000 3,729,800
---------------
$19,224,301
- ---------- ---------------------------------------------------- -------------- ---------------
Health Care Revenue - 20.1%
A+ North Carolina Medical Care Commission, Hospital
Rev. (Carolina Medicorp), 5.5s, 2015 $ 2,250 $ 2,120,580
AA North Carolina Medical Care Commission, Hospital
Rev. (Carolina Medicorp), 6s, 2021 19,000 18,984,230
A+ North Carolina Medical Care Commission, Hospital
Rev. (Gaston Health Care), 5.5s, 2019 5,500 5,120,170
NR North Carolina Medical Care Commission, Hospital
Rev. (Halifax Memorial), 6.75s, 2014 1,355 1,371,314
NR North Carolina Medical Care Commission, Hospital
Rev. (Halifax Memorial), 6.75s, 2024 4,500 4,536,855
A North Carolina Medical Care Commission, Hospital
Rev. (Mercy Hospital), 6.5s, 2015 1,650 1,654,092
A North Carolina Medical Care Commission, Hospital
Rev. (Moore Memorial Hospital), 9.1s, 1999 800 829,288
AA North Carolina Medical Care Commission, Hospital
Rev. (Presbyterian Hospital), 5.5s, 2014 9,750 9,332,408
A+ North Carolina Medical Care Commission, Hospital
Rev. (Rex Hospital), 6.25s, 2017 5,750 5,888,173
NR North Carolina Medical Care Commission, Hospital
Rev. (Valdese General), 8.75s, 2016 5,575 5,960,121
BBB Northern Hospital District, Surry County,
NC, Health Care Facilities Rev., 7.875s, 2021 4,530 4,664,315
AA- Pitt County, NC, Rev. (Memorial Hospital), 5.25s,
2021## 20,000 18,289,800
AA University of North Carolina, Chapel
Hill, University Hospital Rev., 5.25s, 2019 3,000 2,795,520
11
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Health Care Revenue - continued
AA University of North Carolina, Chapel
Hill, University Hospital Rev., 5.25s, 2026 $10,500 $ 9,629,970
---------------
$ 91,176,836
- ---------- ---------------------------------------------------- -------------- ---------------
Electric and Gas Utility Revenue - 15.3%
A New Hanover County, NC, Industrial Facilities Rev.
(Carolina Power & Light Co.), 6.9s, 2009 $ 1,000 $ 1,062,730
BBB+ North Carolina Eastern Municipal Power Agency, 7s,
2007 5,000 5,434,500
BBB+ North Carolina Eastern Municipal Power Agency,
7.25s, 2007 5,000 5,533,000
BBB+ North Carolina Eastern Municipal Power Agency, 7.5s,
2010 3,005 3,424,799
AAA North Carolina Eastern Municipal Power Agency,
AMBAC, 6s, 2018 14,245 14,628,618
AAA North Carolina Eastern Municipal Power Agency, FSA,
5.75s, 2019 2,500 2,428,650
AAA North Carolina Municipal Power Agency,
No. 1, Catawba Electric Rev., MBIA, 0s, 2008 10,150 5,287,135
AAA North Carolina Municipal Power Agency,
No. 1, Catawba Electric Rev., MBIA, 0s, 2009 10,000 4,885,300
AAA North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., MBIA, 6s, 2011 5,000 5,248,700
AAA North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., MBIA, 6.72s, 2012++++ 3,000 2,787,000
AAA North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., AMBAC, 7.625s, 2014 180 190,427
AAA North Carolina Municipal Power Agency,
No. 1, Catawba Electric Rev., FSA, 6.2s, 2018 4,300 4,390,085
AAA North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., AMBAC, 5.375s, 2020 7,000 6,549,690
AAA Puerto Rico Electric Power Authority Rev., FSA, 6s,
2016 5,000 5,073,500
A Wake County, NC, Industrial Facilities
Rev. (Carolina Power & Light), 6.9s, 2009 2,000 2,125,460
---------------
$ 69,049,594
- ---------- ---------------------------------------------------- -------------- ---------------
Water and Sewer Utility Revenue - 3.2%
AAA Concord, NC, Utilities System Revenue, MBIA, 5.5s,
2019 $ 3,000 $ 2,884,650
AAA Kanapolis, NC, Certificates of Participation, MBIA,
7.375s, 2010 5,000 5,380,550
AA+ Winston-Salem, NC, Water & Sewer Systems Rev.,
6.25s, 2012 4,000 4,155,400
AA+ Winston-Salem, NC, Water & Sewer Systems Rev., 5.7s,
2017 2,250 2,216,947
---------------
$ 14,637,547
- ---------- ---------------------------------------------------- -------------- ---------------
Sales and Excise Tax Revenue - 1.1%
A Puerto Rico Highway & Transportation Authority Rev.,
6.625s, 2018 $ 2,715 $ 2,990,763
A Puerto Rico Highway & Transportation Authority Rev.,
5s, 2036 2,000 1,671,300
---------------
$ 4,662,063
- ---------- ---------------------------------------------------- -------------- ---------------
Industrial Revenue (Corporate Guarantee) - 10.7%
NR Alamance County, NC, Industrial Facilities &
Pollution Control Finance
Authority (A.O. Smith Corp.), 7.375s, 2009 $ 1,000 $ 1,000,990
NR Chatham County, NC, Industrial Facilities &
Pollution Control, 9s, 2006 1,260 1,300,774
Industrial Revenue (Corporate Guarantee) - continued
A Craven County, NC, Industrial Facilities & Pollution
Control Finance Authority (Weyerhaeuser Co.),
6.35s, 2010 $ 5,000 $ 5,138,900
NR Gaston County, NC, Industrial Facilities & Pollution
Control Finance Authority
(Combustion Engineering, Inc.), 8.85s, 2015 1,000 1,134,980
BBB Halifax County, NC, Industrial Facilities &
Pollution Control Finance Authority
(Champion International Corp.), 8.149s, 2019 1,500 1,633,710
BBB Haywood County, NC, Industrial Facilities &
Pollution Control Finance Authority (Champion
International Corp.), 8.1s, 2009 2,500 2,707,075
BBB Haywood County, NC, Industrial Facilities &
Pollution Control Finance Authority (Champion
International Corp.), 5.5s, 2018 5,200 4,772,144
NR Haywood County, NC, Industrial Facilities &
Pollution Control Finance Authority (Champion
International Corp.), 6s, 2020 3,100 3,100,000
BBB Haywood County, NC, Industrial Facilities &
Pollution Control Finance Authority (Champion
International Corp.), 5.75s, 2025 3,500 3,220,700
NR Henderson County, NC, Industrial Facilities &
Pollution Control Finance Authority (Figgie
International Real Estate), 8s, 2009 1,400 1,413,244
A Martin County, NC, Industrial Facilities & Pollution
Control Finance Authority (Weyerhaeuser Co.),
7.25s, 2014 7,000 7,625,730
A Martin County, NC, Industrial Facilities & Pollution
Control Finance Authority (Weyerhaeuser Co.),
6.8s, 2024 7,500 7,780,050
A Martin County, NC, Industrial Facilities & Pollution
Control Finance Authority (Weyerhaeuser Co.), 6s,
2025 2,000 1,917,420
AAA Mecklenburg County, NC, Industrial Facilities &
Pollution Control Finance Authority (Precision
Steel), 7.75s, 2014 2,600 2,828,514
NR Surry County, NC, Industrial Facilities & Pollution
Control Finance Authority (Weyerhaeuser Co.),
9.25s, 2002 1,500 1,757,160
NR Wake County, NC, Industrial Facilities & Pollution
Control Finance Authority (Mallinkcodt), 6.75s,
2012 1,100 1,154,142
---------------
$ 48,485,533
- ---------- ---------------------------------------------------- -------------- ---------------
Universities - 5.9%
AAA Appalachian State University, NC, MBIA, 6.1s, 2014 $ 1,140 $ 1,175,830
AAA Appalachian State University, NC, MBIA, 6.125s, 2019 4,870 5,013,422
AA+ North Carolina Education Facilities Finance Agency
(Duke University), 6.75s, 2021 11,500 12,259,115
AA University of North Carolina (Chapel Hill), 0s, 2012 9,105 3,396,438
AA University of North Carolina (Chapel Hill), 0s, 2013 4,285 1,485,952
AAA University of North Carolina (Charlotte), MBIA,
5.5s, 2021 3,455 3,300,872
---------------
$ 26,631,629
- ---------- ---------------------------------------------------- -------------- ---------------
Total Municipal Bonds (Identified Cost, $422,976,444) $443,849,251
------------------------------------------------------------------------------------- -----------------
</TABLE>
12
<PAGE>
Portfolio of Investments -- continued
Floating Rate Demand Note -- 0.1%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
Wake County, NC, Industrial Facilities & Pollution
Control Rev. (Carolina Power & Light Co.), due
2017, at Identified Cost $ 600 $ 600,000
- ---------- ---------------------------------------------------- -------------- ---------------
Total Investments (Identified Cost, $423,576,444) $444,449,251
Other Assets, Less Liabilities - 1.8% 8,096,301
Net Assets - 100.0% $452,545,552
------------------------------------------------------------------------------------- -----------------
</TABLE>
(section) Indexed security.
++++Inverse floating rate security.
+Restricted security
###Security segregated as collateral for an open futures contract.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
Municipal Bonds - 96.6%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
----------------------------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
General Obligation - 2.6%
AA Charleston County, SC, 5.5s, 2014 $1,250 $ 1,234,037
A Commonwealth of Puerto Rico, 5.25s, 2018 500 457,040
AAA Dorchester County, SC, FGIC, 5.2s, 2017 2,250 2,084,737
A Puerto Rico Public Buildings Authority, 5.7s, 2009 1,000 1,005,120
---------------
$ 4,780,934
- ---------- ---------------------------------------------------- -------------- ---------------
State and Local Appropriation - 7.4%
AAA Berkeley County, SC, School District, AMBAC, 6.3s,
2016 $ 1,800 $ 1,873,854
AAA Greenville County, SC, Certificates of Participation
(Courthouse & Detention Center), 5.7s, 2017 1,000 970,160
AAA Greenville County, SC, Certificates of Participation
(Greenville Tech College), AMBAC, 5.9s, 2019 1,100 1,093,136
AAA Hilton Head Island, SC, Public Finance Corp.,
Certificates of Participation, AMBAC, 5.75s, 2014 2,000 1,979,740
AAA Lexington County, SC, School District No. 1,
Certificates of Participation
(Gilbert Middle School), MBIA, 6.65s, 2012 1,000 1,054,810
BBB+ Myrtle Beach, SC, Public Finance Corp., Certificates
of Participation (Convention Center), 6.875s, 2017 2,500 2,588,000
AAA North Charleston, SC, Certificates of
Participation (Coliseum), FGIC, 6s, 2016 1,355 1,380,839
A Puerto Rico Public Buildings Authority, 5.5s, 2021 1,000 942,720
NR Williamsburg County, SC, School District Public
Facilities Corp., Certificates of Participation,
7.5s, 2006 175 172,483
NR Williamsburg County, SC, School District Public
Facilities Corp., Certificates of Participation,
7.5s, 2007 190 187,125
NR Williamsburg County, SC, School District Public
Facilities Corp., Certificates of Participation,
7.5s, 2008 205 201,754
NR Williamsburg County, SC, School District Public
Facilities Corp., Certificates of Participation,
7.5s, 2009 220 216,374
State and Local Appropriation - continued
NR Williamsburg County, SC, School District Public
Facilities Corp., Certificates of Participation,
7.5s, 2012 $ 270 $ 256,734
NR Williamsburg County, SC, School District Public
Facilities Corp., Certificates of Participation,
7.5s, 2014 315 298,686
NR Williamsburg County, SC, School District Public
Facilities Corp., Certificates of Participation,
7.5s, 2018 635 599,433
---------------
$13,815,848
- ---------- ---------------------------------------------------- -------------- ---------------
Refunded and Special Obligation - 19.5%
NR Anderson County, SC, 7.75s, 1997 $ 500 $ 533,540
A+ Calhoun, SC, Solid Waste Disposal Rev. (Eastman
Kodak), 6.75s, 2017 1,000 1,119,940
AA Charlestown County, SC, Alumax Project, 6.5s, 2001 1,315 1,446,131
AAA Charlestown County, SC, Certificates of
Participation (Charlestown Public Facilities
Corp.), MBIA, 7.1s, 2001 2,000 2,258,840
AA Columbia, SC, Waterworks & Sewer Rev., 0s, 2004 1,500 1,029,150
AA Columbia, SC, Waterworks & Sewer Rev., 0s, 2006 2,045 1,237,490
AAA Commonwealth of Puerto Rico, Public Improvement,
6.8s, 2002 425 481,244
AAA Greenville Hospital System, SC, Hospital Facilities
Rev., "A", FGIC, 7.8s, 1998 1,950 2,126,007
AAA Greenville Hospital System, SC, Hospital Facilities
Rev., "B", FGIC, 7.8s, 1998 1,500 1,635,390
AAA Greenwood County, SC, Hospital Rev.
(Self Memorial Hospital), BIGI, 8.25s, 1997 500 540,715
AAA Greenwood County, SC, Hospital Rev.
(Self Memorial Hospital), BIGI, 8.375s, 1997 1,000 1,083,230
AAA Laurens, SC, Utility Systems Rev., FGIC, 7.625s,
1998 1,100 1,196,250
AAA Lexington County, SC, School District No. 1,
Certificates of Participation, (White Knoll Middle
School), CGIC, 7.65s, 1999 1,400 1,553,734
AAA Myrtle Beach, SC, Water & Sewer Rev., 6s, 2000 1,780 1,874,678
AAA Myrtle Beach, SC, Water & Sewer Rev., 6s, 2000 1,750 1,843,082
AAA North Charleston, SC, Sewer Rev., MBIA, 7.75s, 1998 1,250 1,371,475
AAA Puerto Rico Aqueduct & Sewer Authority, 9s, 2005 750 972,112
AAA Puerto Rico Highway & Transportation Authority,
Highway Rev., 6.625s, 2002 300 336,876
AA Richland County, SC, 6.25s, 2000 1,260 1,357,020
AAA Richland County, SC, Certificates of Participation,
FGIC, 0s, 2005 1,160 745,427
AAA Richland County, SC, Certificates of Participation,
FGIC, 0s, 2006 1,160 702,310
AAA Richland County, SC, Certificates of Participation,
FGIC, 0s, 2007 1,160 660,399
NR South Carolina Jobs, Economic Development Authority
(Carolina Hospital System Project), 7.55s, 2002 2,000 2,335,880
AAA South Carolina Public Service Authority, "C", 7.1s,
2001 1,220 1,379,795
AAA South Carolina Public Service Authority (Santee
Cooper), 6.625s, 2002 4,000 4,472,000
13
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Refunded and Special Obligation - continued
A- Spartanburg County, SC, Hospital Facilities Rev.
(Mary Black Hospital), 8.25s, 1998 $ 500 $ 555,235
AAA York County, SC, School District No. 3, MBIA, 7.5s,
1998 575 624,898
AAA York, SC, Water & Sewer Rev., AMBAC, 7.875s, 1996 620 641,266
---------------
$36,114,114
- ---------- ---------------------------------------------------- -------------- ---------------
Solid Waste Revenue - 1.0%
A Charleston County, SC, Resource
Recovery Rev. (Foster Wheeler), 9.25s, 2010 $1,750 $ 1,907,377
- ---------- ---------------------------------------------------- -------------- ---------------
Single Family Housing Revenue - 6.2%
AA South Carolina Housing Finance & Development
Authority, 8.6s, 2019 $1,000 $ 1,035,950
AA South Carolina Housing Finance & Development
Authority, 7.55s, 2011 1,750 1,815,415
AA South Carolina Housing Finance & Development
Authority, 7.75s, 2022 2,650 2,766,573
AA South Carolina Housing Finance & Development
Authority, 7.8s, 2022 1,000 1,039,430
AA South Carolina Housing Finance & Development
Authority, 7.9s, 2032 4,610 4,809,428
---------------
$11,466,796
- ---------- ---------------------------------------------------- -------------- ---------------
Multi-Family Housing Revenue - 2.3%
AA South Carolina Housing Finance & Development
Authority (Fairway Apartments), 7.625s, 2033 $1,975 $ 2,070,748
BBB+ South Carolina Housing Finance & Development
Authority (Hunting Ridge Apartments), 6.75s, 2025 1,000 992,320
AA- South Carolina Housing Finance & Development
Authority (Runaway Bay Apartments), 6.125s, 2015 1,300 1,266,876
---------------
$ 4,329,944
- ---------- ---------------------------------------------------- -------------- ---------------
Insured Health Care Revenue - 9.3%
AAA Charleston County, SC, Hospital Rev. (Medical
Society Health Project), MBIA, 5.5s, 2019 $2,550 $ 2,390,319
AAA Charleston County, SC, Hospital Rev. (Medical
Society Health Project), MBIA, 5s, 2022 2,450 2,129,687
AAA Charleston County, SC, Hospital Rev. (Medical
Society Health Project), 5.625s, 2025 1,000 941,920
AAA Greenwood County, SC, Hospital Rev.
(Self Memorial Hospital), MBIA, 5.875s, 2017 1,000 1,000,540
AAA Pickens & Richland Counties, SC, Hospital Rev.
(Baptist Hospital), AMBAC, 5.75s, 2021 3,635 3,544,888
AAA South Carolina Jobs, Economic Development Authority,
Hospital Facilities Rev. (Anderson Area Medical
Center), MBIA, 5.25s, 2015 1,750 1,611,890
AAA South Carolina Jobs, Economic Development Authority,
Hospital Facilities Rev. (Tuomey Regional Medical
Center), MBIA, 5.75s, 2015 1,000 982,550
AAA South Carolina Jobs, Economic Development Authority,
Hospital Facilities Rev. (Tuomey Regional Medical
Center), MBIA, 5.5s, 2020 2,390 2,257,737
Insured Health Care Revenue - continued
AAA Spartanburg County Health Services District Inc.,
Hospital Rev., AMBAC, 5.5s, 2015 $1,000 $ 955,540
AAA Spartanburg County Health Services District Inc.,
Hospital Rev., AMBAC, 5.3s, 2020 1,500 1,385,055
---------------
$17,200,126
- ---------- ---------------------------------------------------- -------------- ---------------
Health Care Revenue - 7.5%
NR Charlestown County, SC, First Mortgage
Rev. (Driftwood Health Care), 12.5s, 2014 $2,085 $ 2,120,382
NR Greenville County, SC, First Mortgage Rev. (Chestnut
Hill), 10.125s, 2016 1,925 1,925,000
AA- Greenville Hospital System, SC, Hospital Facilities
Rev., 6s, 2020 5,400 5,298,372
NR Horry County, SC, Hospital Facilities Rev. (Conway
Hospital), 6.75s, 2012 4,500 4,570,515
---------------
$13,914,269
- ---------- ---------------------------------------------------- -------------- ---------------
Electric and Gas Utility Revenue - 11.9%
A Colleton & Dorchester Counties, SC, Pollution
Control Rev., 6.6s, 2014 $3,000 $ 3,165,030
A Fairfield County, SC, Pollution Control
Rev. (South Carolina Electric Co.), 6.5s, 2014 1,250 1,329,512
AAA Piedmont Municipal Power Agency, SC, Electric Rev.,
FGIC, 6.25s, 2021 4,600 4,863,902
AAA Piedmont Municipal Power Agency, SC, Electric Rev.,
FGIC, 5s, 2022 2,300 2,010,844
A- Puerto Rico Electric Power Authority, 6.125s, 2008 1,025 1,074,548
A- Puerto Rico Electric Power Authority, 5.5s, 2020 1,000 932,770
AAA Puerto Rico Telephone Authority Rev.,
AMBAC, 5.59s, 2004S. 1,000 941,000
AAA South Carolina Public Service Authority, MBIA,
6.923s, 2013++++ 3,000 2,775,000
AAA South Carolina Public Service Authority, FGIC,
5.875s, 2023 5,000 4,989,850
---------------
$22,082,456
- ---------- ---------------------------------------------------- -------------- ---------------
Water and Sewer Utility Revenue - 17.4%
AAA Cayce, SC, Waterworks & Sewer Rev., AMBAC, 5.25s,
2015 $1,500 $ 1,389,945
AA- Charleston County, SC, Waterworks & Sewer Rev., 6s,
2012 2,000 2,047,020
AAA Charleston County, SC, Waterworks & Sewer Rev.,
MBIA, 5s, 2022 3,150 2,780,380
AA Columbia, SC, Waterworks & Sewer Rev., 0s, 2005 2,245 1,443,900
AA Columbia, SC, Waterworks & Sewer Rev., 0s, 2006 9,330 5,654,166
AA Columbia, SC, Waterworks & Sewer Rev., 5.375s, 2012 3,500 3,448,725
NR Laurens County, SC, Water & Sewer
Commission, Sewer System Rev., 5.5s, 2014 1,080 1,032,156
AAA Laurens County, SC, Public Utility Systems
Refunding, FGIC, 5s, 2018 2,395 2,113,590
AAA Myrtle Beach, SC, Water & Sewer Rev., AMBAC, 5.5s,
2013 1,000 979,290
A Puerto Rico Commonwealth Aqueduct & Sewer Authority
Rev., 5s, 2015 1,000 898,060
AAA Rock Hill, SC, Utility Systems Rev., AMBAC, 5s, 2020 1,285 1,139,540
AAA St. Andrews, SC, Public Services District, Sewer
System Rev., FGIC, 7.75s, 2018 1,000 1,065,190
14
<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
A+ South Carolina Resources Authority (Local Government
Program), 7.25s, 2020 $3,000 $ 3,207,450
AAA Union, SC, Combined Public Utility System Rev.,
FGIC, 5s, 2021 650 580,750
AAA Western Carolina Regional Sewer Authority, AMBAC,
0s, 2007 4,400 2,433,820
NR York County, SC, Water & Sewer Rev., 6.5s, 2025 2,000 1,981,760
---------------
$ 32,195,742
- ---------- ---------------------------------------------------- -------------- ---------------
Sales and Excise Tax Revenue - 0.8%
A Puerto Rico Highway & Transportation Authority Rev.,
5.5s, 2019 $1,500 $ 1,401,030
- ---------- ---------------------------------------------------- -------------- ---------------
Industrial Revenue (Corporate Guarantee) - 10.1%
BBB+ Chester County, SC, Industrial Rev. (Springs
Industries, Inc.), 7.35s, 2014 $1,000 $ 1,072,000
BBB+ Chester County, SC, Industrial Rev. (Springs
Industries, Inc.), 7.8s, 2014 1,025 1,110,464
AA- Darlington County, SC, Industrial
Development Rev. (Nucor Corp.), 5.75s, 2023 2,000 1,892,100
A+ Darlington County, SC, Industrial Development Rev.
(Sunoco Products Co.), 6.125s, 2025 1,500 1,502,715
NR Fairfield County, SC, Industrial Rev. (Rite Aid,
Inc.), 7.9s, 2016 2,950 3,044,872
NR Greenville County, SC, Industrial Rev. (Kroger Co.),
7.85s, 2015 500 543,115
NR Lexington County, SC, Industrial Rev. (J.B. White &
Co.), 8s, 2005 655 699,409
AA- Oconee County, SC, Pollution Control Rev. (Duke
Power Co.), 7.5s, 2017 1,000 1,090,590
A- Richland County, SC, Pollution Control Rev. (Union
Camp Corp.), 6.55s, 2020 1,800 1,886,850
A- Richland County, SC, Solid Waste Facilities Rev.
(Union Camp Corp.), 6.75s, 2022 2,000 2,097,620
A+ York City, SC, Industrial Rev. (Hoechst Celanese),
5.7s, 2024 4,000 3,771,680
---------------
$ 18,711,415
- ---------- ---------------------------------------------------- -------------- ---------------
Universities - 0.6%
AAA Coastal Carolina University, 6.875s, 2026 $1,000 $ 1,078,710
- ---------- ---------------------------------------------------- -------------- ---------------
Total Municipal Bonds (Identified Cost, $170,214,802) $178,998,761
------------------------------------------------------------------------------------- -----------------
Floating Rate Demand Notes - 1.9%
Charleston County, SC, Industrial Rev. (Massey
Coal), due 2007 $3,200 $ 3,200,000
Lincoln County, WY, Pollution Control Rev. (Exxon),
due 2014 200 200,000
Uinta County, WY, Pollution Control Rev. (Chevron),
due 2020 100 100,000
- ---------- ---------------------------------------------------- -------------- ---------------
Total Floating Rate Demand Notes, at Identified Cost and Value $ 3,500,000
------------------------------------------------------------------------------------- -----------------
Total Investments (Identified Cost, $173,714,802) $182,498,761
Other Assets, Less Liabilities - 1.5% 2,721,889
Net Assets - 100.0% $185,220,650
------------------------------------------------------------------------------------- -----------------
</TABLE>
(section) Indexed security.
++++Inverse floating rate security.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS TENNESSEE MUNICIPAL BOND FUND
Municipal Bonds - 96.2%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
----------------------------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
General Obligation - 9.8%
AAA Huntington, TN, School District, AMBAC, 5.35s, 2021 $1,050 $ 989,468
AA Metropolitan Government of Nashville & Davidson
County, TN, 6.125s, 2014 1,000 1,036,570
AA Metropolitan Government of Nashville & Davidson
County, TN, 6.125s, 2019 3,255 3,363,294
AA Metropolitan Government of Nashville & Davidson
County, TN, 6.15s, 2025 1,000 1,031,580
AAA Puerto Rico Commonwealth, MBIA, 5.375s, 2022 1,000 946,910
AA- Rutherford County, TN, 0s, 2015 1,500 481,035
AAA Sevier County, TN, Public Building Authority, AMBAC,
5.6s, 2015 800 772,328
AA+ Shelby County, TN, 5.125s, 2015 1,000 934,710
NR Territory of Virgin Islands, 7.75s, 2006 415 455,068
AAA Union County, TN, AMBAC, 5.25s, 2020 1,000 927,940
AAA Weakley County, TN, School, FGIC, 5.1s, 2015 1,125 1,041,773
---------------
$11,980,676
- ---------- ---------------------------------------------------- -------------- ---------------
State and Local Appropriation - 3.2%
AAA Gatlinburg, TN, Public Building Authority
(Gatlinburg Convention Center), AMBAC, 6.9s, 2012 $1,000 $ 1,073,580
A Puerto Rico Public Buildings Authority, Education &
Health, 6.285s, 2016 2,000 1,858,840
A Puerto Rico Public Buildings Authority, 5.5s, 2021 1,000 942,720
---------------
$ 3,875,140
- ---------- ---------------------------------------------------- -------------- ---------------
Refunded and Special Obligation - 21.8%
AAA Bristol, TN, Health & Educational Facilities Board
Rev. (Bristol Memorial), FGIC, 7s, 2001 $ 500 $ 560,185
AAA Gladeville, TN, Utility District, Waterworks Rev.,
FGIC, 7.4s, 2000 500 558,405
AAA Knox County, TN, Health, Educational & Housing
Facilities Board (Fort Sanders), MBIA, 8s, 2008 2,000 2,148,760
AAA Knox County, TN, Health, Educational & Housing
Facilities Board (Mercy Health), AMBAC, 7.6s, 1999 3,500 3,893,610
NR Knox County, TN, Industrial Development Board, 0s,
2016 8,325 2,210,870
NR Memphis, TN, Electric Systems Rev., 6.75s, 2000 1,500 1,637,640
AAA Memphis-Shelby County, TN, Airport Authority, MBIA,
8s, 2008 3,500 3,781,750
AAA Mt. Juliet, TN, Public Building Authority (Madison),
MBIA, 7.7s, 2004 1,100 1,377,662
AAA Mt. Juliet, TN, Public Building Authority (Madison),
MBIA, 7.8s, 2004 3,500 4,406,010
NR Mt. Juliet, TN, Public Building Authority (Poplar
Grove), 8.375s, 1999 1,430 1,606,777
NR New Tazewell, TN, Health, Educational & Housing
Facilities Board (Lincoln), 7.25s, 1997 2,000 2,105,220
AAA Puerto Rico Highway & Transportation Authority Rev.,
8.125s, 1998 670 740,189
AAA Shelby County, TN, 6.5s, 1999 1,120 1,208,077
NR Wilson County, TN, Water & Wastewater Authority,
Waterworks Rev., 8s, 1999 500 558,190
---------------
$26,793,345
- ---------- ---------------------------------------------------- -------------- ---------------
15
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Single Family Housing Revenue - 4.0%
A Shelby County, TN, Single Family Mortgage Rev., FHA,
0s, 2015 $10,000 $ 1,516,900
A+ Tennessee Housing Development Agency, 7.4s, 2016 305 315,754
A+ Tennessee Housing Development Agency, 8.125s, 2021 135 132,883
A+ Tennessee Housing Development Agency, 7.65s, 2022 1,000 1,037,800
A+ Tennessee Housing Development Agency, 7.375s, 2023 1,000 1,037,910
A+ Tennessee Housing Development Agency, 7.125s, 2026 800 843,088
---------------
$ 4,884,335
- ---------- ---------------------------------------------------- -------------- ---------------
Multi-Family Housing Revenue - 4.9%
AAA Franklin, TN, Industrial Development Rev., FHA,
6.75s, 2027 $ 1,000 $ 1,031,440
NR Jackson, TN, Health, Education &
Housing Facilities Board, FHA, 7.1s, 2028 1,610 1,678,667
AAA Metropolitan Government of Nashville & Davidson
County, TN, Health & Education, FHA, 7.25s, 2032 495 514,864
NR Metropolitan Government of Nashville & Davidson
County, TN, Industrial, FHA, 6.95s, 2026 1,000 1,036,000
A+ Metropolitan Government of Nashville & Davidson
County, TN, Industrial, FHA, 7.7s, 2029 1,000 1,044,580
AA- Metropolitan Government of Nashville & Davidson
County, TN, Industrial, FHA, 7.5s, 2029 695 725,684
---------------
$ 6,031,235
- ---------- ---------------------------------------------------- -------------- ---------------
Insured Health Care Revenue - 10.7%
AAA Bristol, TN, Health & Educational Facilities Board
Rev. (Bristol Memorial), FGIC, 8.87s, 2021 $ 1,325 $ 1,373,005
AAA Bristol, TN, Health & Educational Facilities Board
Rev. (Bristol Memorial), FGIC, 5.25s, 2021 1,000 916,120
AAA Chattanooga-Hamilton County, TN, Hospital Authority
(Erlanger Medical Center), FSA, 5.5s, 2013 1,500 1,458,690
AAA Jackson, TN, Hospital Refunding
(General Hospital), AMBAC, 5.625s, 2015 2,000 1,941,820
AAA Johnson City, TN, Health & Education Financing
Authority (Johnson City
Medical Center Hospital), MBIA, 5.25s, 2016 2,625 2,415,551
AAA Knox County, TN, Health, Educational & Housing
Facilities Board (Fort Sanders), MBIA, 5.75s, 2014 3,250 3,263,585
AAA Knox County, TN, Health, Educational & Housing
Facilities Board, (Fort Sanders), MBIA, 5.25s,
2023 2,000 1,823,480
---------------
$13,192,251
- ---------- ---------------------------------------------------- -------------- ---------------
Health Care Revenue - 4.8%
NR Clarksville, TN, Hospital Rev. (Clarksville Memorial
Hospital), 6.375s, 2018 $ 1,000 $ 974,730
A Cookeville, TN, Industrial Development Board,
Hospital Rev. (Cookville General), 5.75s, 2010 2,000 1,839,660
NR Knox County, TN, Health, Educational & Housing
Facilities Board (Baptist East), 8.5s, 2004 1,300 1,373,138
Health Care Revenue - continued
NR Knox County, TN, Health, Educational & Housing
Facilities Board (Baptist East), 8.6s, 2016 $ 710 $ 747,879
BBB+ Knox County, TN, Health, Educational & Housing
Facilities Board (East Tennessee Children's),
6.5s, 2012 1,000 997,490
---------------
$ 5,932,897
- ---------- ---------------------------------------------------- -------------- ---------------
Electric and Gas Utility Revenue - 1.5%
AAA Puerto Rico Telephone Authority Rev.,
AMBAC, 5.59s, 2004S. $ 2,000 $ 1,882,000
- ---------- ---------------------------------------------------- -------------- ---------------
Water and Sewer Utility Revenue - 18.7%
AAA Madison, TN, Utility Waterworks Refunding, MBIA, 5s,
2019 $ 2,750 $ 2,495,708
AAA Metropolitan Government of Nashville & Davidson
County, TN, Water & Sewer Rev., FGIC, 6.5s, 2010 1,000 1,108,520
AAA Metropolitan Government of Nashville & Davidson
County, TN, Water & Sewer Rev., FGIC, 5.2s, 2013 2,000 1,923,720
AAA Metropolitan Government of Nashville & Davidson
County, TN, Water & Sewer Rev., FGIC, 5.1s, 2016 2,200 2,019,820
AAA Metropolitan Government of Nashville & Davidson
County, TN, Water & Sewer Rev., RIBS, AMBAC,
8.054s, 2022++++ 1,000 1,006,000
NR Mt. Juliet, TN, Public Building Authority
(Cumberland), 7.55s, 2024 2,045 2,189,929
AAA Mt. Juliet, TN, Public Building
Authority (Hermitage), MBIA, 7.5s, 2009 300 319,815
NR Mt. Juliet, TN, Public Building Authority
(Milcroft), 7.55s, 2024 1,215 1,301,107
NR Mt. Juliet, TN, Public Building Authority (New
Market), 8.375s, 2024 565 607,228
NR Mt. Juliet, TN, Public Building Authority (Tipton),
7.5s, 2004 355 386,041
AAA North Anderson County, TN, Utility
District Waterworks Rev., MBIA, 5.6s, 2019 925 890,368
NR Poplar Grove, TN, Utility District, Waterworks Rev.,
6.375s, 2011 500 513,375
A Puerto Rico Commonwealth Aqueduct & Sewer Rev.,
6.25s, 2012 1,000 1,055,310
AAA West Knox Utility District, Knox County, TN, Water &
Sewer Rev., MBIA, 0s, 2002 1,315 936,149
AAA West Knox Utility District, Knox County, TN, Water &
Sewer Rev., MBIA, 0s, 2003 1,045 701,791
AAA West Knox Utility District, Knox County, TN, Water &
Sewer Rev., MBIA, 0s, 2004 1,920 1,213,977
AAA West Knox Utility District, Knox County, TN, Water &
Sewer Rev., MBIA, 0s, 2005 1,920 1,140,729
AAA West Knox Utility District, Knox County, TN, Water &
Sewer Rev., MBIA, 0s, 2006 1,920 1,080,998
AAA West Knox Utility District, Knox County, TN, Water &
Sewer Rev., MBIA, 0s, 2007 1,920 1,012,781
NR Wilson County, TN, Water & Wastewater Authority, 6s,
2014 1,000 1,013,480
---------------
$22,916,846
- ---------- ---------------------------------------------------- -------------- ---------------
16
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Sales and Excise Tax Revenue - 1.6%
A Puerto Rico Commonwealth Highway &
Transportation Authority Rev., 5.5s, 2019 $1,000 $ 934,020
A- Tennessee Local Development Authority
Rev., Community Provider Loan, 7s, 2021 1,000 1,066,720
---------------
$ 2,000,740
- ---------- ---------------------------------------------------- -------------- ---------------
Industrial Revenue (Corporate Guarantee) - 11.9%
BB Bristol, TN, Industrial Development Authority (Kmart
Corp.), 7.5s, 2008 $1,105 $ 944,344
AA- Humphreys County, TN, Certificates of Participation
(DuPont), 6.7s, 2024 1,750 1,850,730
NR Knox County, TN, Industrial
Development Board (Kroger Co.), 8.1s, 2003 2,000 2,213,060
NR Lawrenceburg, TN, Industrial Development Board
(Tridon, Inc.), 9.625s, 2006 1,000 1,025,390
A- Maury County, TN, Industrial Development Board,
Pollution Control Rev. (Saturn Corp.), 6.5s, 2024 1,500 1,552,410
BBB McMinn County, TN, Industrial Development Board,
Pollution Control Rev. (Bowater), 7.625s, 2016 1,000 1,061,710
BBB Memphis-Shelby County, TN, Airport Authority
(Federal Express Corp.), 7.875s, 2009 2,755 3,027,414
BBB Memphis-Shelby County, TN, Airport
Authority (Federal Express Corp.), 6.2s, 2014 1,000 968,700
NR Metropolitan Government of Nashville & Davidson
County, TN, IDR (Wilson Sporting), 7.75s, 2014 1,000 1,096,810
A- Puerto Rico Industrial, Medical & Environmental
Pollution Control Facilities, Finance Authority
Rev. (Baxter Travenol Laboratories), 8s, 2012 750 822,780
---------------
$ 14,563,348
- ---------- ---------------------------------------------------- -------------- ---------------
Universities - 3.3%
AA Jackson, TN, Health, Educational & Housing
Facilities Board (Lambuth University), 5.9s, 2015 $1,000 $ 999,510
AA Metropolitan Government of Nashville & Davidson
County, TN, Health, Educational & Housing
Facilities Board (Vanderbilt University), 5.125s,
2013 490 460,620
AA Metropolitan Government of Nashville & Davidson
County, TN, Health, Educational & Housing
Facilities Board (Vanderbilt University), 7.625s,
2016 1,000 1,076,600
AA Metropolitan Government of Nashville & Davidson
County, TN, Health, Educational & Housing
Facilities Board (Vanderbilt University), 5.2s,
2018 1,600 1,495,696
---------------
$ 4,032,426
- ---------- ---------------------------------------------------- -------------- ---------------
Total Municipal Bonds (Identified Cost, $112,560,572) $118,085,239
------------------------------------------------------------------------------------- -----------------
Floating Rate Demand Note - 2.2%
Uinta County, WY, Pollution Control Rev. (Chevron),
due 2020, at Identified Cost $2,700 $ 2,700,000
- ---------- ---------------------------------------------------- -------------- ---------------
</TABLE>
Call Option Purchased - 0.3%
<TABLE>
<CAPTION>
Principal Amount
of Contracts
Issuer/Expiration Date/Strike Price (000 Omitted) Value
----------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
State of New Jersey, "D"/2003/102
(Premium Paid, $125,600) $2,000 $ 382,000
----------------------------------------------------------------- ---------------- -----------------
Total Investments (Identified Cost, $115,386,172) $121,167,239
Other Assets, Less Liabilities - 1.3% 1,578,536
Net Assets - 100.0% $122,745,775
------------------------------------------------------------------------------------- -----------------
</TABLE>
(section) Indexed security.
++++Inverse floating rate security.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS VIRGINIA MUNICIPAL BOND FUND
Municipal Bonds - 94.8%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
----------------------------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
General Obligation - 10.4%
AA Chesapeake, VA, Water & Sewer Rev., 5s, 2025 $13,100 $11,590,749
NR Lebanon, VA, 7.6s, 2005 375 381,712
NR Lebanon, VA, 7.75s, 2010 310 316,098
AA Norfolk, VA, 5.25s, 2013 3,000 2,861,490
AA- Portsmouth, VA, 6.375s, 2012 1,555 1,631,179
AA Richmond, VA, 6.25s, 2018 2,710 2,767,452
AA Richmond, VA, 0s, 2006 1,000 592,500
AA Richmond, VA, 0s, 2006 2,500 1,481,250
AA Richmond, VA, 0s, 2007 5,280 2,947,032
AA Richmond, VA, 0s, 2008 2,000 1,045,540
AA Richmond, VA, 0s, 2008 5,270 2,754,998
AA Richmond, VA, 0s, 2009 5,175 2,528,919
AA Roanoke, VA, 5s, 2012 3,165 2,975,037
AA Roanoke, VA, 5s, 2013 3,330 3,105,458
NR Roanoke, VA, 5s, 2014 3,505 3,242,055
A Suffolk, VA, 6.5s, 2006 1,250 1,308,650
AAA State of Virginia (Higher Educational Institute),
0s, 1996 1,000 993,660
AAA State of Virginia (Higher Educational Institute),
0s, 1998 1,295 1,186,621
AAA State of Virginia (Higher Educational Institute),
0s, 1999 1,300 1,135,173
AA Virginia, State Public School Authority, 6.5s, 2013 1,875 2,002,631
---------------
$46,848,204
- ---------- ---------------------------------------------------- -------------- ---------------
State and Local Appropriation - 7.8%
NR Chesterfield County, VA, Industrial Development
Authority, Public Facilities, 7.5s, 2008 $ 1,720 $ 1,754,108
AA Fairfax County, VA, Economic Development Authority,
Lease Rev., 5.25s, 2018+ 5,500 5,061,925
AA Henrico County, VA, Industrial Development
Authority, Lease Rev., 6.5s, 2010 5,000 5,458,300
NR New Kent County, VA, Industrial Development
Authority, Public Facilities, 7.5s, 2011 700 749,938
A Puerto Rico Public Buildings Authority, Education &
Health, 6.285s, 2016 6,500 6,041,230
AAA Puerto Rico Public Buildings Authority, Government
Facilities, 5.5s, 2021+ 1,000 960,420
AAA Virginia State Public Building Authority, 0s, 2007 13,305 7,234,993
17
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
State and Local Appropriation - continued
AAA Virginia State Public Building Authority, 0s, 2008 $10,650 $ 5,422,873
AA Virginia State Public Building Authority, 5.2s,
2015+ 2,610 2,451,573
---------------
$35,135,360
- ---------- ---------------------------------------------------- -------------- ---------------
Refunded and Special Obligation - 14.9%
NR Arlington County, VA, Industrial Development
Authority (Arlington Hospital), 7.125s, 2021 $ 4,450 $ 5,052,174
NR Carroll County, VA, Solid Waste Authority Rev.,
7.5s, 2001 2,265 2,605,882
NR Chesapeake, VA, Certificates of Participation,
7.75s, 1996 1,250 1,287,612
NR Chesapeake, VA, Industrial Development
Authority (Sentara Life Care Corp.), 10s, 1997 1,105 1,215,102
AA Chesapeake, VA, Public Improvement, 6.75s, 1999 2,500 2,726,975
AAA Commonwealth of Puerto Rico, 7.9s, 1996 1,660 1,727,861
AA- Hampton, VA, Public Improvement, 6.625s, 2000 1,500 1,631,265
NR Hopewell County, VA, Hospital Authority (John
Randolph Hospital), 8.85s, 1997 4,645 4,895,458
AAA Nelson County, VA, Service Authority, Water & Sewer
Rev., 7.875s, 1996 1,000 1,020,600
NR Newport News, VA, 6.5s, 2000 875 960,908
NR Newport News, VA, 6.5s, 2000 2,205 2,421,487
NR Newport News, VA, 6.5s, 2000 2,325 2,553,268
NR Norfolk, VA, Industrial Development
Authority (Sentara Life Care Corp.), 10s, 1997 4,230 4,651,477
AA Norfolk, VA, Industrial Development Authority
(Sentara Life Corp.), "B", 7.875s, 1998 1,000 1,105,520
AA Norfolk, VA, Industrial Development
Authority (Sentara Life Corp.), "B", 7.9s, 1998 2,000 2,212,240
AA- Portsmouth, VA, 6.9s, 2000 1,500 1,661,625
AAA Puerto Rico Aqueduct & Sewer Authority, 9s, 2005 4,150 5,379,022
AAA Puerto Rico Aqueduct & Sewer Authority, 10.25s, 2009 400 551,008
AAA Roanoke, VA, Industrial Development Authority,
Hospital Rev. (Memorial), 7.25s, 2010 1,750 1,962,853
A+ Roanoke, VA, Industrial Development Authority,
Hospital Rev. (Roanoke Memorial), 7.5s, 2020 1,245 1,408,332
AAA Southeastern Public Service Authority,
VA, Solid Waste System Rev., 9.25s, 1996 2,750 2,842,647
AAA State of Virginia, Public School Authority, 8.5s,
1997 500 527,145
AAA Virginia Beach, VA, Certificates of Participation
(Judicial Center Project), 7.25s, 2010 4,955 5,575,812
A+ Virginia Beach, VA, Hospital Facilities Rev.
(Virginia Beach General Hospital), 8.75s, 2017 2,875 3,148,384
A+ Virginia Beach, VA, Water & Sewer Rev., 6.625s, 2002 2,400 2,663,040
NR Virginia College Building Authority (Hampton
University), 7.75s, 2014 750 834,052
AA Virginia Resources Authority, Water & Sewer System
Rev., 7.875s, 1998 800 882,352
Refunded and Special Obligation - continued
NR Virginia Resources Authority, Water & Sewer System
Rev., 7.5s, 1999 $ 1,180 $ 1,306,602
AAA Virginia Transportation Board, Contract Rev. (Route
28), 7.7s, 1998 2,175 2,359,744
---------------
$67,170,447
- ---------- ---------------------------------------------------- -------------- ---------------
Solid Waste Revenue - 0.7%
AA State of Virginia Research Authority, Waste Disposal
System Rev., 5.5s, 2015 $ 3,230 $ 3,075,477
- ---------- ---------------------------------------------------- -------------- ---------------
Single Family Housing Revenue - 6.2%
AAA Puerto Rico Housing Finance Corp., 7.8s, 2021 $ 5 $ 5,216
AAA Virginia Housing Development Authority, 0s, 2010 560 136,663
AA+ Virginia Housing Development Authority, 6.1s, 2019 7,000 6,982,500
A+ Virginia Housing Development Authority, 7.1s, 2022 2,000 2,097,840
AA+ Virginia Housing Development Authority, 7.8s, 2038 2,500 2,580,650
NR Virginia State Housing Development Authority, 7.22s,
2019++++ 7,500 7,294,725
AA+ Virginia State Housing Development Authority,
6.125s, 2022 8,500 8,439,225
AA+ Virginia State Housing Development Authority, 0s,
2029 3,615 245,856
---------------
$27,782,675
- ---------- ---------------------------------------------------- -------------- ---------------
Multi-Family Housing Revenue - 3.6%
NR Alexandria, VA, Redevelopment &
Housing Authority (Jefferson Village), 9s, 2018 $ 4,000 $ 4,112,960
NR Fairfax County, VA, Redevelopment & Housing
Authority (Little River Glen), 8.95s, 2020 3,845 3,953,275
AAA Harrisonburg, VA, Redevelopment & Housing Authority
(Battery Heights), 7.375s, 2028 3,540 3,698,273
NR Norfolk, VA, Redevelopment & Housing Authority
(Dockside Apartments), 7.375s, 2028 2,000 2,100,020
AA Virginia Housing Development Authority, 6.5s, 2013 2,300 2,328,014
---------------
$16,192,542
- ---------- ---------------------------------------------------- -------------- ---------------
Insured Health Care Revenue - 8.7%
A Albemarle County, VA, Industrial Development
Authority, First Mortgage Rev., 8.9s, 2026### $ 2,150 $ 2,411,418
AAA Augusta County, VA, Industrial Development
Authority, 5.125s, 2021 3,000 2,732,310
A Front Royal-Warren County, VA, Industrial
Development Authority, 9.45s, 2024 1,000 1,095,250
AAA Hanover County, VA, Industrial Development
Authority, 6s, 2008 1,460 1,556,740
AAA Hanover County, VA, Industrial Development
Authority, 5.5s, 2025 6,000 5,666,940
AAA Hanover County, VA, Industrial Development
Authority, 5.5s, 2025 5,950 5,619,716
AAA Henrico County, VA, Industrial Development Authority
Rev. (Bon Secours), FSA, 7.651s, 2027++++ 8,700 8,813,100
AAA Peninsula Ports Authority, VA, Hospital Facilities
Rev. (Wittaker Memorial), 8.7s, 2023 2,100 2,227,890
18
<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 Roanoke, VA, Industrial Development Authority, 5s,
2024 $ 3,000 $ 2,634,360
AAA Roanoke, VA, Industrial Development Authority,
Hospital Rev. (Roanoke Memorial), 6.125s, 2017 6,000 6,280,860
---------------
$39,038,584
- ---------- ---------------------------------------------------- -------------- ---------------
Health Care Revenue - 4.5%
AA- Chesapeake, VA, Industrial Development Authority
(Sentara Life Care Corp.), 7.875s, 2008### $ 1,000 $ 1,091,360
AA- Chesapeake, VA, Industrial Development
Authority (Sentara Life Care Corp.), 8s, 2018 4,000 4,342,840
NR Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing, 9s, 2020 1,910 2,007,830
A+ Henrico County, VA, Industrial Development Authority
(St. John's Hospital), 8.875s, 2015 955 985,923
A+ Henrico County, VA, Industrial Development Authority
(St. Mary's Hospital), 7.5s, 2007 835 907,201
A+ Lynchburg, VA, Industrial Development
Authority (Central Health, Inc.), 8.125s, 2016 1,400 1,499,358
NR Martinsville, VA, Industrial Development Authority,
6.75s, 2004 1,230 1,218,943
AA- Norfolk, VA, Industrial Development Authority
(Sentara Life Corp.), "A", 7.875s, 2008 1,000 1,081,720
AA- Norfolk, VA, Industrial Development
Authority (Sentara Life Corp.), "A", 7.9s, 2018 2,000 2,128,640
BBB+ Peninsula Ports Authority, VA, Hospital Facilities
Rev. (Mary Immaculate), 7.375s, 2017 3,000 3,085,260
A Suffolk, VA, Industrial Development Authority
(Louise Obici Memorial Hospital), 7.875s, 2005 1,910 2,023,607
---------------
$20,372,682
- ---------- ---------------------------------------------------- -------------- ---------------
Electric and Gas Utility Revenue - 3.0%
A+ Halifax County, VA, Industrial Rev.
Authority (Old Dominion Electric), 6s, 2022 $ 5,000 $ 4,863,700
NR Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 8,000 8,450,880
---------------
$13,314,580
- ---------- ---------------------------------------------------- -------------- ---------------
Water and Sewer Utility Revenue - 12.5%
AA Chesterfield County, VA, Water & Sewer Rev., 0s,
2004 $ 5,025 $ 3,258,763
AA Chesterfield County, VA, Water & Sewer Rev., 0s,
2005 4,815 2,941,532
AA Chesterfield County, VA, Water & Sewer Rev., 0s,
2006 4,000 2,297,480
AA Chesterfield County, VA, Water & Sewer Rev., 0s,
2007 6,000 3,215,580
AA Chesterfield County, VA, Water & Sewer Rev., 0s,
2008 6,135 3,077,685
AA Chesterfield County, VA, Water & Sewer Rev., 0s,
2009 6,135 2,875,290
AA Chesterfield County, VA, Water & Sewer Rev., 0s,
2010 9,005 3,935,095
AA- Fairfax County, VA, Water Authority Rev., 6s, 2022 16,000 16,132,640
AAA Hanover County, VA, Water and Sewer Systems, 5.25s,
2026 7,000 6,410,460
Water and Sewer Utility Revenue - continued
AAA Norfolk, VA, Water Rev., 5.875s, 2020 $ 2,000 $ 2,003,200
AAA Norfolk, VA, Water Rev., 5.9s, 2025 3,215 3,226,864
AAA Upper Occoquan Sewer Authority, 5s, 2025 8,000 7,042,160
---------------
$56,416,749
- ---------- ---------------------------------------------------- -------------- ---------------
Turnpike Revenue - 1.7%
AAA Chesapeake Bay, VA, Bridge & Tunnel Authority, 0s,
2005 $ 4,535 $ 2,790,476
AAA Chesapeake Bay, VA, Bridge & Tunnel Authority,
5.25s, 2019 5,000 4,626,650
---------------
$ 7,417,126
- ---------- ---------------------------------------------------- -------------- ---------------
Airport and Port Revenue - 8.0%
AAA Capital Region Airport Rev. (Richmond International
Airport), 5.625s, 2025 $ 6,000 $ 5,771,340
AA- Metropolitan Washington, D.C., Airport Rev., 7.6s,
2014 5,030 5,476,060
AAA Metropolitan Washington, D.C., Airport Rev., 8.2s,
2018 3,500 3,845,765
AAA Metropolitan Washington, D.C., Apartments, 5.75s,
2020 12,000 11,572,560
AA- Peninsula Airport Commission, VA, 7.3s, 2021 2,400 2,634,289
BB+ Puerto Rico Ports Authority Rev., (American
Airlines), 6.3s, 2023 2,000 2,012,760
A+ Virginia Port Authority, 8.2s, 2008 4,500 4,920,435
---------------
$36,233,209
- ---------- ---------------------------------------------------- -------------- ---------------
Sales and Excise Tax Revenue - 0.8%
AA Virginia State Transportation Board, Transportation
Contract Rev., 6.5s, 2018 $ 3,500 $ 3,652,845
- ---------- ---------------------------------------------------- -------------- ---------------
Industrial Revenue (Corporate Guarantee) - 3.8%
A- Halifax, VA, Industrial Development Authority (Tandy
Corp.), 8.25s, 2008 $ 3,500 $ 3,793,475
A- Isle Wight County, VA, Industrial Development
Authority (Union Camp), 6.55s, 2024 8,000 8,228,240
NR Lynchburg, VA, Industrial Development Authority
(Kroger Co.), 7.9s, 2011 1,000 1,079,950
NR Virginia Beach, VA, Development Authority (Beverly
Enterprises), 10s, 2010 1,360 1,513,382
BBB West Point, VA, Industrial Development Authority,
Solid Waste Disposal Rev.,
(Chesapeake Corp. Project), 6.375s, 2019 2,600 2,611,310
---------------
$17,226,357
- ---------- ---------------------------------------------------- -------------- ---------------
Universities - 6.3%
A+ Albemarle County, VA, Industrial Development
Authority Health Services Rev., 6.5s, 2022 $ 1,000 $ 1,015,750
A- Hampton Roads, VA, Medical College General Rev.,
6.875s, 2016 2,000 2,127,640
A- Hampton Roads, VA, Medical College General Rev.,
6.875s, 2016 1,500 1,595,730
NR Loudoun County, VA, Industrial Development
Authority, University Facilities, 6.25s, 2012 2,710 2,795,229
NR Rockingham County, VA, Industrial Development
Authority Rev. (Bridgewater), 6s, 2023 6,610 6,428,489
AA+ University of Virginia, University Rev., 5.375s,
2014 5,690 5,405,955
AA+ University of Virginia, University Rev., 5.375s,
2020 1,520 1,423,283
19
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Universities - continued
AA Virginia College Building Authority, 5.75s, 2019 $5,000 $ 4,924,500
BBB- Virginia College Building Authority, Educational
Facilities Rev. (Marymount), 7s, 2022 2,500 2,634,200
---------------
$ 28,350,776
- ---------- ---------------------------------------------------- -------------- ---------------
Other - 1.9%
NR Danville, VA, Industrial Development Authority,
Industrial Development Rev., 8s, 2013 $3,115 $ 3,083,539
NR Loudoun, VA, Industrial Development Authority,
Industrial Development Rev., 7.125s, 2015 4,000 3,942,040
AAA Virginia State Peninsula Regional Jail
Authority, Jail Facilities Rev., 5.5s, 2018 1,500 1,427,490
---------------
$ 8,453,069
- ---------- ---------------------------------------------------- -------------- ---------------
Total Municipal Bonds (Identified Cost, $407,615,231) $426,680,682
------------------------------------------------------------------------------------- -----------------
Floating Rate Demand Notes - 2.1%
Peninsula Ports Authority, VA (Shell Oil Co.) due
12/01/05 $3,800 $ 3,800,000
Peninsula Ports Authority, VA (Shell Oil Co.) due
07/01/16 3,800 3,800,000
Peninsula Ports Authority, VA (Shell Oil Co.), due
08/15/20 1,900 1,900,000
- ---------- ---------------------------------------------------- -------------- ---------------
Total Floating Rate Demand Notes, at Identified Cost $ 9,500,000
------------------------------------------------------------------------------------- -----------------
Call Options Purchased - 0.3%
Issuer/Expiration Date/Strike Price Principal Amount
of Contracts
(000 Omitted)
----------------------------------------------------------------- ---------------- -----------------
Georgia Municipal Electric Authority/ 2003/102 $ 20 $ 594,000
State of New Jersey, "D"/2003/102 5 955,000
- ---------- ---------------------------------------------------- -------------- ---------------
Total Call Options Purchased (Premiums Paid, $576,800) $ 1,549,000
------------------------------------------------------------------------------------- -----------------
Total Investments (Identifed Cost, $417,692,031) $437,729,682
Other Assets, Less Liabilities - 2.8% 12,464,592
- -------------------------------------------------------------------------------------- ------------------
Net Assets - 100.0% $450,194,274
------------------------------------------------------------------------------------- -----------------
</TABLE>
(section) Indexed security.
++++Inverse floating rate security.
(dagger) Restricted security.
###Security segregated as collateral for an open futures contract.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS WEST VIRGINIA MUNICIPAL BOND FUND
Municipal Bonds - 97.7%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
----------------------------------------------------------------- ---------------- -----------------
<S> <C> <C> <C>
General Obligation - 6.8%
AAA Cabell, WV, Board of Education, MBIA, 6s, 2006 $ 500 $ 535,065
NR Charleston, WV, Public Improvement, 7.2s, 2008 1,240 1,443,980
NR Charleston, WV, Public Improvement, 7.2s, 2009 1,140 1,324,817
AAA Jefferson County, WV, Board of Education, 6.85s,
2009 1,680 1,900,550
General Obligation - continued
AAA Monongalia County, WV, Board of Education, MBIA, 7s,
2005 $ 500 $ 567,760
AAA Ohio County, WV, Board of Education, MBIA, 5.25s,
2018 1,180 1,122,050
AAA State of West Virginia, Water
Development Authority Rev., FSA, 6.2s, 2024 3,000 3,075,630
---------------
$ 9,969,852
- ---------- ---------------------------------------------------- -------------- ---------------
State and Local Appropriation - 7.2%
A Puerto Rico Public Buildings Authority, Education &
Health, 6.285s, 2016S. $2,000 $ 1,858,840
AAA West Virginia Building Commission, Lease Rev. (West
Virginia Regional Jail), MBIA, 0s, 2007 3,150 1,705,568
AAA West Virginia Building Commission, Lease Rev. (West
Virginia Regional Jail), MBIA, 0s, 2008 3,050 1,545,283
AAA West Virginia Building Commission, Lease Rev. (West
Virginia Regional Jail), MBIA, 0s, 2009 2,500 1,167,750
AAA West Virginia Building Commission, Lease Rev. (West
Virginia Regional Jail), MBIA, 7s, 2015 1,000 1,087,690
A- West Virginia School Building Authority, 6.75s, 2015 3,000 3,191,970
---------------
$10,557,101
- ---------- ---------------------------------------------------- -------------- ---------------
Refunded and Special Obligation - 12.0%
BBB+ Charleston, WV, Parking Rev., 8.5s, 1996 $1,000 $ 1,027,650
AAA Kanawha County, WV, Building
Commission (St. Francis Hospital), 7.5s, 2007 265 308,820
AAA Puerto Rico Aqueduct & Sewer Authority, 9s, 2005 1,500 1,944,225
AAA Puerto Rico Electric Power Authority Rev., 8s, 1998 1,000 1,102,110
AAA Puerto Rico Highway & Transportation Authority,
Highway Rev., 6.625s, 2002 400 449,168
AAA South Charleston, WV, Hospital Rev. (Herbert J.
Thomas Memorial Hospital), BIGI, 8s, 1998 500 552,305
AAA West Virginia Hospital Finance Authority (Monongalia
General Hospital), 8.6s, 1997 1,000 1,057,070
AAA West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, 0s, 2005 2,250 1,409,693
AAA West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, 0s, 2006 2,500 1,474,425
AAA West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, 0s, 2007 2,000 1,102,080
AAA West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, 0s, 2008### 610 320,720
AAA West Virginia Resources Recovery Authority, Solid
Waste Disposal Rev., BIGI, 8.25s, 1996 700 719,138
BBB+ West Virginia Water Development Authority, 8.125s,
1998 1,750 1,942,955
AAA West Virginia Water Development Authority, 8.125s,
1998 2,015 2,237,174
BBB+ West Virginia Water Development Authority, 8.625s,
1998 750 841,747
20
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Refunded and Special Obligation - continued
BBB+ West Virginia Water Development Authority, 7.4s,
2001 $ 750 $ 859,882
AAA West Virginia Water Development Authority, 7.1s,
2009 250 293,377
---------------
$17,642,539
- ---------- ---------------------------------------------------- -------------- ---------------
Single Family Housing Revenue - 9.0%
AAA Berkeley, Brooke & Fayette Counties, WV, FGIC, 9.1s,
2011 $ 80 $ 81,666
NR Berkeley County, WV, Residential Mortgage Rev.,
7.875s, 2012 305 311,527
NR Charles Town, WV, Residential Mortgage Rev., 6.2s,
2011 900 903,798
NR Mason County, WV, Rev., 0s, 2014 1,700 431,307
A+ West Virginia Housing Development Fund, 7.85s, 2014 840 864,192
AAA West Virginia Housing Development Fund, 0s, 2015 1,815 243,863
AA+ West Virginia Housing Development Fund, 7.95s, 2017 2,980 3,100,392
A+ West Virginia Housing Development Fund, 7.2s, 2018 5,000 5,220,350
A+ West Virginia Housing Development Fund, 7.2s, 2020 2,000 2,088,140
---------------
$13,245,235
- ---------- ---------------------------------------------------- -------------- ---------------
Multi-Family Housing Revenue - 1.0%
AAA Huntington, WV, Housing Corp., Multi- Family Rev.,
FNMA, 7.5s, 2024 $ 800 $ 838,024
NR Webster County, WV, Housing
Development Rev. (Circlebrook), 6.35s, 2008 555 560,306
---------------
$ 1,398,330
- ---------- ---------------------------------------------------- -------------- ---------------
Insured Health Care Revenue - 8.0%
AAA Monongalia County, WV, Building Commission, Hospital
Rev. (Monongalia General Hospital), 6.625s, 2011 $1,000 $ 1,068,300
AAA West Virginia Hospital Finance Authority (Cabell
Huntington Hospital), AMBAC, 6.25s, 2019 5,000 5,166,400
AAA West Virginia Hospital Finance Authority (West
Virginia University Hospital, Inc.), 5s, 2016 3,250 2,882,393
AAA West Virginia Hospital Finance Authority (West
Virginia University Medical Corp.), MBIA, 7.875s,
2007 1,500 1,604,010
AAA West Virginia Hospital Finance Authority (West
Virginia University Medical Corp.), MBIA, 7.875s,
2018 1,000 1,072,310
---------------
$11,793,413
- ---------- ---------------------------------------------------- -------------- ---------------
Health Care Revenue - 10.2%
BBB+ Berkeley County, WV, Building Commission, Hospital
Rev. (City Hospital Project), 6.5s, 2022 $2,500 $ 2,477,925
NR Hampshire County, WV, First Mortgage Rev. (Romney
Health Care), 9.5s, 2022 1,280 1,311,475
NR Monongalia County, WV, Health Facilities Rev.
(Beverly Enterprises, Inc.), 10s, 2007 865 951,820
NR Princeton, WV, Hospital Rev. (Princeton Community
Hospital), 6s, 2018 1,500 1,358,400
NR West Virginia Hospital Finance Authority
(Charleston Area Medical Center), 6.5s, 2023 2,000 2,044,260
Health Care Revenue - continued
BBB- West Virginia Hospital Finance Authority
(Fairmont General Hospital), 6.625s, 2019 $2,000 $ 1,898,900
BBB- West Virginia Hospital Finance Authority (Logan
General Hospital), 7.25s, 2020 5,000 4,947,200
---------------
$14,989,980
- ---------- ---------------------------------------------------- -------------- ---------------
Electric and Gas Utility Revenue - 11.3%
BBB+ Marshall County, WV, Pollution Control Rev. (Ohio
Power Co.), 6.85s, 2022 $2,000 $ 2,108,880
AAA Marshall County, WV, Pollution Control
Rev. (Ohio Power Co.), MBIA, 6.85s, 2022 3,150 3,366,090
AAA Mason County, WV, Pollution Control Rev.
(Appalachian Power), MBIA, 6.6s, 2022 7,000 7,324,380
NR McDowell County, WV, Industrial Development Rev.
(War Telephone Co.), 13.5s, 2001 500 503,140
AAA Putnam County, WV, Pollution Control Rev.
(Appalachian Power Co.), MBIA, 6.6s, 2019 3,200 3,359,360
---------------
$16,661,850
- ---------- ---------------------------------------------------- -------------- ---------------
Water and Sewer Utility Revenue - 11.1%
A Beckley, WV, Industrial Development Rev. (Beckley
Water Co.), 7s, 2017 $2,000 $ 2,125,200
AAA Charleston,WV, Sewer Rev., MBIA, 6.5s, 2017 2,260 2,392,843
A Puerto Rico Aqueduct & Sewer Authority Rev., 5s,
2019 5,100 4,498,914
AAA West Virginia Water Development Authority, CGIC,
7.5s, 2009 1,100 1,189,738
BBB+ West Virginia Water Development Authority, 7.625s,
2009 500 568,775
AAA West Virginia Water Development Authority, 5.375s,
2025 2,000 1,830,460
AAA West Virginia Water Development Authority, 5.25s,
2035 4,260 3,796,597
---------------
$16,402,527
- ---------- ---------------------------------------------------- -------------- ---------------
Turnpike Revenue - 1.9%
AAA West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, 0s, 2006 $1,885 $ 1,090,680
AAA West Virginia State Parkways, Economic Development &
Tourism Authority, FGIC, 7.452s, 2019++++ 1,800 1,728,000
---------------
$ 2,818,680
- ---------- ---------------------------------------------------- -------------- ---------------
Sales and Excise Tax Revenue - 1.2%
A Puerto Rico Highway & Transportation Authority Rev.,
6.625s, 2018 $1,600 $ 1,762,512
- ---------- ---------------------------------------------------- -------------- ---------------
Industrial Revenue (Corporate Guarantee) - 12.3%
A Braxton County, WV, Solid Waste Disposal
(Weyerhaeuser), 6.5s, 2025 $2,000 $ 2,042,300
BBB+ Harrison County, WV, Commercial Development Rev.
(Kmart Corp.), 7.75s, 2009 625 540,587
NR Jackson County, WV, Pollution Control Rev. (Kaiser
Aluminum & Chemical Corp.), 6.5s, 2008 1,345 1,306,586
NR Kanawha County, WV, Commercial
Development Rev. (Kroger Co.), 8s, 2011 1,000 1,083,810
A Kanawha County, WV, Commercial Development Rev. (May
Dept. Stores Co.), 6.5s, 2003 3,000 3,241,560
BBB Kanawha County, WV, Pollution Control Rev. (Union
Carbide Corp.), 8s, 2020 2,000 2,174,580
21
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ---------------------------------------------------- ---------------- -----------------
Industrial Revenue (Corporate Guarantee) - continued
NR Monongalia County, WV, Commercial
Development Rev. (Kroger Co.), 7.7s, 2012 $2,000 $ 2,146,300
NR Ohio County, WV, Industrial
Development Rev. (Kroger Co.), 8.125s, 2011 2,000 2,180,720
NR Putnam County, WV, Industrial Development Rev. (Rite
Aid Corp.), 10.375s, 2002 590 604,291
BBB South Charleston, WV, Pollution Control Rev. (Union
Carbide Corp.), 7.625s, 2005 2,500 2,837,900
---------------
$ 18,158,634
- ---------- ---------------------------------------------------- -------------- ---------------
Universities - 4.2%
AAA West Virginia University Rev. (West Virginia
University Dormitory Project), AMBAC, 6s, 2012 $5,000 $ 5,112,250
AAA West Virginia University Rev. (West Virginia
University Dormitory Project), MBIA, 6.75s, 2017 1,000 1,060,410
---------------
$ 6,172,660
- ---------- ---------------------------------------------------- -------------- ---------------
Other - 1.5%
NR West Virginia Hospital Finance Authority (General
Division Medical Building), 7.25s, 2014 $2,000 $ 2,170,960
- ---------- ---------------------------------------------------- -------------- ---------------
Total Municipal Bonds (Identified Cost, $136,698,183) $143,744,273
------------------------------------------------------------------------------------- -----------------
Floating Rate Demand Note - 0.5%
Uinta County, WY, Pollution Control Rev. (Chevron),
due 2020, at Identified Cost $ 700 $ 700,000
- ---------- ---------------------------------------------------- -------------- ---------------
Total Investments (Identified Cost, $137,398,183) $144,444,273
Other Assets, Less Liabilities - 1.8% 2,716,208
- -------------------------------------------------------------------------------------- -----------------
Net Assets - 100.0% $147,160,481
------------------------------------------------------------------------------------- -----------------
</TABLE>
(section) Indexed security.
(two double daggers) Inverse floating rate security.
###Security segregated as collateral for an open futures contract.
See notes to financial statements
22
<PAGE>
Financial Statements
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
North South
Maryland Carolina Carolina Tennessee Virginia West Virginia
March 31, 1996 Fund Fund Fund Fund Fund Fund
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments -
Identified cost $143,431,650 $423,576,444 $173,714,802 $115,386,172 $417,692,031 $137,398,183
Unrealized appreciation 7,552,708 20,872,807 8,783,959 5,781,067 20,037,651 7,046,090
----------- ----------- ----------- ----------- ----------- -------------
Total, at value $150,984,358 $444,449,251 $182,498,761 $121,167,239 $437,729,682 $144,444,273
Cash 106,668 295,496 45,565 43,109 260,854 80,920
Receivable for Fund shares sold 273,660 3,387,614 382,832 122,594 3,115,437 169,146
Receivable for investments sold -- 47,596 5,000 110,000 15,589,915 105,923
Interest receivable 2,393,129 8,230,005 2,980,237 1,853,366 7,514,382 2,960,516
Other assets 2,091 6,074 2,363 1,662 9,054 1,778
----------- ----------- ----------- ----------- ----------- -------------
Total assets $153,759,906 $456,416,036 $185,914,758 $123,297,970 $464,219,324 $147,762,556
----------- ----------- ----------- ----------- ----------- -------------
Liabilities:
Distributions payable $ 283,912 $ 768,299 $ 339,531 $ 259,581 $ 940,453 $ 297,820
Payable for Fund shares reacquired 223,051 608,331 121,343 112,796 433,833 68,020
Payable for investments purchased -- 1,681,856 -- -- 11,867,622 --
Payable for daily variation margin on
open futures contracts 60,000 345,000 -- -- 300,000 37,500
Payable to affiliates -
Management fee 6,891 20,270 8,333 5,529 20,141 6,618
Shareholder servicing agent fee 1,370 5,721 2,377 1,582 3,905 1,878
Distribution fee 95,165 276,872 113,053 74,736 286,337 90,414
Accrued expenses and other
liabilities 98,921 164,135 109,471 97,971 172,759 99,825
----------- ----------- ----------- ----------- ----------- -------------
Total liabilities $ 769,310 $ 3,870,484 $ 694,108 $ 552,195 $ 14,025,050 $ 602,075
----------- ----------- ----------- ----------- ----------- -------------
Net assets $152,990,596 $452,545,552 $185,220,650 $122,745,775 $450,194,274 $147,160,481
=========== =========== =========== =========== =========== =============
Net assets consist of:
Paid-in capital $150,192,774 $443,483,840 $179,533,140 $118,157,021 $442,104,244 $143,444,561
Unrealized appreciation on
investments 7,839,469 20,732,187 8,783,959 5,781,067 19,971,623 7,022,212
Accumulated net realized loss
on investments (4,517,848) (10,635,444) (2,766,881) (1,016,275) (10,413,683) (2,860,835)
Accumulated distributions in excess
of net investment income (523,799) (1,035,031) (329,568) (176,038) (1,467,910) (445,457)
----------- ----------- ----------- ----------- ----------- -------------
Total $152,990,596 $452,545,552 $185,220,650 $122,745,775 $450,194,274 $147,160,481
=========== =========== =========== =========== =========== =============
Shares of beneficial interest
outstanding:
Class A 12,621,593 35,385,023 13,936,167 10,558,744 37,318,909 11,870,860
Class B 1,241,495 2,927,071 1,539,202 1,244,377 2,535,676 1,116,407
Class C -- 808,915 -- -- 300,294 --
----------- ----------- ----------- ----------- ----------- -------------
Total shares of beneficial
interest outstanding 13,863,088 39,121,009 15,475,369 11,803,121 40,154,879 12,987,267
=========== =========== =========== =========== =========== =============
Net assets:
Class A $139,296,706 $409,346,969 $166,800,593 $109,811,227 $418,407,978 $134,513,623
Class B 13,693,890 33,846,510 18,420,057 12,934,548 28,420,167 12,646,858
Class C -- 9,352,073 -- -- 3,366,129 --
----------- ----------- ----------- ----------- ----------- -------------
Total net assets $152,990,596 $452,545,552 $185,220,650 $122,745,775 $450,194,274 $147,160,481
=========== =========== =========== =========== =========== =============
Class A shares:
Net asset value and redemption price
per share (net assets / shares of
beneficial interest outstanding) $11.04 $11.57 $11.97 $10.40 $11.21 $11.33
=========== =========== =========== =========== =========== =============
Offering price per share (100/95.25
of net asset value per share) $11.59 $12.15 $12.57 $10.92 $11.77 $11.90
=========== =========== =========== =========== =========== =============
Class B shares:
Net asset value and offering price
per share (net assets / shares of
beneficial interest outstanding) $11.03 $11.56 $11.97 $10.39 $11.21 $11.33
=========== =========== =========== =========== =========== =============
Class C shares:
Net asset value, offering price, and
redemption price per share (net
assets / shares of beneficial
interest outstanding) $ -- $11.56 $ -- $ -- $11.21 $ --
=========== =========== =========== =========== =========== =============
</TABLE>
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
23
<PAGE>
Financial Statements - continued
Statements of Operations
<TABLE>
<CAPTION>
North South
Maryland Carolina Carolina Tennessee Virginia West Virginia
Year Ended March 31, 1996 Fund Fund Fund Fund Fund Fund
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income:
Interest income $ 9,802,523 $28,627,320 $11,720,380 $8,040,838 $29,276,654 $9,360,013
--------- --------- --------- --------- --------- -----------
Expenses -
Management fee $ 863,230 $ 2,550,849 $ 1,031,063 $ 697,496 $ 2,540,788 $ 795,243
Trustees' compensation 15,915 15,915 15,915 15,915 15,915 15,915
Shareholder servicing agent fee
(Class A) 215,693 637,635 258,119 172,856 649,187 199,239
Shareholder servicing agent fee
(Class B) 28,081 66,041 33,850 25,477 55,843 25,881
Shareholder servicing agent fee
(Class C) -- 12,778 -- -- 3,929 --
Distribution and service fee
(Class A) 505,240 1,487,788 602,279 403,330 1,520,607 464,890
Distribution and service fee
(Class B) 127,644 301,823 153,865 115,801 253,832 117,640
Distribution and service fee
(Class C) -- 85,187 -- -- 26,194 --
Custodian fee 62,082 249,811 88,210 49,958 210,487 72,691
Printing 27,132 46,036 21,139 20,537 63,853 21,875
Postage 17,299 35,577 14,615 9,394 43,695 12,366
Auditing fees 31,580 22,430 31,580 34,455 31,580 31,580
Legal fees 2,914 4,260 3,176 580 5,650 4,856
Miscellaneous 50,745 171,353 88,275 55,320 182,565 78,438
--------- --------- --------- --------- --------- -----------
Total expenses $ 1,947,555 $ 5,687,843 $ 2,342,086 $1,601,119 $ 5,604,125 $1,840,614
Fees paid indirectly (18,103) (39,225) (8,800) (6,497) (35,176) (10,841)
--------- --------- --------- --------- --------- -----------
Net expenses $ 1,929,452 $ 5,648,618 $ 2,333,286 $1,594,622 $ 5,568,949 $1,829,773
--------- --------- --------- --------- --------- -----------
Net investment income $ 7,873,071 $22,978,702 $ 9,387,094 $6,446,216 $23,707,705 $7,530,240
--------- --------- --------- --------- --------- -----------
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) (identified
cost basis) -
Investment transactions $ 1,144,173 $ 6,476,859 $ 1,397,129 $1,466,595 $ 4,307,568 $ 251,622
Futures contracts (2,712,836) (1,973,633) (1,424,174) (596,378) (406,452) (43,730)
--------- --------- --------- --------- --------- -----------
Net realized gain (loss) on
investments $(1,568,663) $ 4,503,226 $ (27,045) $ 870,217 $ 3,901,116 $ 207,892
--------- --------- --------- --------- --------- -----------
Change in unrealized appreciation
(depreciation) -
Investments $ 2,847,272 $ 1,476,394 $ 1,796,640 $ 922,874 $ 1,711,965 $1,196,561
Futures contracts 158,229 273,204 (73,449) (34,625) (66,028) (23,878)
--------- --------- --------- --------- --------- -----------
Net unrealized gain on
investments $ 3,005,501 $ 1,749,598 $ 1,723,191 $ 888,249 $ 1,645,937 $1,172,683
--------- --------- --------- --------- --------- -----------
Net realized and unrealized
gain on investments $ 1,436,838 $ 6,252,824 $ 1,696,146 $1,758,466 $ 5,547,053 $1,380,575
--------- --------- --------- --------- --------- -----------
Increase in net assets from
operations $ 9,309,909 $29,231,526 $11,083,240 $8,204,682 $29,254,758 $8,910,815
========= ========= ========= ========= ========= ===========
</TABLE>
See notes to financial statements
24
<PAGE>
Financial Statements -- continued
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
North South
Maryland Carolina Carolina Tennessee Virginia West Virginia
Year Ended March 31, 1996 Fund Fund Fund Fund Fund Fund
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 7,873,071 $ 22,978,702 $ 9,387,094 $ 6,446,216 $ 23,707,705 $ 7,530,240
Net realized gain (loss) on
investments (1,568,663) 4,503,226 (27,045) 870,217 3,901,116 207,892
Net unrealized gain on investments 3,005,501 1,749,598 1,723,191 888,249 1,645,937 1,172,683
--------- --------- --------- --------- --------- -----------
Increase in net assets from
operations $ 9,309,909 $ 29,231,526 $ 11,083,240 $ 8,204,682 $ 29,254,758 $ 8,910,815
--------- --------- --------- --------- --------- -----------
Distributions declared to shareholders -
From net investment income
(Class A) $ (7,300,383) $ (21,314,451) $ (8,720,747) $ (5,935,131) $ (22,461,025) $ (6,996,162)
From net investment income
(Class B) (552,380) (1,292,311) (666,347) (511,085) (1,128,382) (534,078)
From net investment income
(Class C) -- (371,940) -- -- (118,298) --
In excess of net investment
income (Class A) -- (76,544) (7,833) (26,378) (205,431) (26,236)
In excess of net investment
income (Class B) -- (4,641) (598) (2,271) (10,320) (2,003)
In excess of net investment
income (Class C) -- (1,336) -- -- (1,082) --
--------- --------- --------- --------- --------- -----------
Total distributions declared to
shareholders $ (7,852,763) $ (23,061,223) $ (9,395,525) $ (6,474,865) $ (23,924,538) $ (7,558,479)
--------- --------- --------- --------- --------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 11,754,356 $ 97,550,746 $ 19,862,472 $ 9,264,655 $ 92,397,697 $ 17,491,754
Net asset value of shares issued to
shareholders in reinvestment of
distributions 4,256,011 13,374,416 5,148,735 3,118,511 12,033,414 4,098,096
Cost of shares reacquired (21,005,744) (128,090,675) (25,486,913) (18,945,783) (114,561,422) (13,443,792)
--------- --------- --------- --------- --------- -----------
Increase (decrease) in net assets
from Fund share transactions $ (4,995,377) $ (17,165,513) $ (475,706) $ (6,562,617) $ (10,130,311) $ 8,146,058
--------- --------- --------- --------- --------- -----------
Total increase (decrease) in net
assets $ (3,538,231) $ (10,995,210) $ 1,212,009 $ (4,832,800) $ (4,800,091) $ 9,498,394
Net assets:
At beginning of period 156,528,827 463,540,762 184,008,641 127,578,575 454,994,365 137,662,087
--------- --------- --------- --------- --------- -----------
At end of period $152,990,596 $ 452,545,552 $185,220,650 $122,745,775 $ 450,194,274 $147,160,481
========= ========= ========= ========= ========= ===========
Accumulated distributions in excess of
net investment income included in
net assets at end of period $ (523,799) $ (1,035,031) $ (329,568) $ (176,038) $ (1,467,910) $ (445,457)
========= ========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
North South
Maryland Carolina Carolina Tennessee Virginia West Virginia
Year Ended March 31, 1995 Fund Fund Fund Fund Fund Fund
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 8,772,044 $ 25,142,344 $ 9,684,650 $ 6,896,351 $ 25,267,942 $ 7,516,720
Net realized loss on investments (1,923,431) (13,223,193) (2,073,916) (1,682,291) (13,703,623) (2,860,553)
Net unrealized gain on investments 2,635,697 13,773,515 4,304,353 1,666,615 12,561,701 3,004,520
--------- --------- --------- --------- --------- -----------
Increase in net assets from
operations $ 9,484,310 $ 25,692,666 $ 11,915,087 $ 6,880,675 $ 24,126,020 $ 7,660,687
--------- --------- --------- --------- --------- -----------
Distributions declared to shareholders -
From net investment income
(Class A) $ (8,333,922) $(23,735,358) $ (9,149,011) $ (6,505,625) $(24,093,973) $ (7,131,736)
From net investment income
(Class B) (438,122) (973,317) (535,639) (369,736) (877,432) (360,160)
From net investment income
(Class C) -- (383,161) -- -- (296,537) --
From net realized gain on
investments (Class A) -- (2,495,977) (887,817) (16,392) (1,715,754) --
From net realized gain on
investments (Class B) -- (103,677) (54,897) (887) (62,515) --
From net realized gain on
investments (Class C) -- (43,596) -- -- (5,815) --
In excess of net investment income
(Class A) (34,518) -- (4,241) -- (70,576) --
In excess of net investment income
(Class B) (1,815) -- (248) -- (2,570) --
In excess of net investment income
(Class C) -- -- -- -- (869) --
In excess of net realized gain on
investments (Class A) (551,221) (1,516,684) (433,734) (116,960) (328,083) (170,490)
In excess of net realized gain on
investments (Class B) (35,494) (62,999) (26,820) (6,328) (11,934) (8,251)
In excess of net realized gain on
investments (Class C) -- (26,491) -- -- (1,112) --
--------- --------- --------- --------- --------- -----------
Total distributions declared to
shareholders $ (9,395,092) $(29,341,260) $(11,092,407) $ (7,015,928) $(27,467,170) $ (7,670,637)
--------- --------- --------- --------- --------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 14,962,711 $ 54,114,282 $ 21,068,556 $ 18,228,934 $ 52,465,877 $ 14,859,231
Net asset value of shares issued to
shareholders in reinvestment of
distributions 5,220,027 17,432,937 6,185,730 3,344,948 13,994,379 4,136,605
Cost of shares reacquired (31,511,548) (87,206,798) (27,469,733) (16,270,748) (66,801,938) (17,506,211)
--------- --------- --------- --------- --------- -----------
Increase (decrease) in net assets
from Fund
share transactions $(11,328,810) $(15,659,579) $ (215,447) $ 5,303,134 $ (341,682) $
1,489,625
--------- --------- --------- --------- --------- -----------
Total increase (decrease) in net
assets $(11,239,592) $(19,308,173) $ 607,233 $ 5,167,881 $ (3,682,832) $ 1,479,675
Net assets:
At beginning of period 167,768,419 482,848,935 183,401,408 122,410,694 458,677,197 136,182,412
--------- --------- --------- --------- --------- -----------
At end of period $156,528,827 $463,540,762 $184,008,641 $127,578,575 $454,994,365 $137,662,087
========= ========= ========= ========= ========= ===========
Accumulated distributions in excess of
net investment income included in
net assets at end of period $ (650,261) $ (1,261,813) $ (437,589) $ (228,302) $ (1,521,124) $ (421,397)
========= ========= ========= ========= ========= ===========
</TABLE>
See notes to financial statements
25
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Maryland Fund
------------------------- ------------------- -------- ---------- ------- ------- ------- ------ --------
Two
Year Months
Ended Ended Year Ended
March 31, March 31, January 31,
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
1996 1995 1994 1994 1993 1992 1991 1990 1989
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
Class A
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $ 10.94 $ 10.89 $ 11.81 $ 11.40 $ 11.20 $ 10.97 $ 10.79 $ 10.76 $ 10.62
Income from investment
operations# -
Net investment income $ 0.57 $ 0.59 $ 0.10 $ 0.62 $ 0.67 $ 0.70 $ 0.70 $ 0.69 $ 0.69
Net realized and
unrealized gain
(loss) on investments 0.09 0.09 (0.92) 0.53 0.24 0.31 0.19 0.04 0.14
---- --- ---- ------ --- --- --- -- ----
Total from investment
operations $ 0.66 $ 0.68 $ (0.82) $ 1.15 $ 0.91 $ 1.01 $ 0.89 $ 0.73 $ 0.83
---- --- ---- ------ --- --- --- -- ----
Less distributions declared to
shareholders -
From net investment
income++++ $ (0.56) $ (0.59) $ (0.06) $ (0.61) $ (0.69) $ (0.76) $ (0.70) $ (0.69) $ (0.69)
From net realized gain
on investments -- -- -- (0.07) (0.02) (0.02) (0.01) (0.01) --
In excess of net
investment income -- -- (0.04) (0.04) -- -- -- -- --
In excess of net
realized gain on
investments -- (0.04) -- (0.02) -- -- -- -- --
---- --- ---- ------ --- --- --- -- ----
Total distributions
declared to
shareholders $ (0.56) $ (0.63) $ (0.10) $ (0.74) $ (0.71) $ (0.78) $ (0.71) $ (0.70) $ (0.69)
---- --- ---- ------ --- --- --- -- ----
Net asset value - end
of period $ 11.04 $ 10.94 $ 10.89 $ 11.81 $ 11.40 $ 11.20 $ 10.97 $ 10.79 $ 10.76
==== === ==== ====== === === === == ====
Total return++ 6.17% 6.51% (6.96)%+++ 10.27% 8.34% 9.55% 8.51% 6.90% 8.15%
Ratios (to average net
assets)/Supplemental data:
Expenses## 1.19% 1.21% 1.23%+ 1.25% 1.14% 1.16% 1.17% 1.18% 1.14%
Net investment income 5.10% 5.46% 4.97%+ 5.42% 6.13% 6.32% 6.45% 6.33% 6.52%
Portfolio turnover 15% 31% 1% 25% 5% 9% 41% 58% 34%
Net assets at end of
period (000 omitted) $139,297 $145,361 $161,290 $173,419 $145,794 $119,120 $101,742 $93,175 $84,380
</TABLE>
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1995, the per share
distribution in excess of net investment income was $0.003.
See notes to financial statements
26
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Maryland Fund
- -------------------------------------------- -------------------------------------------- --------------------- --------
Year Two Months
Year Ended Ended Ended Year Ended
January 31, March 31, March 31, January 31,
- -------------------------------------------- -------------------------------------------- ---------- ------- --------
1988 1987 1996 1995 1994 1994**
- -------------------------------------------- -------------------------------------------- ---------- ------- --------
Class A Class B
- -------------------------------------------- -------------------------------------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.20 $ 10.44 $ 10.93 $ 10.88 $11.80 $11.88
Income from investment operations# -
Net investment income $ 0.68 $ 0.71 $ 0.48 $ 0.51 $ 0.08 $ 0.22
Net realized and unrealized gain (loss)
on investments (0.57) 0.78 0.10 0.09 (0.91) (0.01)
-------- ----- ------ -------- ------- ---------
Total from investment operations $ 0.11 $ 1.49 $ 0.58 $ 0.60 $(0.83) $ 0.21
-------- ----- ------ -------- ------- ---------
Less distributions declared to shareholders -
From net investment income++++ $ (0.67) $ (0.73) $ (0.48) $ (0.51) $(0.08) $(0.21)
From net realized gain on investments (0.01) -- -- -- -- (0.05)
In excess of net investment income -- -- -- -- (0.01) (0.01)
In excess of net realized gain on
investments -- -- -- (0.04) -- (0.02)
From paid-in capital (0.01) -- -- -- -- --
-------- ----- ------ -------- ------- ---------
Total distributions declared to
shareholders $ (0.69) $ (0.73) $ (0.48) $ (0.55) $(0.09) $(0.29)
-------- ----- ------ -------- ------- ---------
Net asset value - end of period $ 10.62 $ 11.20 $ 11.03 $ 10.93 $10.88 $11.80
======== ===== ====== ======== ======= =========
Total return++ 1.25% 14.86% 5.41% 5.75% (7.08)%+++ 4.45%+
Ratios (to average net assets)/Supplemental
data:
Expenses## 1.10% 1.10% 1.91% 1.93% 1.95%+ 1.81%+
Net investment income 6.47% 6.60% 4.36% 4.73% 4.19%+ 4.23%+
Portfolio turnover 13% 11% 15% 31% 1% 25%
Net assets at end of period (000 omitted) $79,906 $81,712 $13,694 $11,168 $6,478 $5,345
</TABLE>
**For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1995, the per share
distribution in excess of net investment income was $0.003.
See notes to financial statements
27
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
North Carolina Fund
------------------------- ------------------- -------- ---------- ------- ------- ------- ------ --------
Two
Year Months
Ended Ended Year Ended
March 31, March 31, January 31,
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
1996 1995 1994 1994 1993 1992 1991 1990 1989
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
Class A
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 11.42 $ 11.48 $ 12.37 $ 11.80 $ 11.45 $ 11.30 $ 11.18 $ 11.15 $ 11.13
------ ----- ------ -------- ----- ----- ----- ---- ------
Income from investment
operations# -
Net investment income $ 0.59 $ 0.61 $ 0.10 $ 0.64 $ 0.65 $ 0.70 $ 0.72 $ 0.73 $ 0.74
Net realized and
unrealized gain (loss)
on investments 0.15 0.03 (0.89) 0.58 0.37 0.26 0.17 0.03 0.02
------ ----- ------ -------- ----- ----- ----- ---- ------
Total from investment
operations $ 0.74 $ 0.64 $ (0.79) $ 1.22 $ 1.02 $ 0.96 $ 0.89 $ 0.76 $ 0.76
------ ----- ------ -------- ----- ----- ----- ---- ------
Less distributions declared to
shareholders -
From net investment
income++++++ $ (0.59) $ (0.60) $ (0.07) $ (0.61) $ (0.67) $ (0.76) $ (0.72) $ (0.73) $ (0.74)
From net realized gain
on investments -- (0.06) -- (0.01) -- (0.01) (0.05) -- --
In excess of net
investment income -- -- (0.03) (0.03) -- -- -- -- --
In excess of net
realized gain on
investments -- (0.04) -- -- -- -- -- -- --
From paid-in capital++++ -- -- -- -- -- (0.04) -- -- --
------ ----- ------ -------- ----- ----- ----- ---- ------
Total distributions
declared to
shareholders $ (0.59) $ (0.70) $ (0.10) $ (0.65) $ (0.67) $ (0.81) $ (0.77) $ (0.73) $ (0.74)
------ ----- ------ -------- ----- ----- ----- ---- ------
Net asset value - end of
period $ 11.57 $ 11.42 $ 11.48 $ 12.37 $ 11.80 $ 11.45 $ 11.30 $ 11.18 $ 11.15
====== ===== ====== ======== ===== ===== ===== ==== ======
Total return++ 6.56% 5.86% (6.39)%++ 10.59% 9.23% 8.82% 8.34% 6.97% 7.12%
Ratios (to average net
assets)/Supplemental data:
Expenses## 1.17% 1.16% 1.16%+ 1.19% 1.07% 1.09% 1.09% 1.12% 1.11%
Net investment income 5.04% 5.38% 4.96%+ 5.21% 5.80% 6.17% 6.47% 6.48% 6.70%
Portfolio turnover 30% 58% 2% 12% 2% 39% 44% 61% 25%
Net assets at end of
period (000 omitted) $409,347 $429,131 $460,321 $495,158 $398,352 $312,466 $226,806 $175,101 $129,287
</TABLE>
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended January 31, 1991, the per share
distribution from paid-in capital was $0.0005.
(three double daggers) For the year ended March 31, 1996, the per share
distribution in excess of net investment income was $0.002.
See notes to financial statements
28
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
North Carolina Fund
- -------------------------------------------- -------------------------------------------------------------------------
Year Two Months
Year Ended Ended Ended Year Ended
January 31, March 31, March 31, January 31,
- -------------------------------------------- -------------------------------------------- ---------- ------- --------
1988 1987 1996 1995 1994 1994**
- -------------------------------------------- -------------------------------------------- ---------- ------- --------
Class A Class B
- -------------------------------------------- -------------------------------------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.82 $ 11.09 $ 11.42 $ 11.47 $ 12.36 $ 12.36
-------- ----- ------ -------- ------- ---------
Income from investment operations# -
Net investment income $ 0.73 $ 0.75 $ 0.50 $ 0.52 $ 0.08 $ 0.22
Net realized and unrealized gain (loss) on
investments (0.69) 0.90 0.14 0.05 (0.89) 0.01
-------- ----- ------ -------- ------- ---------
Total from investment operations $ 0.04 $ 1.65 $ 0.64 $ 0.57 $ (0.81) $ 0.23
-------- ----- ------ -------- ------- ---------
Less distributions declared to shareholders -
From net investment income++++ $ (0.73) $ (0.76) $ (0.50) $ (0.52) $ (0.08) $ (0.21)
From net realized gain on investments -- (0.16) -- (0.06) -- (0.01)
In excess of net investment income -- -- -- -- -- (0.01)
In excess of net realized gain on
investments -- -- -- (0.04) -- --
-------- ----- ------ -------- ------- ---------
Total distributions declared to
shareholders $ (0.73) $ (0.92) $ (0.50) $ (0.62) $ (0.08) $ (0.23)
-------- ----- ------ -------- ------- ---------
Net asset value - end of period $ 11.13 $ 11.82 $ 11.56 $ 11.42 $ 11.47 $ 12.36
======== ===== ====== ======== ======= =========
Total return++ 0.65% 15.76% 5.70% 5.20% (6.51)%+++ 4.58%+
Ratios (to average net assets)/Supplemental
data:
Expenses## 1.08% 1.07% 1.90% 1.88% 1.88%+ 1.84%+
Net investment income 6.71% 6.63% 4.30% 4.64% 4.18%+ 4.03%+
Portfolio turnover 10% 10% 30% 58% 2% 12%
Net assets at end of period (000 omitted) $110,462 $105,668 $33,847 $26,260 $15,866 $13,379
</TABLE>
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1996 and the two months
ended March 31, 1994, the per share distribution in excess of net investment
income for Class B shares was $0.002 and $0.004, respectively.
See notes to financial statements
29
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
North Carolina Fund
- ----------------------------------------------------- -------------------- ---------- ------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
- ----------------------------------------------------- ---------- ------ ---------- ------------
1996 1995 1994 1994***
- ----------------------------------------------------- ---------- ------ ---------- ------------
Class C
- ----------------------------------------------------- ---------- ------ ---------- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.41 $11.47 $12.36 $12.24
-------- ---- -------- ----------
Income from investment operations# -
Net investment income $ 0.51 $ 0.53 $ 0.10 $ 0.02
Net realized and unrealized gain (loss) on
investments 0.15 0.04 (0.90) 0.12
-------- ---- -------- ----------
Total from investment operations $ 0.66 $ 0.57 $(0.80) $ 0.14
-------- ---- -------- ----------
Less distributions declared to shareholders -
From net investment income++++ $(0.51) $(0.53) $(0.09) $(0.02)
From net realized gain on investments -- (0.06) -- --
In excess of net realized gain on investments -- (0.04) -- --
-------- ---- -------- ----------
Total distributions declared to shareholders $(0.51) $(0.63) $(0.09) $(0.02)
-------- ---- -------- ----------
Net asset value - end of period $11.56 $11.41 $11.47 $12.36
======== ==== ======== ==========
Total return 5.87% 5.18% (6.50)%+++ 16.50%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.83% 1.81% 1.82%+ 1.44%+
Net investment income 4.38% 4.71% 4.25%+ 2.33%+
Portfolio turnover 30% 58% 2% 12%
Net assets at end of period (000 omitted) $9,352 $8,149 $6,661 $4,584
</TABLE>
*** For the period from the commencement of offering of Class C shares,
January 3, 1994 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(two double daggers) For the year ended March 31, 1996, the two months ended
March 31, 1994 and the year ended January 31, 1994, the per share
distribution in excess of net investment income was $0.002, $0.002 and
$0.003, respectively.
See notes to financial statements
30
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
South Carolina Fund
------------------------- ------------------- -------- ---------- ------- ------- ------- ------ --------
Two
Year Months
Ended Ended Year Ended
March 31, March 31, January 31,
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
1996 1995 1994 1994 1993 1992 1991 1990 1989
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
Class A
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 11.86 $ 11.79 $ 12.74 $ 12.02 $ 11.74 $ 11.45 $ 11.30 $ 11.24 $ 11.14
------ ----- ------ -------- ----- ----- ----- ---- ------
Income from investment
operations# -
Net investment income $ 0.62 $ 0.63 $ 0.08 $ 0.63 $ 0.67 $ 0.70 $ 0.71 $ 0.72 $ 0.76
Net realized and
unrealized gain (loss)
on investments 0.11 0.15 (0.92) 0.74 0.34 0.40 0.21 0.06 0.11
------ ----- ------ -------- ----- ----- ----- ---- ------
Total from investment
operations $ 0.73 $ 0.78 $ (0.84) $ 1.37 $ 1.01 $ 1.10 $ 0.92 $ 0.78 $ 0.87
------ ----- ------ -------- ----- ----- ----- ---- ------
Less distributions declared to
shareholders -
From net investment
income++++ $ (0.62) $ (0.62) $ (0.08) $ (0.61) $ (0.69) $ (0.76) $ (0.71) $ (0.72) $ (0.77)
From net realized gain
on investments -- (0.06) -- (0.01) (0.04) (0.05) (0.06) -- --
In excess of net
investment income -- -- (0.03) (0.03) -- -- -- -- --
In excess of net
realized gain on
investments -- (0.03) -- -- -- -- -- -- --
------ ----- ------ -------- ----- ----- ----- ---- ------
Total distributions
declared to
shareholders $ (0.62) $ (0.71) $ (0.11) $ (0.65) $ (0.73) $ (0.81) $ (0.77) $ (0.72) $ (0.77)
------ ----- ------ -------- ----- ----- ----- ---- ------
Net asset value - end of
period $ 11.97 $ 11.86 $ 11.79 $ 12.74 $ 12.02 $ 11.74 $ 11.45 $ 11.30 $ 11.24
====== ===== ====== ======== ===== ===== ===== ==== ======
Total return++ 6.20% 6.93% (6.65)%+++ 11.69% 8.89% 9.95% 8.46% 7.13% 8.18%
Ratios (to average net
assets)/Supplemental data:
Expenses## 1.20% 1.19% 1.23%+ 1.22% 1.12% 1.15% 1.18% 1.21% 0.97%
Net investment income 5.10% 5.37% 5.09%+ 5.06% 5.74% 6.07% 6.30% 6.35% 6.90%
Portfolio turnover 18% 30% 4% 10% 11% 22% 47% 54% 27%
Net assets at end of
period (000 omitted) $166,801 $171,045 $173,316 $187,307 $144,539 $101,434 $75,922 $57,675 $45,391
</TABLE>
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1996, the per share
distribution in excess of net investment income was $0.0006 for Class A
shares.
See notes to financial statements
31
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
South Carolina Fund
- -------------------------------------------- --------------------- ---------- ---------- --------- -----------
Two Months
Year Ended Year Ended Ended Year Ended
January 31, March 31, March 31, January 31,
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
1988 1987 1996 1995 1994 1994**
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
Class A Class B
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.54 $ 10.89 $ 11.86 $ 11.78 $ 12.73 $12.67
-------- ----- -------- -------- ------- ---------
Income from investment operations# -
Net investment income $ 0.77 $ 0.77 $ 0.52 $ 0.54 $ 0.08 $ 0.21
Net realized and unrealized gain (loss) on
investments (0.36) 0.69 0.12 0.17 (0.94) 0.06
-------- ----- -------- -------- ------- ---------
Total from investment operations $ 0.41 $ 1.46 $ 0.64 $ 0.71 $ (0.86) $ 0.27
-------- ----- -------- -------- ------- ---------
Less distributions declared to shareholders -
From net investment income++++ $ (0.77) $ (0.78) $ (0.53) $ (0.54) $ (0.08) $(0.20)
From net realized gain on investments -- (0.03) -- (0.06) -- --
In excess of net investment income -- -- -- -- (0.01) (0.01)
In excess of net realized gain on
investments -- -- -- (0.03) -- --
From paid-in capital (0.04) -- -- -- -- --
-------- ----- -------- -------- ------- ---------
Total distributions declared to
shareholders $ (0.81) $ (0.81) $ (0.53) $ (0.63) $ (0.09) $(0.21)
-------- ----- -------- -------- ------- ---------
Net asset value - end of period $ 11.14 $ 11.54 $ 11.97 $ 11.86 $ 11.78 $12.73
======== ===== ======== ======== ======= =========
Total return++ 3.92% 14.05% 5.43% 6.26% (6.77)%+++ 5.47%+
Ratios (to average net assets)/Supplemental data:
Expenses## 0.81% 0.99% 1.92% 1.90% 1.96%+ 1.90%+
Net investment income 7.07% 7.00% 4.35% 4.63% 4.29%+ 3.86%+
Portfolio turnover 12% 13% 18% 30% 4% 10%
Net assets at end of period (000 omitted) $34,025 $27,978 $18,420 $12,964 $10,085 $8,217
</TABLE>
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1996 and March 31, 1995,
the per share distribution in excess of net investment income for Class B
shares was $0.0005 and $0.00436, respectively.
See notes to financial statements
32
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Tennessee Fund
- ---------------------------------------- ---------------------- --------- ---------- -------- -------- ----------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
- ---------------------------------------- ---------- -------- --------- ---------- -------- -------- ----------
1996 1995 1994 1994 1993 1992 1991
- ---------------------------------------- ---------- -------- --------- ---------- -------- -------- ----------
Class A
-------------------------------------- -------- ------ ------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.27 $ 10.26 $ 10.94 $ 10.37 $ 10.10 $ 9.90 $ 9.80
-------- ------ ------- -------- ------ ------ --------
Income from investment operations# -
Net investment incomeS. $ 0.54 $ 0.56 $ 0.09 $ 0.57 $ 0.57 $ 0.61 $ 0.62
Net realized and unrealized gain (loss)
on investments 0.13 0.02 (0.68) 0.57 0.31 0.30 0.13
-------- ------ ------- -------- ------ ------ --------
Total from investment operations $ 0.67 $ 0.58 $ (0.59) $ 1.14 $ 0.88 $ 0.91 $ 0.75
-------- ------ ------- -------- ------ ------ --------
Less distributions declared to shareholders -
From net investment income++++++++ $ (0.54) $ (0.56) $ (0.07) $ (0.54) $ (0.57) $ (0.66) $ (0.63)
From net realized gain on
investments++++ -- -- -- -- (0.01) (0.05) (0.02)
In excess of net investment income -- -- (0.02) (0.03) (0.03) -- --
In excess of net realized gain on
investments -- (0.01) -- -- -- -- --
From paid-in capital++++++ -- -- -- -- -- -- --
-------- ------ ------- -------- ------ ------ --------
Total distributions declared to
shareholders $ (0.54) $ (0.57) $ (0.09) $ (0.57) $ (0.61) $ (0.71) $ (0.65)
-------- ------ ------- -------- ------ ------ --------
Net asset value - end of period $ 10.40 $ 10.27 $ 10.26 $ 10.94 $ 10.37 $ 10.10 $ 9.90
======== ====== ======= ======== ====== ====== ========
Total return++ 6.66% 5.86% (5.39)%+++ 11.20% 9.03% 9.50% 7.96%
Ratios (to average net assets)/Supplemental dataS.:
Expenses## 1.21% 1.22% 1.21%+ 1.29% 1.14% 1.15% 1.03%
Net investment income 5.18% 5.52% 5.31%+ 5.25% 5.89% 6.11% 6.37%
Portfolio turnover 20% 27% 4% 12% 9% 42% 58%
Net assets at end of period (000
omitted) $109,811 $117,572 $117,117 $123,050 $99,443 $87,898 $72,108
* For the period from the commencement of investment operations, August 12, 1988 to January 31, 1989.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
(two double daggers) For the year ended March 31, 1995, the per share distribution from net realized gain on investments was
$0.0014.
(three double daggers) For the year ended January 31, 1991, the per share distribution from paid-in capital was $0.0013.
(four double daggers) For the year ended March 31, 1996, the per share distribution in excess of net investment income was
$0.0024.
(section) The investment adviser did not impose all or a portion of its advisory, distribution or expense reimbursement fees for
the periods indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income -- -- -- -- $ 0.61 -- --
Ratios (to average net assets):
Expenses -- -- -- -- 1.17% -- --
Net investment income -- -- -- -- 6.23% -- --
</TABLE>
See notes to financial statements
33
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Tennessee Fund
- -------------------------------------------- --------------------- ---------- ---------- --------- -----------
Two Months
Year Ended Year Ended Ended Year Ended
January 31, March 31, March 31, January 31,
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
1990 1989* 1996 1995 1994 1994**
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
Class A Class B
- -------------------------------------------- --------------------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.68 $ 9.53 $ 10.26 $ 10.26 $10.95 $10.87
-------- ----- -------- -------- ------- ---------
Income from investment operations# -
Net investment incomeS. $ 0.67 $ 0.22 $ 0.46 $ 0.48 $ 0.08 $ 0.19
Net realized and unrealized gain (loss) on
investments 0.11 0.10 0.14 0.01 (0.69) 0.08
-------- ----- -------- -------- ------- ---------
Total from investment operations $ 0.78 $ 0.32 $ 0.60 $ 0.49 $(0.61) $ 0.27
-------- ----- -------- -------- ------- ---------
Less distributions declared to shareholders -
From net investment income++++++ $ (0.66) $ (0.17) $ (0.47) $ (0.48) $(0.08) $(0.19)
From net realized gain on investments++++ -- -- -- -- -- --
In excess of net realized gain on
investments -- -- -- (0.01) -- --
-------- ----- -------- -------- ------- ---------
Total distributions declared to
shareholders $ (0.66) $ (0.17) $ (0.47) $ (0.49) $(0.08) $(0.19)
-------- ----- -------- -------- ------- ---------
Net asset value - end of period $ 9.80 $ 9.68 $ 10.39 $ 10.26 $10.26 $10.95
======== ===== ======== ======== ======= =========
Total return 8.30% 3.43%+++ 5.89% 5.00% (5.59)%+++ 2.48%+++
Ratios (to average net assets)/Supplemental
data:
Expenses## 0.53% 0.40%+ 1.93% 1.94% 1.93%+ 1.93%+
Net investment income 6.70% 5.98%+ 4.43% 4.80% 4.49%+ 4.20%+
Portfolio turnover 78% 5% 20% 27% 4% 12%
Net assets at end of period (000 omitted) $56,048 $15,832 $12,935 $10,006 $5,294 $3,818
* For the period from the commencement of investment operations, August 12, 1988 to January 31, 1989.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(two double daggers) For the year ended March 31, 1995, the per share distribution from net realized gain on investments was
$0.0014.
(three double daggers) For the year ended March 31, 1996, the per share distribution in excess of net investment income was
$0.0021.
(section) Net investment income $ 0.60 $ 0.20 -- -- -- --
Ratios (to average net assets):
Expenses 1.24% 0.95%+ -- -- -- --
Net investment income 5.99% 5.43%+ -- -- -- --
</TABLE>
See notes to financial statements
34
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Virginia Fund
------------------------- ------------------- -------- ---------- ------- ------- ------- ------ --------
Two
Year Months
Ended Ended Year Ended
March 31, March 31, January 31,
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
1996 1995 1994 1994 1993 1992 1991 1990 1989
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
Class A
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 11.09 $ 11.15 $ 12.07 $ 11.72 $ 11.44 $ 11.16 $ 10.97 $ 10.91 $ 10.75
------ ----- ------ -------- ----- ----- ----- ---- ------
Income from investment
operations# -
Net investment income $ 0.59 $ 0.56 $ 0.10 $ 0.65 $ 0.68 $ 0.71 $ 0.73 $ 0.73 $ 0.74
Net realized and
unrealized gain (loss)
on investments 0.13 0.04 (0.92) 0.56 0.30 0.34 0.19 0.06 0.16
------ ----- ------ -------- ----- ----- ----- ---- ------
Total from investment
operations $ 0.72 $ 0.60 $ (0.82) $ 1.21 $ 0.98 $ 1.05 $ 0.92 $ 0.79 $ 0.90
------ ----- ------ -------- ----- ----- ----- ---- ------
Less distributions declared to
shareholders -
From net investment
income++++ $ (0.60) $ (0.61) $ (0.06) $ (0.62) $ (0.70) $ (0.77) $ (0.73) $ (0.73) $ (0.74)
From net realized gain
on investments++++++ -- (0.04) -- (0.20) -- -- -- -- --
In excess of net
investment income -- -- (0.04) (0.04) -- -- -- -- --
In excess of net
realized gain on
investments -- (0.01) -- -- -- -- -- -- --
------ ----- ------ -------- ----- ----- ----- ---- ------
Total distributions
declared to
shareholders $ (0.60) $ (0.66) $ (0.10) $ (0.86) $ (0.70) $ (0.77) $ (0.73) $ (0.73) $ (0.74)
------ ----- ------ -------- ----- ----- ----- ---- ------
Net asset value - end of
period $ 11.21 $ 11.09 $ 11.15 $ 12.07 $ 11.72 $ 11.44 $ 11.16 $ 10.97 $ 10.91
====== ===== ====== ======== ===== ===== ===== ==== ======
Total return++ 6.52% 5.67% (6.80)%+++ 10.67% 8.88% 9.76% 8.74% 7.46% 8.76%
Ratios (to average net
assets)/Supplemental data:
Expenses## 1.18% 1.16% 1.17%+ 1.18% 1.08% 1.08% 1.11% 1.12% 1.09%
Net investment income 5.20% 4.91% 5.33%+ 5.37% 6.02% 6.32% 6.64% 6.67% 6.91%
Portfolio turnover 42% 27% 5% 22% 20% 13% 38% 41% 38%
Net assets at end of
period (000 omitted) $418,408 $430,688 $443,580 $479,333 $399,696 $328,664 $275,202 $240,553 $207,680
</TABLE>
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1996 and March 31, 1995,
the per share distribution in excess of net investment income was $0.005 and
$0.003, respectively.
(three double daggers) For the year ended January 31, 1993, the per share
distribution from net realized gain on investments was $0.00348.
See notes to financial statements
35
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Virginia Fund
- -------------------------------------------- --------------------- ---------- ---------- --------- -----------
Two Months
Year Ended Year Ended Ended Year Ended
January 31, March 31, March 31, January 31,
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
1988 1987 1996 1995 1994 1994**
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
Class A Class B
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.38 $ 10.78 $ 11.08 $ 11.14 $ 12.06 $ 12.14
-------- ----- -------- -------- ------- ---------
Income from investment operations# -
Net investment income $ 0.72 $ 0.74 $ 0.51 $ 0.53 $ 0.09 $ 0.22
Net realized and unrealized gain (loss) on
investments (0.57) 0.61 0.13 (0.01) (0.92) 0.01
-------- ----- -------- -------- ------- ---------
Total from investment operations $ 0.15 $ 1.35 $ 0.64 $ 0.52 $ (0.83) $ 0.23
-------- ----- -------- -------- ------- ---------
Less distributions declared to shareholders -
From net investment income++++ $ (0.71) $ (0.75) $ (0.51) $ (0.53) $ (0.09) $ (0.21)
From net realized gain on investments (0.05) -- -- (0.04) -- (0.09)
In excess of net investment income -- -- -- -- -- (0.01)
In excess of net realized gain on
investments -- -- -- (0.01) -- --
From paid-in capital++++++ (0.02) -- -- -- -- --
-------- ----- -------- -------- ------- ---------
Total distributions declared to
shareholders $ (0.78) $ (0.75) $ (0.51) $ (0.58) $ (0.09) $ (0.31)
-------- ----- -------- -------- ------- ---------
Net asset value - end of period $ 10.75 $ 11.38 $ 11.21 $ 11.08 $ 11.14 $ 12.06
======== ===== ======== ======== ======= =========
Total return++ 1.61% 13.12% 5.85% 4.91% (6.92)%+++ 4.93%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.04% 1.02% 1.90% 1.88% 1.88%+ 1.82%+
Net investment income 6.75% 6.73% 4.46% 4.84% 4.52%+ 4.25%+
Portfolio turnover 11% 20% 42% 27% 5% 22%
Net assets at end of period (000 omitted) $192,104 $181,937 $28,420 $22,007 $13,337 $10,877
</TABLE>
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1996, the year ended March
31, 1995 and the two months ended March 31, 1994, the per share distribution
in excess of net investment income was $0.002, $0.005 and $0.002,
respectively.
(three double daggers) For the year ended January 31, 1987 the per share
distribution from paid-in capital was $0.0005.
See notes to financial statements
36
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Virginia Fund
- ----------------------------------------------------- ------------------------ ---------- ------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
- ----------------------------------------------------- ---------- ---------- ---------- ------------
1996 1995 1994 1994***
- ----------------------------------------------------- ---------- ---------- ---------- ------------
Class C
- ----------------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.07 $11.14 $12.06 $11.94
-------- -------- -------- ----------
Income from investment operations# -
Net investment income $ 0.51 $ 0.56 $ 0.08 $ 0.02
Net realized and unrealized gain (loss) on
investments 0.15 (0.04) (0.91) 0.12
-------- -------- -------- ----------
Total from investment operations $ 0.66 $ 0.52 $(0.83) $ 0.14
-------- -------- -------- ----------
Less distributions declared to shareholders -
From net investment income++++ $(0.52) $(0.54) $(0.09) $(0.02)
From net realized gain on investments -- (0.04) -- --
In excess of net realized gain on investments -- (0.01) -- --
-------- -------- -------- ----------
Total distributions declared to shareholders $(0.52) $(0.59) $(0.09) $(0.02)
-------- -------- -------- ----------
Net asset value - end of period $11.21 $11.07 $11.14 $12.06
======== ======== ======== ==========
Total return 6.02% 4.85% (6.91)%+++ 17.05%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.83% 1.80% 1.82%+ 1.18%+
Net investment income 4.53% 4.90% 4.48%+ 1.79%+
Portfolio turnover 42% 27% 5% 22%
Net assets at end of period (000 omitted) $3,366 $2,300 $1,760 $ 833
</TABLE>
*** For the period from the commencement of offering of Class C shares,
January 3, 1994 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(two double daggers) For the years ended March 31, 1996, March 31, 1995 and
January 31, 1994, the per share distribution in excess of net investment
income was $0.005, $0.002 and $0.002, respectively.
See notes to financial statements
37
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
West Virginia Fund
------------------------- ------------------- -------- ---------- ------- ------- ------- ------ --------
Two
Year Months
Ended Ended Year Ended
March 31, March 31, January 31,
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
1996 1995 1994 1994 1993 1992 1991 1990 1989
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
Class A
------------------------- -------- ------- -------- ---------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 11.21 $ 11.19 $ 12.06 $ 11.50 $ 11.20 $ 10.93 $ 10.72 $ 10.68 $ 10.51
------ ----- ------ -------- ----- ----- ----- ---- ------
Income from investment
operations# -
Net investment income $ 0.61 $ 0.62 $ 0.01 $ 0.64 $ 0.66 $ 0.70 $ 0.71 $ 0.71 $ 0.77
Net realized and
unrealized gain (loss)
on investments 0.12 0.03 (0.78) 0.69 0.34 0.34 0.21 0.04 0.18
------ ----- ------ -------- ----- ----- ----- ---- ------
Total from investment
operations $ 0.73 $ 0.65 $ (0.77) $ 1.33 $ 1.00 $ 1.04 $ 0.92 $ 0.75 $ 0.95
------ ----- ------ -------- ----- ----- ----- ---- ------
Less distributions declared to
shareholders -
From net investment
income++++ $ (0.61) $ (0.62) $ (0.06) $ (0.61) $ (0.69) $ (0.76) $ (0.71) $ (0.71) $ (0.78)
From net realized gain
on investments -- -- -- (0.12) (0.01) (0.01) -- -- --
In excess of net
investment income -- -- (0.04) (0.04) -- -- -- -- --
In excess of net
realized gain on
investments -- (0.01) -- -- -- -- -- -- --
------ ----- ------ -------- ----- ----- ----- ---- ------
Total distributions
declared to
shareholders $ (0.61) $ (0.63) $ (0.10) $ (0.77) $ (0.70) $ (0.77) $ (0.71) $ (0.71) $ (0.78)
------ ----- ------ -------- ----- ----- ----- ---- ------
Net asset value - end of
period $ 11.33 $ 11.21 $ 11.19 $ 12.06 $ 11.50 $ 11.20 $ 10.93 $ 10.72 $ 10.68
====== ===== ====== ======== ===== ===== ===== ==== ======
Total return++ 6.58% 6.07% (6.37)%+++ 11.80% 9.12% 9.84% 8.91% 7.26% 9.43%
Ratios (to average net
assets)/Supplemental data:
Expenses## 1.22% 1.19% 1.30%+ 1.24% 1.15% 1.17% 1.21% 1.22% 0.86%
Net investment income 5.30% 5.62% 5.36%+ 5.30% 5.97% 6.33% 6.59% 6.63% 7.01%
Portfolio turnover 11% 23% 2% 26% 19% 14% 37% 34% 9%
Net assets at end of
period (000 omitted) $134,514 $127,616 $130,726 $141,190 $115,289 $80,440 $61,984 $52,398 $43,026
</TABLE>
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the year ended March 31, 1996, the per share
distribution in excess of net investment income was $0.002.
See notes to financial statements
38
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
West Virginia Fund
- -------------------------------------------- --------------------- ---------- ---------- --------- -----------
Two Months
Year Ended Year Ended Ended Year Ended
January 31, March 31, March 31, January 31,
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
1988 1987 1996 1995 1994 1994**
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
Class A Class B
- -------------------------------------------- ---------- ------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.30 $ 10.77 $ 11.21 $ 11.19 $12.06 $12.13
-------- ----- -------- -------- ------- ---------
Income from investment operations# -
Net investment income $ 0.77 $ 0.81 $ 0.52 $ 0.53 $ 0.01 $ 0.22
Net realized and unrealized gain (loss) on
investments (0.72) 0.56 0.12 0.04 (0.87) 0.05
-------- ----- -------- -------- ------- ---------
Total from investment operations $ 0.05 $ 1.37 $ 0.64 $ 0.57 $(0.86) $ 0.27
-------- ----- -------- -------- ------- ---------
Less distributions declared to shareholders -
From net investment income++++ $ (0.76) $ (0.81) $ (0.52) $ (0.54) $(0.01) $(0.21)
From net realized gain on investments (0.02) (0.03) -- -- -- (0.12)
In excess of net investment income -- -- -- -- -- (0.01)
In excess of net realized gain on
investments -- -- -- (0.01) -- --
From paid-in capital++++++ (0.06) -- -- -- -- --
-------- ----- -------- -------- ------- ---------
Total distributions declared to
shareholders $ (0.84) $ (0.84) $ (0.52) $ (0.55) $(0.01) $(0.34)
-------- ----- -------- -------- ------- ---------
Net asset value - end of period $ 10.51 $ 11.30 $ 11.33 $ 11.21 $11.19 $12.06
======== ===== ======== ======== ======= =========
Total return++ 0.76% 13.42% 5.81% 5.30% (6.48)%+++ 5.59%+
Ratios (to average net assets)/Supplemental data:
Expenses## 0.79% 0.87% 1.94% 1.91% 2.02%+ 1.89%+
Net investment income 7.32% 7.42% 4.56% 4.87% 4.56%+ 4.14%+
Portfolio turnover 11% 9% 11% 23% 2% 26%
Net assets at end of period (000 omitted) $36,276 $34,436 $12,647 $10,046 $5,456 $4,530
</TABLE>
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(double dagger) Total returns for Class A shares do not include the
applicable sales charge. If the charge had been included, the results would
have been lower.
(two double daggers) For the years ended March 31, 1996 and March 31, 1995,
the per share distribution in excess of net investment income for Class B
shares was $0.002 and $0.005.
(three double daggers) For the year ended January 31, 1987, the per share
distribution from paid-in capital was $0.0018.
See notes to financial statements
39
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Municipal Series 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. The Trust presently
consists of nineteen Funds, as follows: MFS Municipal Income Fund, MFS
Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California
Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal
Bond Fund, MFS Louisiana Municipal Bond Fund, MFS Maryland Municipal Bond
Fund* (Maryland Fund), MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund* (North Carolina Fund), MFS Pennsylvania Municipal Bond
Fund, MFS South Carolina Municipal Bond Fund* (South Carolina Fund), MFS
Tennessee Municipal Bond Fund* (Tennessee Fund), MFS Texas Municipal Bond
Fund, MFS Virginia Municipal Bond Fund* (Virginia Fund), MFS Washington
Municipal Bond Fund, and MFS West Virginia Municipal Bond Fund* (West
Virginia Fund). Each Fund, except MFS Municipal Income Fund, is
non-diversified.
The Funds denoted with an asterisk above are included within these financial
statements.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Because each Fund invests primarily in the securities of a single
state and its political subdivisions, each Fund is vulnerable to the effects
of changes in the legal and economic environment of that particular state.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Futures contracts, options and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility
and short-term repurchase rates. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Futures Contracts - Each Fund may enter into futures contracts for the
delayed delivery of securities or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, each 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. Each Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
rates or securities prices. Investments in interest rate futures for purposes
other than hedging may be made to modify the duration of the portfolio
without incurring the additional transaction costs involved in buying and
selling the underlying securities. Investments in index contracts, or
contracts on related options, for purposes other than hedging may be made
when a Fund has cash on hand and wishes to participate in anticipated market
appreciation while the cash is being invested. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the
futures contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Each 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 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.
Fees Paid Indirectly - The Trust's custodian bank calculates its fee based on
each Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by each
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Trust'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. Each 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 each 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.
40
<PAGE>
Notes to Financial Statements - continued
Distributions paid by each Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for
federal income tax purposes because each Fund intends to meet certain
requirements of the Code applicable to regulated investment companies, which
will enable each 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.
Each Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains.
During the year ended March 31, 1996, the following amounts were reclassified
from accumulated net realized loss on investments to accumulated
distributions in excess of net investment income due to timing differences
between book and tax accounting for accrued market discount on disposal of
securities:
North West
Carolina Tennessee Virginia
Fund Fund Fund
================================== ========= ========= ==========
$309,303 $80,913 $4,179
With respect to the Maryland, South Carolina and Virginia Funds, the
following amounts were reclassified to accumulated distributions in excess of
net investment income and paid-in capital, respectively, from accumulated net
realized loss on investments due to timing differences between book and tax
accounting for accrued market discount on disposal of securities:
South
Maryland Carolina Virginia
Fund Fund Fund
=================================== ========= ========= ===========
Accumulated Undistributed Net
Investment Income $106,154 $116,452 $270,092
Paid-In Capital $154,720 $ 88,914 $ 80
These changes had no effect on the net assets or the net asset value per
share of the Funds.
At March 31, 1996, the following Funds, for federal income tax purposes, had
capital loss carryfowards which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization
or expiration.
<TABLE>
<CAPTION>
North South West
Maryland Carolina Carolina Tennessee Virginia Virginia
Expiration Date Fund Fund Fund Fund Fund Fund
================== ========= ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C> <C>
March 31, 2003 $ -- $9,803,419 $ -- $ 381,262 $ 6,639,093 $ 295,369
March 31, 2004 4,231,087 2,709,187 635,014 3,840,742 2,589,345
--------- --------- --------- --------- --------- -----------
Total $4,231,087 $9,803,419 $2,709,187 $1,016,276 $10,479,835 $2,884,714
========= ========= ========= ========= ========= ===========
</TABLE>
Multiple Classes of Shares of Beneficial Interest - Each Fund offers both
Class A and Class B shares. The North Carolina and Virginia Funds offer Class
C shares. The three classes of shares differ in their respective shareholder
servicing agent, distribution and service fees. All shareholders bear the
common expenses of the Fund pro rata based on the 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.
(3) Transactions with Affiliates
Investment Adviser - The Trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.55%
of each Fund's average daily net assets.
The Trust pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain of the
officers and Trustees of the Trust are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Trust has
an unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation for the year ended March 31, 1996
is a net periodic pension expense for each Fund, as follows:
<TABLE>
<CAPTION>
North South West
Maryland Carolina Carolina Tennessee Virginia Virginia
Fund Fund Fund Fund Fund Fund
================== ========= ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C> <C>
$4,445 $4,445 $4,445 $3,661 $4,445 $4,445
</TABLE>
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$38,119, $112,097, $53,628, $31,401, $91,953 and $56,110 as its portion of
the sales charge on sales of Class A shares of the Maryland, North Carolina,
South Carolina, Tennessee, Virginia and West Virginia Funds, respectively for
the year ended March 31, 1996.
41
<PAGE>
Notes to Financial Statements -- continued
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 each Fund will pay MFD up to
0.35% per annum of its average daily net assets attributable to Class A
shares in order that MFD may pay expenses on behalf of the Fund related to
the distribution and servicing of its shares. These expenses include a
service fee to each securities dealer that enters into a sales agreement with
MFD of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class A shares which are attributable to that securities
dealer, a distribution fee to MFD of up to 0.10% per annum of the Fund's
average daily net assets attributable to Class A shares, commissions to
dealers and payments to MFD wholesalers for sales at or above a certain
dollar level, and other such distribution-related expenses that are approved
by the Fund. MFD retains the service fee for accounts not attributable to a
securities dealer which amounted to $19,467, $27,829, $11,668, $10,327,
$26,797 and $7,973 for the Maryland, North Carolina, South Carolina,
Tennessee, Virginia and West Virginia Funds for the year ended March 31,
1996. Fees incurred under the distribution plan during the year ended March
31, 1996 were 0.35% of each Fund's average daily net assets attributable to
Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that each Fund will pay
MFD a distribution fee of 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. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class
B 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. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $742,
$1,180, $1,968, $851, $1,496 and $204 for the Maryland, North Carolina, South
Carolina, Tennessee, Virginia and West Virginia Funds, respectively for Class
B shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $716, and $2,214 for the North Carolina
and Virginia Funds, respectively for Class C shares. Fees incurred under the
distribution plans during the year ended March 31, 1996 were 1.00% of each of
the Fund's average daily net assets attributable to Class B and Class C
shares on an annualized basis.
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
shareholder redemption within twelve months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended March 31, 1996 on Class
A and Class B shares were as follows:
<TABLE>
<CAPTION>
North South West
Maryland Carolina Carolina Tennessee Virginia Virginia
CDSC Imposed Fund Fund Fund Fund Fund Fund
================== ========= ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C> <C>
Class A $ -- $ 2,053 $ 430 $ 4 $ -- $ 4
--------- --------- --------- --------- --------- -----------
Class B $59,233 $66,144 $37,842 $19,385 $46,610 $33,870
========= ========= ========= ========= ========= ===========
</TABLE>
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, were as follows
(000 omitted):
<TABLE>
<CAPTION>
North South West
Maryland Carolina Carolina Tennessee Virginia Virginia
Fund Fund Fund Fund Fund Fund
================== ========= ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C> <C>
Purchases $22,530 $135,894 $32,879 $24,954 $185,350 $25,068
Sales 32,039 155,432 35,751 33,123 205,590 15,992
</TABLE>
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Funds, as computed on a federal income tax basis,
are as follows (000 omitted):
<TABLE>
<CAPTION>
North South West
Maryland Carolina Carolina Tennessee Virginia Virginia
Fund Fund Fund Fund Fund Fund
================== ========= ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C> <C>
Aggregate cost $143,432 $423,576 $173,715 $115,386 $417,692 $137,398
--------- --------- --------- --------- --------- -----------
Gross unrealized
appreciation $ 8,668 $ 24,093 $ 9,639 $ 6,694 $ 23,077 $ 8,354
Gross unrealized
depreciation (1,115) (3,220) (855) (913) (3,039) (1,308)
--------- --------- --------- --------- --------- -----------
Net unrealized
appreciation $ 7,553 $ 20,873 $ 8,784 $ 5,781 $ 20,038 $ 7,046
========= ========= ========= ========= ========= ===========
</TABLE>
(5) Shares of Beneficial Interest
The 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:
42
<PAGE>
Notes to Financial Statements -- continued
<TABLE>
<CAPTION>
Class A Shares Maryland Fund North Carolina Fund South Carolina Fund
--------------------- --------------------- -----------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Shares sold 576 $ 6,386 7,027 $ 82,500 1,071 $ 12,906
Shares issued to shareholders in reinvestment
of distributions 358 3,959 1,060 12,349 395 4,764
Shares reacquired (1,602) (17,764) (10,276) (120,480) (1,950) (23,552)
------- ------- ------- ------- ------- ---------
Net decrease (668) $ (7,419) (2,189) $ (25,631) (484) $ (5,882)
======= ======= ======= ======= ======= =========
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
Shares sold 793 $ 8,524 3,008 $ 33,720 1,422 $ 16,607
Shares issued to shareholders in reinvestment
of distributions 461 4,949 1,457 16,419 502 5,842
Shares reacquired (2,777) (29,402) (7,002) (77,840) (2,209) (25,465)
------- ------- ------- ------- ------- ---------
Net increase (decrease) (1,523) $(15,929) (2,537) $ (27,701) (285) $ (3,016)
======= ======= ======= ======= ======= =========
Tennessee Fund Virginia Fund West Virginia Fund
------------------- ------------------- ---------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
Shares sold 527 $ 5,493 7,192 $ 82,090 1,206 $ 13,870
Shares issued to shareholders in reinvestment
of distributions 271 2,835 1,009 11,447 328 3,752
Shares reacquired (1,692) (17,696) (9,726) (111,003) (1,047) (11,988)
------- ------- ------- ------- ------- ---------
Net increase (decrease) (894) $ (9,368) (1,525) $ (17,466) 487 $ 5,634
======= ======= ======= ======= ======= =========
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
Shares sold 1,284 $ 13,091 2,822 $ 30,863 908 $ 10,025
Shares issued to shareholders in reinvestment
of distributions 311 3,153 1,219 13,336 355 3,917
Shares reacquired (1,555) (15,606) (4,988) (54,182) (1,557) (16,951)
------- ------- ------- ------- ------- ---------
Net decrease 40 $ 638 (947) $ (9,983) (294) $ (3,009)
======= ======= ======= ======= ======= =========
Class B Shares Maryland Fund North Carolina Fund South Carolina Fund
------------------- ------------------- ---------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
Shares sold 485 $ 5,368 952 $ 11,119 575 $ 6,957
Shares issued to shareholders in reinvestment
of distributions 27 297 70 821 32 384
Shares reacquired (292) (3,242) (395) (4,599) (161) (1,935)
------- ------- ------- ------- ------- ---------
Net increase 220 $ 2,423 627 $ 7,341 446 $ 5,406
======= ======= ======= ======= ======= =========
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
Shares sold $
598 $ 6,438 1,174 13,233 383 $ 4,461
Shares issued to shareholders in reinvestment
of distributions 25 271 71 795 30 344
Shares reacquired (197) (2,109) (328) (3,609) (175) (2,005)
------- ------- ------- ------- ------- ---------
Net increase $
426 $ 4,600 917 10,419 238 $ 2,800
======= ======= ======= ======= ======= =========
Tennessee Fund Virginia Fund West Virginia Fund
------------------- ------------------- ---------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
Shares sold 362 $ 3,771 706 $ 8,043 317 $ 3,621
Shares issued to shareholders in reinvestment
of distributions 27 284 43 494 30 346
Shares reacquired (120) (1,249) (199) (2,269) (127) (1,455)
------- ------- ------- ------- ------- ---------
Net increase 269 $ 2,806 550 $ 6,268 220 $ 2,512
======= ======= ======= ======= ======= =========
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount Shares Amount
=================================================================================================================================
Shares sold 505 $ 5,138 440 $ 4,834 918 $ 10,079
Shares issued to shareholders in reinvestment
of distributions 19 192 20 220 37 408
Shares reacquired (65) (664) (51) (555) (166) (1,815)
------- ------- ------- ------- ------- ---------
Net increase 459 $ 4,666 409 $ 4,499 789 $ 8,672
======= ======= ======= ======= ======= =========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Class C Shares North Carolina Fund Virginia Fund
------------------- -------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount
=============================================== ======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold 334 $ 3,931 199 $ 2,264
Shares issued to shareholders in reinvestment
of distributions 18 205 8 92
Shares reacquired (257) (3,011) (114) (1,289)
------- ------- ------- -------
Net increase 95 $ 1,125 93 $ 1,067
======= ======= ======= =======
North Carolina Fund West Virginia Fund
------------------- -------------------
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount
=============================================== ======= ======= ======= =======
Shares sold 637 $ 7,160 1,049 $ 11,525
Shares issued to shareholders in reinvestment
of distributions 19 219 23 250
Shares reacquired (523) (5,757) (1,022) (10,805)
------- ------- ------- -------
Net increase 133 $ 1,622 50 $ 970
======= ======= ======= =======
</TABLE>
(6) Line of Credit
The Trust entered into an agreement which enables each of the Funds to
participate with other funds managed by MFS in an unsecured line of credit
with a bank which permits borrowings up to $350 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 each of the Funds for the year ended March 31, 1996 ranged from $1,565 to
$10,487.
(7) Financial Instruments
The Trust 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. These financial instruments include
futures contracts. The notional or contractual amounts of these instruments
represent the investment a 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.
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Appreciation
Fund Description Expiration Contracts Position (Depreciation)
====================== ======================== =========== ========== ========= =================
<S> <C> <C> <C> <C> <C>
Maryland Fund U.S. Treasury Bonds June 1996 80 Short $ 286,761
North Carolina Fund U.S. Treasury Bonds June 1996 230 Short $(140,620)
Virginia Fund U.S. Treasury Bonds June 1996 400 Short $ (66,028)
West Virginia Fund U.S. Treasury Bonds June 1996 50 Short $ (23,878)
</TABLE>
At March 31, 1996, each Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
The Trust 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 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 March 31, 1996:
<TABLE>
<CAPTION>
Principal
(000 Unrealized
Fund Description Index Omitted) Value Depreciation
====================== ========================================== =============== ========== ======= =============
<S> <C> <C> <C> <C> <C>
Maryland Fund Puerto Rico Public Buildings Authority, PSA Municipal
6.285s, 2016 Swap $3,000 $2,788,260 $(211,740)
North Carolina Fund Puerto Rico Public Buildings Authority, PSA Municipal
6.285s, 2016 Swap $6,500 $6,041,230 $(458,770)
South Carolina Fund Puerto Rico Telephone Authority Rev.,
5.59s, 2004 J. J. Kenny $1,000 $ 941,000 $(59,000)
Tennessee Fund Puerto Rico Public Buildings Authority, PSA Municipal
6.285s, 2016 Swap $2,000 $1,858,840 $(141,160)
Puerto Rico Telephone Authority Rev.,
5.59s, 2004 J.J. Kenny 2,000 1,882,000 (118,000)
Virginia Fund Puerto Rico Public Buildings Authority, PSA Municipal
6.285s, 2016 Swap $6,500 $6,041,230 $(458,770)
West Virginia Fund Puerto Rico Public Buildings Authority, PSA Municipal
6.285s, 2016 Swap $2,000 $1,858,840 $(141,160)
</TABLE>
(8) Restricted Securities
Each Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At March 31,
1996, the North Carolina Fund and the Virginia Fund owned the following
restricted securities (constituting 1.17% and 1.88%, respectively, of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Funds do not have the right to demand that such
securities be registered. The value of these securities are determined by
valuations supplied by a pricing service or broker. These securities may be
offered and sold to "qualified institutional buyers" under Rule 144A of the
1933 Act.
44
<PAGE>
Notes to Financial Statements -- continued
<TABLE>
<CAPTION>
Par Amount
Date of (000
Fund Description Acquisition Omitted) Cost Value
====================== ========================================== =============== ========== ======= =============
<S> <C> <C> <C> <C> <C>
North Carolina Fund Pasquotank County, NC, Certificates of
Participation, MBIA, 5s, 2015 12/14/95 $3,000 $2,846,250 $2,730,270
Randolph County, NC, Certificates of
Participation, MBIA, 5.3s, 2015 11/16/95 2,750 2,644,486 2,585,495
Virginia Fund Fairfax County, VA, Economic Development
Authority, Lease Rev., 5.25s, 2018 6/7/95 $5,500 $5,284,895 $5,061,925
Puerto Rico Public Buildings Authority,
Government Facilities, 5.5s, 2021 3/19/96 1,000 954,000 960,420
Virginia State Public Building Authority,
5.2s, 2015 1/25/96 2,610 2,572,259 2,451,573
</TABLE>
Independent Auditors' Report
To the Trustees of MFS Municipal Series Trust and Shareholders of the
Portfolios of MFS Municipal Series Trust:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of MFS Maryland Municipal Bond Fund,
MFS North Carolina Municipal Bond Fund, MFS South Carolina Municipal Bond
Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund and
MFS West Virginia Municipal Bond Fund (portfolios of MFS Municipal Series
Trust) as of March 31, 1996, the related statements of operations for the
year then ended, the statements of changes in net assets for the years ended
March 31, 1996 and 1995, and the financial highlights for each of the years
in the two year period ended March 31, 1996, the two months ended March 31,
1994, and each of the years in the eight-year period ended January 31, 1994.
These financial statements and financial highlights are the responsibility of
the Trust'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 March 31, 1996 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 each of the
aforementioned Funds of MFS Municipal Series Trust at March 31, 1996, the
results of their operations, the changes in their net assets, and their
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 29, 1996
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>
MFS(R) Municipal
Series Trust [DALBAR MFS #1 logo]
500 Boylston Street
Boston, MA 02116
MFS(R) Maryland Municipal Bond Fund
MFS(R) North Carolina Municipal Bond Fund
MFS(R) South Carolina Municipal Bond Fund
MFS(R) Tennessee Municipal Bond Fund
MFS(R) Virginia Municipal Bond Fund
MFS(R) West Virginia Municipal Bond Fund
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
[logo]
MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
40/240
41/241/341
42/242
43/243/343
44/244
MST-2A-5/96-56M53/253
<PAGE>
[MFS LOGO]
Annual Report for
Year Ended
March 31, 1996
MFS(R) Municipal Series Trust
For the States of: Alabama, Arkansas, Georgia, Massachusetts,
New York and Pennsylvania
<PAGE>
MFS(R) MUNICIPAL SERIES TRUST
Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey*
Private Investor; Former Chairman and Director
(until 1991), Massachusetts Financial Services
Company; Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Marshall N. Cohan
Private Investor
Lawrence H. Cohn, M.D.
Chief of Cardiac Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE
Chief Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill
Private Investor;
Director, Rockefeller Financial Services, Inc.
(investment adviser)
Walter E. Robb, III
President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); Trustee, Landmark Funds
(mutual funds)
Arnold D. Scott*
Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames*
President and Director,
Massachusetts Financial Services Company
J. Dale Sherratt
President, Insight Resources, Inc.
(acquisition planning specialists)
Ward Smith
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Managers
David R. King*
Geoffrey L. Schechter*
David B. Smith*
Treasurer
W. Thomas London*
*Affiliated with the Investment Adviser
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Deloitte & Touche LLP
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
For information on MFS mutual funds,
call your financial adviser or, for an
information kit, call toll free:
1-800-637-2929 any business
day from 9 a.m. to 5 p.m. Eastern time
(or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
equipped with a Telecommunications Device
for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
[DALBAR #1 LOGO]
Top-Rated Service
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score--on a scale of 1 to 4--in the 1995 survey. A total
of 71 firms responded, offering input on the quality of service they received
from 36 mutual fund companies nationwide. The survey contained questions about
service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
<PAGE>
Letter to Shareholders
Dear Shareholders:
Declining interest rates and a favorable inflation outlook helped create
opportunities in the municipal market during the past 12 months. During the
fiscal year ended March 31, 1996, all classes of shares of the individual
state Funds available within the Trust generated positive total returns. For
the most part, these returns underperformed the 8.38% return of the Lehman
Brothers Municipal Bond Index (the Lehman Index), an unmanaged index of
municipal bond investments rated Baa or higher. However, although this index
is considered the benchmark for performance of municipal bonds, it is
comprised of municipal bonds issued nationwide, while each of the Funds in
the Trust is limited to investing in the bonds of a particular state. Because
individual indices do not exist for all of the states, we have provided a
discussion of each Fund's performance relative to the Lehman Index on the
following pages.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to
quarter. Thus, while one quarter may experience an annualized rate of growth
in Gross Domestic Product (GDP) of less than 1%, another quarter may see
annualized growth in excess of 3%--but, for the year, we believe growth could
stay within our expected range of 2% to 2-1/2%. While some increase in
consumer spending has taken place in the early months of this year,
consumers, who represent two-thirds of the economy, remain in a somewhat
weakened position, due in part to an increase in consumer installment debt in
excess of 30% over the past two years. Meanwhile, growth is also being
constrained by ongoing economic doldrums in Europe and Japan, important
markets for U.S. exports. Here again, we are seeing a few tentative signs,
particularly in Japan, of modest recoveries that could lead to improved
prospects for U.S. exporters. Also, the "lag effect" of increases in
short-term interest rates by the Federal Reserve Board in 1994 and into 1995
is helping to keep growth in check. This lag effect can last up to two years,
and although the Fed did reduce short-term rates late last year and earlier
this year, we expect it to continue its diligent anti-inflationary policies.
Finally, it appears that inflation is likely to remain under control this
year, due in part to a continued moderation in wage pressures and the subdued
level of economic growth. At the same time, we believe the current upward
pressure on energy prices bears close scrutiny, as energy is an important
component of the inflation outlook.
Municipal Bond Market
Interest rates on municipal bonds experienced dramatic swings during the
fiscal year ended March 31, 1996. Rates declined by approximately 70 basis
points (0.70%) during the first nine months of the fiscal year, as a
combination of slowing economic growth and reduced inflationary pressures
enabled the Federal Reserve to begin lowering interest rates. Positive news
out of Washington, D.C. regarding the possibility of a balanced budget
provided further impetus for the rally in fixed-income securities. In the
fourth quarter of the fiscal year, interest rates on municipal securities
increased by about 55 basis points (0.55%) as signs of a reemergence in
economic growth and rising commodity prices raised inflationary concerns.
Further driving interest rates higher was the apparent failure of the federal
government to reach agreement on a balanced budget.
The overall 15-basis point (0.15%) decline in tax-exempt yields during the
fiscal year ended March 31, 1996 was dwarfed by the approximately 70-basis
point (0.70%) decline in yields on long-term U.S. Treasury securities during
the same period, driving the yield ratio of 30-year AAA-rated municipals to
U.S. Treasuries from 79% to 86%. The dramatic underperformance by tax-exempt
securities can be attributed to investors' fears concerning major tax reform,
more specifically, the potential of the implementation of a flat tax and the
removal of municipal bonds' special tax status. While these fears have
subsided somewhat recently as it appears that major tax reform is improbable,
tax-exempt securities are still trading at levels reflective of some modest
prospect of tax reform.
Supply continues to provide a positive foundation for the municipal bond
market. In 1995, new issuance totalled approximately $156 billion, a decline
of 5% from the previous year and nearly one-half of 1993's record level. More
importantly, during 1995 the outstanding supply of municipal bonds declined
by approximately $45 billion. It is expected that new issuance will again be
in the range of $160 billion, barring any sharp decline in interest rates,
and that the outstanding supply will again decline, by approximately $30
billion. Given the favorable technical outlook for municipal bonds and their
current yield ratios compared to U.S. Treasuries, we believe that tax-exempt
securities represent good value (although principal value and interest on
Treasury securities are guaranteed by the U.S. government if held to
maturity).
Portfolio Strategy
Although the structure of each Fund is impacted by the unique market dynamics
of its state, we strive to manage all the Funds in a similar style. We are
generally constructive on the municipal market, although recent volatility
and the aforementioned signs of growth have raised some concerns. Therefore,
we have shortened the durations (measures of interest rate sensitivity) of
some of the longer-term Funds to lessen their interest rate sensitivity. We
have also sought to purchase bonds that came to market at relatively high
yields, which tend to be relatively more defensive and help us maintain
dividend levels.
The focus on credit issues in the municipal market has grown with the Orange
County, California bankruptcy filing, the deterioration of Washington, D.C.'s
financial condition, and many other local problems. At the same time, with
the volatility in interest rates, we feel it is appropriate to maintain very
high quality across the Funds' portfolios. Finally, the rapidly changing
credit landscape
1
<PAGE>
Letter to Shareholders-continued
may present many opportunities that, with our research team, we hope to
identify and take advantage of to enhance the value of the Funds.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
/s/ David R. King /s/ Geoffrey L. Schechter /s/ David B. Smith
David R. King, Geoffrey L. Schechter and David B. Smith
Portfolio Managers
April 12, 1996
Portfolio Manager Profiles
David King has been a member of the MFS investment staff since 1985. A
graduate of the University of New Hampshire and the Babson College Graduate
School of Business Administration, he began his career at MFS as a member of
the Fixed Income Department and was named Assistant Vice President -
Investments in 1987. In 1988 he was named Vice President - Investments. Mr.
King is a Chartered Financial Analyst (C.F.A.) and currently has portfolio
management responsibilities for the Alabama, Arkansas and Pennsylvania state
Funds.
Geoffrey Schechter joined MFS in 1993 as an investment officer in the Fixed
Income Department. A graduate of the University of Texas and the Boston
University Graduate School of Business Administration, he was named Assistant
Vice President - Investments in 1994, Vice President - Investments in 1995
and currently has portfolio management responsibilities for the New York
state Fund. Mr. Schechter is a Certified Public Accountant (C.P.A.) and a
C.F.A.
David Smith has been a member of the MFS investment staff since 1988. A
graduate of Union College and the Babson College Graduate School of Business
Administration, he began his career at MFS as a Senior Treasury Analyst in
the Corporate Treasury Department. He was named a Research Aanalyst in the
Fixed Income Department in 1989, Investment Officer in 1990, Assistant Vice
President - Investments in 1991 and Vice President - Investments in 1993. Mr.
Smith is a C.F.A. and currently has portfolio management responsibilities for
the Georgia and Massachusetts state Funds.
Objective and Policies
The investment objective for each state Fund is to provide current income
exempt from federal income taxes and from the personal income taxes, if any,
of that state.
Each state Fund seeks to achieve its investment objective by investing its
assets primarily in municipal debt instruments. Each Fund may purchase
instruments, the interest on which may be subject to an alternative minimum
tax. Generally, each state Fund will invest at least two-thirds of its assets
in tax-exempt securities in the three highest grades (A or above) of
recognized rating agencies or comparable unrated securities. Each state Fund
may also enter into options and futures transactions and purchase securities
on a "when-issued" basis. A small portion of income may be subject to state,
federal, and/or alternative minimum tax. Capital gains, if any, are subject
to capital gains tax.
The performance of the individual state Funds listed on the following page
includes the reinvestment of distributions but excludes the effects of any
sales charges. Each Fund's results have been compared to the Lehman Index.
The portfolio of each Fund will tend to be structured with respect to
maturity and coupon and sector distribution, reflecting our views on interest
rates, credit quality, and financing trends. However, each Fund's performance
will differ because of supply/demand and credit quality conditions, which
vary from state to state.
2
<PAGE>
Alabama
For the 12 months ended March 31, 1996, Class A shares of the Fund provided a
total return of 7.13%, while Class B shares returned 6.25%. Both returns
underperformed the 8.38% return of the Lehman Index. Class A shares
outperformed the 6.92% average return for Alabama tax-exempt municipal bond
funds, as reported by Lipper Analytical Services, while Class B shares
underperformed the average. The Fund's underperformance relative to the
Lehman Index was due to the Fund's defensive structure, which caused its
performance to lag during the first two quarters of the fiscal year. The Fund
tended to do better in flat and down markets, and also had a higher dividend
yield than it would have had if it had been more aggressively structured.
Arkansas
The Fund's total returns for the fiscal year ended March 31, 1996 of 6.19% on
Class A shares and 5.43% on Class B shares lagged the 8.38% return of the
Lehman Index. The Fund's portfolio includes many older, higher-coupon bonds,
which caused it to underperform when interest rates declined during the first
three quarters. At the same time, these bonds helped maintain the yield at
levels higher than what they would have been had the Fund been restructured
to allow a greater return potential.
Georgia
The Fund's total returns for the fiscal year ended March 31, 1996 of 6.48%
for Class A shares and 5.52% for Class B shares underperformed the 8.38%
return of the Lehman Index, as well as the 7.44% return for the average
Georgia tax-exempt municipal bond fund, as reported by Lipper Analytical
Services, over the same period.
The Fund benefited from its high component of non-callable bonds during the
period of falling interest rates; however, this same position detracted from
performance as interest rates rose precipitously during the first calendar
quarter of 1996.
Massachusetts
The Fund's total returns for the fiscal year ended March 31, 1996 of 6.95%
for Class A shares and 6.27% for Class B shares underperformed the 8.38%
return of the Lehman Index. The performance of the Fund's Class A shares
matched the 6.95% return of the average Massachusetts tax-exempt municipal
bond fund, as reported by Lipper Analytical Services, while the Fund's Class
B shares slightly underperformed this average over the same period.
The Fund benefited by increasing its interest rate exposure during the period
of falling interest rates, by reinvesting proceeds of called bonds, and by
repositioning prerefunded positions into long-term discount bonds. The Fund
also benefited by having some of its high-coupon holdings prerefunded during
the period, substantially increasing the market value of those positions. We
will continue to monitor developments in the health care and utility sectors
to identify opportunities and risks within our current holdings. The Fund has
endeavored to dampen volatility by hedging its positions in the rising
interest rate environment experienced since February 1996.
New York
During the fiscal year ended March 31, 1996, the total returns of 6.98% for
Class A shares and 6.10% for Class B shares underperformed the 8.38% return
of the Lehman Index. Class A shares outperformed the 6.90% average return for
New York state tax-exempt municipal bond funds, as reported by Lipper
Analytical Services, while Class B shares underperformed the average. The
Fund's underperformance relative to the Lehman Index is primarily
attributable to the defensive posture that the Fund maintained during the
first two months of the fiscal year, when interest rates were generally
declining, and the aggressive posture that the Fund maintained during the
fourth quarter of the fiscal year, a period marked by rising interest rates.
Pennsylvania
The Fund provided total returns of 6.85% on Class A shares and 6.23% on Class
B shares for the 12 months ended March 31, 1996, compared to an 8.38% return
for the Lehman Index. Both classes underperformed the 7.46% average return
for Pennsylvania tax-exempt municipal bond funds as reported by Lipper
Analytical Services. The differential was primarily due to the first quarter
results, when the Fund was defensively structured relative to the Lehman
Index. The interest rate sensitivity was increased during the second and
third quarters and performance improved. The Fund has recently become more
defensive in an effort to provide some downside protection should interest
rates continue to rise.
3
<PAGE>
Performance
The following information illustrates the growth of a hypothetical $10,000
investment for each Fund's Class A shares for the periods indicated in
comparison to various market indicators. Fund results reflect the deduction
of the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do
not reflect any fees or expenses. You cannot invest in an index. All results
reflect the reinvestment of all dividends and capital gains.
Class B shares were offered effective September 7, 1993. Information on Class
B share performance appears on the following pages.
Please note that the performance of other classes will be greater than or
less than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
MFS ALABAMA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from February 1,
1990 to March 31, 1996)
<TABLE>
<CAPTION>
MFS Alabama Lehman Brothers Consumer
Days Municipal Bond Fund-A Municipal Bond Index Price Index
<S> <C> <C> <C> <C>
2/1/90 0 9,525 10,000 10,000
3/31/90 58 9,530 10,092 10,102
3/31/91 423 10,289 11,023 10,597
3/31/92 789 11,335 12,125 10,934
3/31/93 1,154 12,848 13,643 11,272
3/31/94 1,519 13,218 13,959 11,554
3/31/95 1,884 14,079 14,996 11,884
3/31/96 2,250 15,083 16,253 12,221
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 3 5 through
Year Years Years 3/31/96
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Alabama Municipal Bond Fund (Class A) including 4.75%
sales charge +2.00% +3.78% +6.90% +6.91%*
-------------------------------------------------------------------------------------------------------------
MFS Alabama Municipal Bond Fund (Class A) at net asset value +7.13% +5.49% +7.95% +7.75%*
-------------------------------------------------------------------------------------------------------------
MFS Alabama Municipal Bond Fund (Class B) with CDSC+ +2.25% -- -- +2.03%++
-------------------------------------------------------------------------------------------------------------
MFS Alabama Municipal Bond Fund (Class B) without CDSC +6.25% -- -- +3.11%++
-------------------------------------------------------------------------------------------------------------
Average Alabama tax-exempt municipal bond fund +6.92% +5.20% +7.78% +7.76%**
-------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% +8.08% +8.19%**
-------------------------------------------------------------------------------------------------------------
Consumer Price Index(S) +2.84% +2.73% +2.89% +3.31%**
-------------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of offering of Class A shares,
February 1, 1990 to March 31, 1996.
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on February 1, 1990. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
4
<PAGE>
MFS ARKANSAS MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from February 3,
1992 to March 31, 1996)
<TABLE>
<CAPTION>
MFS Arkansas Lehman Brothers Consumer
Days Municipal Bond Fund-A Municipal Bond Index Price Index
<S> <C> <C> <C> <C>
2/3/92 0 9,525 10,000 10,000
3/31/92 57 9,512 10,007 10,087
3/31/93 422 10,791 11,260 10,398
3/31/94 787 10,963 11,521 10,659
3/31/95 1,152 11,611 12,377 10,963
3/31/96 1,518 12,329 13,415 11,274
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 3 5 through
Year Years Years 3/31/96
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Arkansas Municipal Bond Fund (Class A) including 4.75%
sales charge +1.16% +2.87% -- +5.16%*
-------------------------------------------------------------------------------------------------------------
MFS Arkansas Municipal Bond Fund (Class A) at net asset value +6.19% +4.54% -- +6.40%*
-------------------------------------------------------------------------------------------------------------
MFS Arkansas Municipal Bond Fund (Class B) with CDSC+ +1.43% -- -- +0.89%++
-------------------------------------------------------------------------------------------------------------
MFS Arkansas Municipal Bond Fund (Class B) without CDSC +5.43% -- -- +1.96%++
-------------------------------------------------------------------------------------------------------------
Average other state tax-exempt municipal bond fund +6.99% +5.40% -- +6.39%**
-------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% -- +7.30%**
-------------------------------------------------------------------------------------------------------------
Consumer Price Index(S) +2.84% +2.73% -- +2.92%**
-------------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of offering of Class A shares,
February 3, 1992 to March 31, 1996.
+These returns reflect the current Class B CDSC of 4% for the 1-year period
and 3% for the period commencing September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on February 1, 1992. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
MFS GEORGIA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from July 1, 1988
to March 31, 1996)
<TABLE>
<CAPTION>
MFS Georgia Lehman Brothers Consumer
Days Municipal Bond Fund-A Municipal Bond Index Price Index
<S> <C> <C> <C> <C>
7/1/88 0 9,525 10,000 10,000
3/31/89 273 9,943 10,517 10,364
3/31/90 638 10,849 11,626 10,907
3/31/91 1,003 11,722 12,699 11,441
3/31/92 1,369 12,900 13,968 11,805
3/31/93 1,734 14,504 15,716 12,169
3/31/94 2,099 14,761 16,081 12,475
3/31/95 2,464 15,595 17,276 12,831
3/31/96 2,830 16,606 18,724 13,195
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 3 5 through
Year Years Years 3/31/96
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Georgia Municipal Bond Fund (Class A) including 4.75% sales
charge +1.39% +2.92% +6.17% +6.69%*
-------------------------------------------------------------------------------------------------------------
MFS Georgia Municipal Bond Fund (Class A) at net asset value +6.48% +4.61% +7.21% +7.35%*
-------------------------------------------------------------------------------------------------------------
MFS Georgia Municipal Bond Fund (Class B) with CDSC+ +1.52% -- -- +0.70%++
-------------------------------------------------------------------------------------------------------------
MFS Georgia Municipal Bond Fund (Class B) without CDSC +5.52% -- -- +1.77%++
-------------------------------------------------------------------------------------------------------------
Average Georgia tax-exempt municipal bond fund +7.44% +5.37% +7.33% +7.97%**
-------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% +8.08% +8.54%**
-------------------------------------------------------------------------------------------------------------
Consumer Price Index(S) +2.84% +2.73% +2.89% +3.66%**
-------------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of offering of Class A shares, June 6,
1988 to March 31, 1996.
+These returns reflect the current Class B CDSC of 4% for the 1-year period
and 3% for the period commencing September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on June 1, 1988. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
5
<PAGE>
MFS MASSACHUSETTS MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 10-Year Period Ended
March 31, 1996)
<TABLE>
<CAPTION>
MFS Massachusetts Lehman Brothers Consumer
Days Municipal Bond Fund-A Municipal Bond Index Price Index
<S> <C> <C> <C> <C>
4/1/86 0 9,525 10,000 10,000
3/31/87 365 10,609 11,097 10,304
3/31/88 731 10,570 11,376 10,705
3/31/89 1,095 11,411 12,196 11,238
3/31/90 1,460 12,302 13,482 11,826
3/31/91 1,825 13,351 14,726 12,405
3/31/92 2,191 14,695 16,197 12,800
3/31/93 2,556 16,516 18,225 13,195
3/31/94 2,921 16,783 18,648 13,526
3/31/95 3,286 17,771 20,034 13,912
3/31/96 3,652 19,006 21,713 14,307
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
1 3 5
Year Years Years 10 Years
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Massachusetts Municipal Bond Fund (Class A) including 4.75%
sales charge +1.88% +3.10% +6.28% +6.64%
--------------------------------------------------------------------------------------------------------
MFS Massachusetts Municipal Bond Fund (Class A) at net asset
value +6.95% +4.79% +7.32% +7.16%
--------------------------------------------------------------------------------------------------------
MFS Massachusetts Municipal Bond Fund (Class B) with CDSC+ +2.27% -- -- +1.62%*
--------------------------------------------------------------------------------------------------------
MFS Massachusetts Municipal Bond Fund (Class B) without CDSC +6.27% -- -- +2.67%*
--------------------------------------------------------------------------------------------------------
Average Massachusetts tax-exempt municipal bond fund** +6.95% +5.19% +7.80% +6.99%
--------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** +8.38% +6.01% +8.08% +8.06%
--------------------------------------------------------------------------------------------------------
Consumer Price Index(S)** +2.84% +2.73% +2.89% +3.65%
--------------------------------------------------------------------------------------------------------
</TABLE>
+These returns reflect the current Class B CDSC of 4% for the 1-year period
and 3% for the period commencing September 7, 1993.
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Source: Lipper Analytical Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
MFS NEW YORK MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from July 1, 1988
to March 31, 1996)
<TABLE>
<CAPTION>
MFS New York Lehman Brothers Consumer
Days Municipal Bond Fund-A Municipal Bond Index Price Index
<S> <C> <C> <C> <C>
7/1/88 0 9,525 10,000 10,000
3/31/89 273 9,923 10,517 10,364
3/31/90 638 10,835 11,626 10,907
3/31/91 1,003 11,863 12,699 11,441
3/31/92 1,369 13,148 13,968 11,805
3/31/93 1,734 15,099 15,716 12,169
3/31/94 2,099 15,432 16,081 12,475
3/31/95 2,464 16,362 17,276 12,831
3/31/96 2,830 17,504 18,724 13,195
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 3 5 through
Year Years Years 3/31/96
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS New York Municipal Bond Fund (Class A) including 4.75%
sales charge +1.92% +3.36% +7.04% +7.41%*
-------------------------------------------------------------------------------------------------------------
MFS New York Municipal Bond Fund (Class A) at net asset value +6.98% +5.05% +8.09% +8.08%*
-------------------------------------------------------------------------------------------------------------
MFS New York Municipal Bond Fund (Class B) with CDSC+ +2.10% -- -- +1.34%++
-------------------------------------------------------------------------------------------------------------
MFS New York Municipal Bond Fund (Class B) without CDSC +6.10% -- -- +2.40%++
-------------------------------------------------------------------------------------------------------------
Average New York tax-exempt municipal bond fund +6.90% +4.72% +7.79% +7.99%**
-------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% +8.08% +8.54%**
-------------------------------------------------------------------------------------------------------------
Consumer Price Index(S) +2.84% +2.73% +2.89% +3.66%**
-------------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of offering of Class A shares, June 6,
1988 to March 31, 1996.
+These returns reflect the current Class B CDSC of 4% for the 1-year period
and 3% for the period commencing September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on June 1, 1988. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
6
<PAGE>
MFS PENNSYLVANIA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from February 1,
1993 to March 31, 1996)
<TABLE>
<CAPTION>
MFS Pennsylvania Lehman Brothers Consumer
Days Municipal Bond Fund-A Municipal Bond Index Price Index
<S> <C> <C> <C> <C>
2/1/93 0 9,525 10,000 10,000
3/31/93 58 9,501 10,252 10,070
3/31/94 423 9,727 10,490 10,323
3/31/95 788 10,519 11,269 10,617
3/31/96 1,154 11,240 12,214 10,919
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 3 5 through
Year Years Years 3/31/96
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Pennsylvania Municipal Bond Fund (Class A) including 4.75%
sales charge +1.81% +4.06% -- +3.77%*
-------------------------------------------------------------------------------------------------------------
MFS Pennsylvania Municipal Bond Fund (Class A) at net asset
value +6.85% +5.76% -- +5.38%*
-------------------------------------------------------------------------------------------------------------
MFS Pennsylvania Municipal Bond Fund (Class B) with CDSC+ +2.23% -- -- +1.28%++
-------------------------------------------------------------------------------------------------------------
MFS Pennsylvania Municipal Bond Fund (Class B) without CDSC +6.23% -- -- +2.34%++
-------------------------------------------------------------------------------------------------------------
Average Pennsylvania tax-exempt municipal bond fund +7.46% +5.44% -- +6.03%**
-------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% -- +6.52%**
-------------------------------------------------------------------------------------------------------------
Consumer Price Index(S) +2.84% +2.73% -- +2.81%**
-------------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of offering of Class A shares,
February 1, 1993 to March 31, 1996.
+These returns reflect the current Class B CDSC of 4% for the 1-year period
and 3% for the period commencing September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on February 1, 1993. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost. All results for the Pennsylvania
Fund and all Class A results for the Alabama, Georgia and New York Funds
reflect the applicable expense subsidy which is explained in the Notes to
Financial Statements. Had these subsidies not been in effect, the results
would have been less favorable. These subsidies may be rescinded at any time.
Tax Form Summary
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
Exempt-Interest Dividends
For federal income tax purposes, approximately 99% of the total dividends
paid by each Fund from net investment income during the year ended March 31,
1996, is designated as an exempt-interest dividend.
7
<PAGE>
Portfolio of Investments - March 31, 1996
MFS ALABAMA MUNICIPAL BOND FUND
Municipal Bonds and Warrants - 98.0%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------ ----------------- --------------
<S> <C> <C> <C>
General Obligation - 14.2%
AA Birmingham, AL, 8s, 2015 $1,150 $ 1,226,464
AA Birmingham, AL, 5.125s, 2017, Warrants 1,000 904,240
AAA Commonwealth of Puerto Rico, MBIA,
5.375s, 2022 1,000 946,910
AAA Hoover, AL, AMBAC, 5s, 2020, Warrants 1,120 999,365
AA Huntsville, AL, 5.5s, 2020 3,000 2,832,390
NR Shelby County, AL, 7.4s, 2007, Warrants 1,000 1,081,600
NR Shelby County, AL, 7.7s, 2017, Warrants 800 883,208
AAA Shelby County, AL, MBIA, 0s, 2011,
Warrants 3,000 1,160,310
AA State of Alabama, 0s, 2004 2,500 1,624,175
AA State of Alabama, 0s, 2006 1,165 650,792
AA State of Alabama, 7.1s, 2010 250 274,105
-------------
$12,583,559
--- --------------------------------------- --------------- -------------
State and Local Appropriation - 4.2%
NR Alabama Building Renovation Finance
Authority Rev., 7.45s, 2011 $1,500 $ 1,669,830
A Montgomery County, AL, Rev. (Department
of Human Resources Project), 7s, 2007,
Warrants 1,000 1,068,870
A Puerto Rico Public Buildings Authority,
5.6s, 2008 500 504,625
A Puerto Rico Public Buildings Authority,
5.5s, 2021 500 471,360
-------------
$ 3,714,685
--- --------------------------------------- --------------- -------------
Refunded and Special Obligation - 12.4%
A Alabama Mental Health Finance
Authority, 7.375s, 1999 $ 250 $ 275,170
NR Alexander City, AL, 0s, 2001, Warrants 1,000 319,280
NR Alexander City, AL, 0s, 2001, Warrants 1,000 296,910
NR Alexander City, AL, 0s, 2001, Warrants 1,250 345,125
NR Birmingham, AL, 7.4s, 1999 1,000 1,100,860
AA Birmingham, AL, Historical Preservation
Authority (Kelly Ingram/Civil Rights),
7.2s, 2001 1,000 1,122,740
AA Birmingham, AL, Public Parks &
Recreation Board Rev. (Legion Park),
7.25s, 1999 400 441,820
NR Birmingham, AL, Waterworks & Sewer
Board Rev., 7.2s, 2000 500 552,630
BBB Gadsden East, AL, Medical Clinic Board
Rev. (Baptist Hospital), 7.8s, 2001 2,000 2,331,860
AAA Hoover, AL, Board of Education, AMBAC,
6.625s, 2001, Warrants 1,000 1,100,460
NR Morgan County-Decatur, AL, Hospital
Board Rev., 7.875s, 1999 750 834,743
AAA Puerto Rico Highway & Transportation
Authority, 6.5s, 2002 1,000 1,116,200
AAA University of Alabama, University
Housing Rev., MBIA, 7.1s, 2001 1,000 1,126,960
-------------
$10,964,758
--- --------------------------------------- --------------- -------------
Single Family Housing Revenue - 5.5%
NR Alabama Housing Finance Authority,
FNMA, GNMA, FHLMC, 6.55s, 2014 $2,465 $ 2,511,342
AAA Alabama Housing Finance Authority,
GNMA, 7.4s, 2022 705 734,822
AAA Alabama Housing Finance Authority,
GNMA, 7.5s, 2022 470 497,067
AAA Alabama Housing Finance Authority,
GNMA, 7.6s, 2022 150 156,800
AAA Alabama Housing Finance Authority,
GNMA, 7.75s, 2022 440 461,960
AAA Alabama Housing Finance Authority,
GNMA, 7.9s, 2022 525 552,757
-------------
$ 4,914,748
--- --------------------------------------- --------------- -------------
Multi-Family Housing Revenue - 2.1%
AAA Alabama Housing Finance Authority,
Residential Development Authority, FHA,
7.25s, 2023 $1,425 $ 1,488,826
AA Puerto Rico Housing Finance Corp., FHA,
7.5s, 2015 355 372,399
-------------
$ 1,861,225
--- --------------------------------------- --------------- -------------
Insured Health Care Revenue - 6.9%
AAA Birmingham, AL, Special Care Facilities
(Carraway), Connie Lee, 5.875s, 2025 $1,000 $ 962,810
AAA Birmingham, AL, Special Care Facilities
(Children's Hospital), FGIC, 5.625s,
2018 1,625 1,564,063
AA Birmingham, AL, Special Care Facilities
(Daughters of Charity), AMBAC, 5s, 2025 1,500 1,312,095
AAA Huntsville, AL, Health Care Facilities
Rev., MBIA, 6.375s, 2022 850 878,390
AAA University of Alabama, Hospital Rev.
(Birmingham), MBIA, 5s, 2014 1,500 1,377,435
-------------
$ 6,094,793
--- --------------------------------------- --------------- -------------
Health Care Revenue - 6.5%
BBB- Baldwin County, AL, Eastern Shore
Health Care Authority (Thomas), 8.5s,
2016 $1,000 $ 1,078,380
AA Birmingham, AL, Special Care Facilities
(Daughters of Charity), AMBAC, 5.25s,
2015 1,000 916,040
A Montgomery, AL, Medical Clinic Board
Rev. (Jackson Hospital & Clinic), 7s,
2015 2,725 2,828,904
NR South Medical Clinic Board Rev.
(Cullman Regional Medical Center),
6.5s, 2023 1,000 966,580
-------------
$ 5,789,904
--- --------------------------------------- --------------- -------------
Electric and Gas Utility Revenue - 2.1%
AAA DeKalb and Cherokee County, AL, Gas
Rev., AMBAC, 5.4s, 2016 $1,000 $ 947,290
AAA Puerto Rico Telephone Authority Rev.,
AMBAC, 5.59s, 2004(S) 1,000 941,000
-------------
$ 1,888,290
--- --------------------------------------- --------------- -------------
Water and Sewer Utility Revenue - 11.5%
BBB Alabama Water Pollution Control
Authority, 7.75s, 2012 $ 950 $ 1,011,266
AAA Arab, AL, Waterworks Board, Water Rev.,
MBIA, 7.05s, 2016 1,000 1,073,310
AA Birmingham, AL, Waterworks & Sewer
Board, 5.375s, 2020 2,000 1,876,140
AA Birmingham, AL, Waterworks and Sewer
Board Rev., 5.5s, 2020 1,000 954,020
BBB- Fairview, AL, Government Utility
Services, Corporate Water Rev., 8s,
2020 1,000 1,070,330
AAA Fort Payne, AL, Waterworks Board, Water
Rev., MBIA , 5.35s, 2016 1,000 934,150
AAA Limestone County, AL, Water Authority
Rev., FGIC, 7.7s, 2019 900 968,940
AAA Limestone County, AL, Water Authority
Rev., FGIC, 5.25s, 2020 2,500 2,305,150
-------------
$10,193,306
--- --------------------------------------- --------------- -------------
8
<PAGE>
- --- --------------------------------------- --------------- -------------
Airport and Port Revenue - 6.6%
AAA Alabama Docks Department, Docks
Facilities Rev., BIGI, 7.6s, 2012 $2,600 $ 2,805,192
AAA Birmingham, AL, Airport Rev., AMBAC,
5.25s, 2020 1,000 910,590
NR Mobile, AL, Airport Authority, 7.375s,
2012 1,000 1,015,250
NR Mobile, AL, Airport Authority, 8.875s,
2015 1,000 1,091,170
-------------
$ 5,822,202
--- --------------------------------------- --------------- -------------
Sales and Excise Tax Revenue - 2.5%
AAA Alabama Mental Health Finance
Authority, MBIA, 5.5s, 2015 $1,300 $ 1,252,199
A Puerto Rico Highway Transportation
Authority, 5.5s, 2017 1,000 936,760
-------------
$ 2,188,959
--- --------------------------------------- --------------- -------------
Industrial Revenue (Corporate Guarantee) - 11.0%
BBB- Butler, AL, Industrial Development
Rev., 8s, 2028 $1,000 $ 1,109,930
NR Camden, AL, Industrial Development
Board, Pollution Control Rev., 7.75s,
2009 500 537,580
BBB Courtland, AL, Industrial Development
Board, Solid Waste Disposal Rev., 5.9s,
2017 1,000 967,120
BBB Courtland, AL, Industrial Development
Board, Solid Waste Disposal Rev.,
7.75s, 2020 1,485 1,576,089
AA Mobile, AL, Industrial Development
Board (Mobil), 6s, 2014 1,500 1,514,490
BBB Mobile, AL, Industrial Development
Board, Dock & Wharf Rev. (Ideal Basic,
Inc.), 6.75s, 2004 270 270,907
BBB Mobile, AL, Industrial Development
Board, Dock & Wharf Rev. (Ideal Basic,
Inc.), 6.875s, 2009 1,075 1,079,031
BBB+ Piedmont, AL, Industrial Development
Board (Springs Industries, Inc.),
8.25s, 2010 1,000 1,090,350
AA- Tarrant City, AL, Industrial
Development Board Rev. (Vulcan
Materials Co.), 7.5s, 2011 1,500 1,640,400
-------------
$ 9,785,897
--- --------------------------------------- --------------- -------------
Universities - 9.3%
AAA Alabama Agriculture & Mech., MBIA,
5.75s, 2013 $ 500 $ 499,765
AAA Alabama Agriculture & Mech., MBIA,
5.5s, 2020 2,545 2,429,508
AAA Alabama Board of Education Rev.
(Shelton State Community College),
MBIA, 6s, 2014 1,000 1,025,370
NR Homewood, AL, Educational Building
Authority Rev. (Samford University),
6.5s, 2016 1,000 1,047,130
AA- UAB Educational Foundation, AL, Student
Housing Rev., 5.35s, 2019 1,630 1,570,635
AAA University of Southern Alabama, Tuition
Rev., AMBAC, 5s, 2015 1,775 1,625,101
-------------
$ 8,197,509
--- --------------------------------------- --------------- -------------
Other - 3.2%
NR Birmingham, AL, Downtown Redevelopment
Authority (Social Security
Administration), 0s, 2010 $2,985 $ 2,012,875
Other - continued
AAA Birmingham-Jefferson, AL, Civic Center,
Capital Outlay, MBIA, 0s, 2009 $1,660 $ 789,379
-------------
$ 2,802,254
--- --------------------------------------- --------------- -------------
Total Municipal Bonds and Warrants (Identified Cost, $82,756,189) $86,802,089
-------------------------------------------------------------------- -------------
Floating Rate Demand Note - 0.3%
-------------------------------------------------------------------- -------------
NR Uinta County, WY, Pollution Control
Rev. (Chevron), due 2020, at Identified
Cost $ 300 $ 300,000
--- --------------------------------------- --------------- -------------
Total Investments (Identified Cost, $83,056,189) $87,102,089
Other Assets, Less Liabilities - 1.7% 1,521,133
-------------------------------------------------------------------- -------------
Net Assets - 100.0% $88,623,222
-------------------------------------------------------------------- -------------
(S) Indexed security.
See notes to financial statements
Portfolio of Investments - March 31, 1996
</TABLE>
MFS ARKANSAS MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
Municipal Bonds - 97.8%
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
<S> <C> <C> <C>
Student Loan Revenue - 1.3%
NR Arkansas Student Loan Authority Rev.,
7.15s, 2002 $ 835 $ 887,412
NR Arkansas Student Loan Authority Rev.,
6.75s, 2006 1,500 1,539,720
------------
$2,427,132
--- --------------------------------------- --------------- ------------
General Obligation - 3.0%
AA Arkansas College Savings, 0s, 2009 $1,146 $ 543,410
AA Arkansas Waste Disposal & Pollution
Control Rev., 6.25s, 2020 1,000 1,039,260
AA Arkansas Water Resources Development
Authority, 5.65s, 2018 1,000 972,690
AA Arkansas Water Resources Development
Authority, 5.75s, 2025 1,000 976,610
A Commonwealth of Puerto Rico, Public
Improvements, 5.25s, 2018 1,000 914,080
AAA Mississippi County, AR, Community
College District, AMBAC, 6s, 2018 1,000 1,023,830
------------
$5,469,880
--- --------------------------------------- --------------- ------------
State and Local Appropriation - 4.7%
AAA Arkansas Development Finance Authority,
Correctional Facilities Rev., MBIA,
7.125s, 2010 $2,000 $2,176,500
A Arkansas Development Finance Authority,
Local Government Rev., 7.1s, 2008 2,440 2,672,556
NR Arkansas Development Finance Authority
Rev. (State Agencies Facilities),
5.875s, 2013 875 850,360
A Arkansas Development Finance Authority
Rev. (State Agencies Facilities),
5.875s, 2013 1,000 935,100
A Puerto Rico Public Buildings Authority,
Education & Health, 6.285s, 2016(S) 2,000 1,858,840
------------
$8,493,356
--- --------------------------------------- --------------- ------------
Refunded and Special Obligation - 13.5%
AAA Arkansas Development Finance Authority,
Water Rev., MBIA, 7s, 2001 $2,900 $3,239,213
9
<PAGE>
Refunded and Special Obligation - continued
AAA Arkansas Development Finance Authority,
Water Rev., MBIA, 6.4s, 2002 $ 2,000 $ 2,194,900
AAA Arkansas Housing Development Agency,
Single Family Mortgage Rev., ETM,
8.375s, 2010 800 971,320
AAA Arkansas Housing Development Agency,
Single Family Mortgage Rev., ETM,
8.375s, 2011 1,000 1,247,520
AAA Arkansas Waste Disposal & Pollution
Control Rev., 6.25s, 2002 4,000 4,331,800
AA Arkansas Water Resources Development
Authority, 6.375s, 2012 1,000 1,051,200
NR Beaver Water District, AR, Benton &
Washington Counties, Water Rev.,
6.625s, 1999 500 544,455
NR Beaver Water District, AR, Benton &
Washington Counties, Water Rev., 6.75s,
1999 1,750 1,912,820
AAA Harrison, AR, Residential Housing
Facilities Board, Single Family
Mortgage Rev., FGIC, ETM, 7.4s, 2011 4,000 4,618,680
AAA Puerto Rico Aqueduct & Sewer Authority,
7.875s, 1998 1,000 1,100,590
AAA Puerto Rico Public Buildings Authority,
7.125s, 1998 1,500 1,620,120
AAA Sherwood, AR, Residential Housing
Facilities Board, Single Family
Mortgage Rev., MBIA, 7.5s, 2010 1,250 1,488,987
------------
$24,321,605
- --- --------------------------------------- --------------- ------------
Single Family Housing Revenue - 14.6%
NR Arkansas Development Finance Authority,
Single Family Mortgage Rev., 0s, 2011 $ 5,000 $ 1,689,350
AAA Arkansas Development Finance Authority,
Single Family Mortgage Rev., GNMA,
7.4s, 2023 1,450 1,510,784
AAA Arkansas Development Finance Authority,
Single Family Mortgage Rev., GNMA,
7.45s, 2027 1,710 1,831,786
AAA Arkansas Development Finance Authority,
Single Family Mortgage Rev., GNMA,
FNMA, 6.7s, 2027 3,000 3,039,420
A+ Arkansas Housing Development Agency,
Residential Mortgage Rev., 0s, 2015 29,350 3,604,180
NR Jefferson County, AR, Health Care &
Residential Facilities Board, 7.25s,
2011 1,000 1,034,480
NR Lonoke County, AR, Residential Housing
Facilities Board, 7.375s, 2011 363 372,415
NR Lonoke County, AR, Residential Housing
Facilities Board, 7.9s, 2011 1,073 1,159,890
NR Mississippi County, AR, Public
Facilities Board, Mortgage Rev., 7.2s,
2010 1,295 1,429,731
NR North Little Rock, AR, Residential
Housing Facilities Board, 0s, 2010 21,925 8,543,734
NR Pulaski County, AR, Public Facilities
Board Rev., 0s, 2014 2,750 819,967
NR Saline County, AR, Residential Housing
Facilities Board, 7.875s, 2011 1,220 1,293,834
------------
$26,329,571
- --- --------------------------------------- --------------- ------------
Multi-Family Housing Revenue - 0.2%
AAA West Memphis, AR, Public Facilities
Board Rev., AMBAC, 0s, 2011 $ 1,090 $ 429,078
- --- --------------------------------------- --------------- ------------
Insured Health Care Revenue - 8.9%
AAA Arkansas Development Finance Authority
Rev. (Sisters of Mercy), MBIA, 5s, 2013 $ 6,340 $ 5,882,505
AAA Arkansas Development Finance Authority
Rev. (Sisters of Mercy), MBIA, 5s, 2019 6,000 5,384,580
AAA Independence, AR, Housing Education
Financing Authority (While River), FSA,
5.5s, 2009 1,850 1,844,098
AAA Pulaski County, AR, Health Facilities
Board Rev. (Sisters of
Charity/Nazareth), MBIA, 6s, 2012 1,000 1,038,060
AAA Saline County, AR, Hospital Rev.,
Connie Lee, 6s, 2019 2,000 1,987,400
------------
$16,136,643
- --- --------------------------------------- --------------- ------------
Health Care Revenue - 7.4%
NR Baxter County, AR, Hospital Rev., 7.5s,
2021 $ 3,145 $ 3,342,380
A+ Little Rock, AR, Health Facilities
Board, Hospital Rev., 6.9s, 2009 1,400 1,525,944
A Little Rock, AR, Health Facilities
Board, Hospital Rev., 7s, 2017 3,250 3,442,302
A- Pulaski County, AR, Hospital Rev.
(Arkansas Children's Hospital), 6.15s,
2017 5,000 4,997,300
------------
$13,307,926
- --- --------------------------------------- --------------- ------------
Electric and Gas Utility Revenue - 15.2%
BBB Independence County, AR, Pollution
Control Rev. (Arkansas Power & Light
Co.), 6.25s, 2021 $ 3,000 $ 2,962,320
AA- Jefferson County, AR, Pollution Control
Rev. (Arkansas Electric Cooperative),
6.125s, 2008 2,000 2,006,720
BBB Jefferson County, AR, Pollution Control
Rev. (Arkansas Power & Light Co.),
6.3s, 2018 1,050 1,061,403
AAA Jonesboro, AR, City Water & Light
Plant, Public Utilities Systems Rev.,
AMBAC, 5.25s, 2013 1,210 1,163,899
AAA North Little Rock, AR, Electric Rev.,
MBIA, 6.5s, 2010 1,000 1,047,330
AAA North Little Rock, AR, Electric Rev.,
MBIA, 6.5s, 2010 2,000 2,162,100
AAA North Little Rock, AR, Electric Rev.,
MBIA, 6.5s, 2015 6,000 6,615,420
BBB Pope County, AR, Solid Waste Disposal
Rev. (Arkansas Power & Light Co.), 8s,
2020 1,780 1,979,591
AAA Pope County, AR, Solid Waste Disposal
Rev. (Arkansas Power & Light Co.), FSA,
8s, 2021 3,000 3,357,060
AAA Puerto Rico Telephone Authority Rev.,
AMBAC, 5.59s, 2004(S) 4,000 3,764,000
AAA West Memphis, AR, Public Utility
Systems Rev., MBIA, 6.6s, 2009 1,250 1,334,825
------------
$27,454,668
- --- --------------------------------------- --------------- ------------
Water and Sewer Utility Revenue - 12.1%
AAA Arkansas Development Finance Authority,
Water & Sewer Rev., MBIA, 5s, 2012 $ 1,000 $ 944,580
AAA Arkansas Development Finance Authority,
Water & Sewer Rev., MBIA, 5s, 2015 3,000 2,786,130
10
<PAGE>
Water and Sewer Utility Revenue - continued
AAA Arkansas Development Finance Authority,
Water & Sewer Rev., MBIA, 5.4s, 2015 $ 1,750 $ 1,706,267
AA Arkansas Water Resources Development
Authority, 6.375s, 2021 1,000 1,048,490
AAA Beaver Water District, AR, Benton &
Washington Counties, Water & Sewer
Rev., MBIA, 5.85s, 2008 2,000 2,075,460
NR El Dorado, AR, Water & Sewer Rev., 6s,
2012 1,000 1,030,670
AAA Fort Smith, AR, Water & Sewer, MBIA,
5.7s, 2008 1,000 1,028,690
AAA Fort Smith, AR, Water & Sewer, MBIA,
6s, 2012 2,250 2,329,290
A Puerto Rico Aqueduct & Sewer Authority,
5s, 2015 1,000 898,060
AAA Russellville, AR, Water Systems Rev.,
AMBAC, 6.25s, 2012 2,365 2,474,168
NR South Sebastian County, AR, Water Users
Assn., 5.95s, 2016 2,425 2,480,872
NR South Sebastian County, AR, Water Users
Assn., 6.15s, 2023 1,000 1,032,940
AAA Texarkana, AR, Public Facilities Board,
Waterworks Facilities Rev., MBIA, 7s,
2007 2,000 2,096,060
------------
$ 21,931,677
- --- --------------------------------------- --------------- ------------
Sales and Excise Tax Revenue - 3.1%
NR Little Rock, AR, Hotel & Restaurant
Gross Receipts Tax, 7.375s, 2015 $ 4,790 $ 5,641,183
Industrial Revenue (Corporate Guarantee) - 10.9%
AA- Blytheville, AR, Solid Waste Recycling
& Sewerage Treatment Rev. (Nucor
Corp.), 6.9s, 2021 $ 5,000 $ 5,252,860
AA- Blytheville, AR, Solid Waste Recycling
& Sewerage Treatment Rev. (Nucor
Corp.), 6.375s, 2023 8,445 8,561,297
A- Camden, AR, Environmental
(International Paper), 7.625s, 2018 1,000 1,113,620
AA- Jonesboro, AR, Industrial Development
Rev. (Anheuser-Busch Co.), 6.5s, 2012 3,500 3,762,159
A- Pine Bluff, AR, Solid Waste Disposal
Rev. (International Paper Co.), 5.55s,
2017 1,050 984,690
------------
$ 19,674,626
- --- --------------------------------------- --------------- ------------
Universities - 1.8%
NR University of Arkansas, University
Rev., 7.2s, 2010 $ 2,500 $ 2,810,125
NR University of Arkansas, University
Rev., 6.625s, 2012 500 528,455
------------
$ 3,338,580
- --- --------------------------------------- --------------- ------------
Other - 1.1%
A- Little Rock, AR, Wastewater and Sewer
Rev., 5.8s, 2016 $ 2,000 $ 1,937,200
- --- --------------------------------------- --------------- ------------
Total Municipal Bonds (Identified Cost, $171,459,722) $176,893,125
Other Assets, Less Liabilities - 2.2% 3,963,086
- --- --------------------------------------- --------------- ------------
Net Assets - 100.0% $180,856,211
- --- --------------------------------------- --------------- ------------
(S) Indexed security.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS GEORGIA MUNICIPAL BOND FUND
Municipal Bonds - 96.4%
- --- --------------------------------------- --------------- ------------
General Obligation - 10.6%
AA Fulton County, GA, School District,
6.375s, 2010 $ 2,000 $ 2,210,500
AA Fulton County, GA, School District,
6.375s, 2012 1,000 1,086,670
AA Fulton County, GA, School District,
6.375s, 2016 1,000 1,080,050
AA Fulton County, GA, School District,
5.625s, 2021 1,000 970,710
AAA Paulding County, GA, School District,
MBIA, 6s, 2013 1,000 1,048,450
AA+ State of Georgia, 5.25s, 2011 1,500 1,476,345
NR Territory of Virgin Islands, 7.75s,
2006 415 455,068
------------
$ 8,327,793
- --- --------------------------------------- --------------- ------------
State and Local Appropriation - 6.3%
AA Fulton County, GA, Building Authority
Rev. (Judicial Center Project), 0s,
2011 $ 3,000 $ 1,304,220
AA Fulton County, GA, Building Authority
Rev. (Judicial Center Project), 0s,
2012 6,015 2,444,977
AAA Puerto Rico Public Buildings Authority,
Government Facilities Guaranteed,
AMBAC, 6.25s, 2015 1,100 1,187,494
------------
$ 4,936,691
- --- --------------------------------------- --------------- ------------
Refunded and Special Obligation - 8.0%
AA+ DeKalb County, GA, 7.5s, 2000 $ 780 $ 872,937
AAA Fulton County, GA, School District,
7.625s, 1997 500 534,665
NR Hogansville, GA, Combined Public
Utility Systems Rev., 9s, 2000 2,200 2,624,864
AAA Marietta, GA, Development Authority
Rev. (Life College, Inc.), CAP GTY,
7.2s, 1999 1,000 1,112,500
AAA Marietta, GA, Development Authority
Rev. (Life College, Inc.), CAP GTY,
7.25s, 1999 1,000 1,114,170
------------
$ 6,259,136
- --- --------------------------------------- --------------- ------------
Single Family Housing Revenue - 2.7%
AAA DeKalb County, GA, Housing Authority,
Single Family Mortgage Rev., GNMA,
7.75s, 2022 $ 495 $ 509,518
AA+ Georgia Housing & Finance Authority,
0s, 2031 10,525 775,061
AA+ Georgia Residential Finance Authority
Rev., 8.375s, 2019 5 5,232
AA+ Georgia Residential Finance Authority
Rev., 8s, 2020 390 410,506
AA+ Georgia Residential Finance Authority
Rev., 7.25s, 2021 365 385,918
------------
$ 2,086,235
- --- --------------------------------------- --------------- ------------
Multi-Family Housing Revenue - 5.1%
A Cobb County, GA, Housing Authority Rev.
(Signature Place Project), 6.875s, 2017 $ 1,500 $ 1,530,555
NR Hinesville, GA, Leased Housing Corp.
Rev. (Baytree Apartments), FHA, 6.7s,
2017 900 927,117
AAA St. Mary's, GA (Cumberland Oaks
Apartments), FNMA, 7.375s, 2022 1,470 1,549,982
------------
$ 4,007,654
- --- --------------------------------------- --------------- ------------
11
<PAGE>
Insured Health Care Revenue - 7.6%
AAA Albany-Dougherty County, GA, Hospital
Authority Rev. (Phoebe Putney Memorial
Hospital, Inc.), AMBAC, 5.7s, 2013 $3,100 $ 3,053,965
AAA Crisp County, GA, Hospital Authority
Rev., Certificates of Participation
(Crisp Regional PJ), FSA, 5.4s, 2012 1,000 966,110
AAA Macon-Bibb County, GA, Hospital
Authority Rev. (Memorial Medical
Center), FGIC, 5.3s, 2013 2,000 1,920,620
------------
$ 5,940,695
- --- --------------------------------------- --------------- ------------
Health Care Revenue - 6.1%
NR Fulton County, GA, Residential Care
Facilities, Elderly Authority Rev.
(Lenbrook Square Foundation), 9.75s,
2017 $1,050 $ 1,069,436
NR Richmond County, GA, Development
Authority, Nursing Home Refunding
(Beverly Enterprises), 8.75s, 2011 1,190 1,284,891
NR Royston, GA, Hospital Authority Rev.
(Cobb Health), 7.375s, 2014 1,565 1,623,421
BBB+ Savannah, GA, Hospital Authority Rev.
(Chandler Hospital), 7s, 2011 800 799,944
------------
$ 4,777,692
- --- --------------------------------------- --------------- ------------
Electric and Gas Utility Revenue - 9.8%
AAA Appling County, GA, Development
Authority (Oglethorpe Power Corp.),
MBIA, 7.15s, 2021 $1,400 $ 1,521,814
A Burke County, GA, Development
Authority, Pollution Control Rev.
(Georgia Power Vogl), 8.375s, 2017### 1,000 1,059,910
AAA Georgia Municipal Electric Authority,
Power Rev., AMBAC, 0s, 2013 1,675 637,807
AAA Georgia Municipal Electric Authority,
Power Rev., BIGI, 0s, 2008 2,500 1,315,750
AAA Georgia Municipal Electric Authority,
Power Rev., BIGI, 0s, 2009 1,500 738,270
AAA Georgia Municipal Electric Authority,
Power Rev., MBIA, 6.5s, 2020 1,250 1,363,750
A+ Monroe County, GA, Development
Authority, Pollution Control Rev.
(Oglethorpe Power), 6.8s, 2012 1,000 1,081,330
------------
$ 7,718,631
- --- --------------------------------------- --------------- ------------
Water and Sewer Utility Revenue - 16.0%
NR Barnesville, GA, Water & Sewer Rev.,
6.9s, 2022 $1,715 $ 1,797,509
AAA Brunswick, GA, Water & Sewer Rev.,
MBIA, 6.1s, 2014 1,000 1,053,510
AAA Cartersville, GA, Water & Sewer Rev.,
AMBAC, 7.2s, 2012 2,225 2,401,754
AAA Columbia County, GA, Water & Sewer
Rev., AMBAC, 6.9s, 2011 1,000 1,084,400
AA DeKalb County, GA, Water & Sewer Rev.,
5.25s, 2023 1,000 910,860
AAA Douglasville-Douglas County, GA, Water
& Sewer Authority, AMBAC, 5.625s, 2015 1,800 1,788,192
AAA Fulton County, GA, Water & Sewer Rev.,
FGIC, 6.375s, 2014 3,250 3,530,378
------------
$12,566,603
- --- --------------------------------------- --------------- ------------
Airport and Port Revenue - 8.7%
A Atlanta, GA, Airport Facilities Rev.,
6.25s, 2021 $ 500 $ 503,685
AAA Atlanta, GA, Airport Facilities Rev.,
AMBAC, 0s, 2010 6,000 2,683,440
AAA Atlanta, GA, Airport Facilities Rev.,
MBIA, 0s, 2010 3,500 1,561,140
BB Clayton County, GA, Development
Authority, Special Facilities Rev.
(Delta Airlines), 7.625s, 2020 500 518,015
BB Fulton County, GA (Delta Airlines),
6.95s, 2012 1,500 1,551,945
------------
$ 6,818,225
- --- --------------------------------------- --------------- ------------
Industrial Revenue (Corporate Guarantee) - 11.9%
NR Adel County, GA, Industrial Development
Authority, Pollution Control Rev.
(Weyerhaeuser Co.), 9s, 2006 $1,000 $ 1,032,360
BB Atlanta, GA, Special Purpose Facilities
Rev. (Delta Airlines Project), 7.9s,
2018 1,000 1,063,000
AA- Cartersville, GA, Development Authority
Rev., Water & Wastewater Facilities
(Anheuser-Busch Cos., Inc.), 7.4s, 2010 500 590,345
B+ Effingham County, GA, Development
Authority, Pollution Control Rev. (Fort
Howard Corp.), 7.9s, 2005 1,750 1,847,475
NR Emanuel County, GA, Development
Authority (Figgie Properties Project),
7.95s, 2004 475 478,087
AA- Savannah, GA, Economic Development
Authority, Industrial Development Rev.
(Hershey Foods Corp.), 6.6s, 2012 1,150 1,219,966
NR Savannah, GA, Economic Development
Authority, Industrial Development Rev.
(Union Camp Corp.), 6.15s, 2017 1,000 1,023,600
BBB Savannah, GA, Port Authority, Pollution
Control Rev. (Union Carbide Corp.),
7.55s, 2004 1,000 1,012,080
BBB Wayne County, GA, Solid Waste Rev.
(ITT-Rayonier, Inc.), 8s, 2015 1,000 1,099,540
------------
$ 9,366,453
- --- --------------------------------------- --------------- ------------
Universities - 1.5%
AAA Marietta, GA, Development Authority
Rev. (Life College, Inc.), CAP GTY,
5.8s, 2019 $1,200 $ 1,183,296
- --- --------------------------------------- --------------- ------------
Other - 2.1%
AA- George L. Smith II/Georgia World
Congress Center Authority (Domed
Stadium Project), 7.875s, 2020 $1,475 $ 1,619,432
- --- --------------------------------------- --------------- ------------
Total Municipal Bonds (Identified Cost, $70,673,827) $75,608,536
- --- --------------------------------------- --------------- ------------
Floating Rate Demand Notes - 2.2%
NR Georgia Hospital Financing Authority
Rev. (Equipment), due 2001 $1,100 $ 1,100,000
NR Uinta County, WY, Pollution Control
Rev. (Chevron), due 2020 600 600,000
- --- --------------------------------------- --------------- ------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,700,000
- --- --------------------------------------- --------------- ------------
Total Investments (Identified Cost, $72,373,827) $77,308,536
Other Assets, Less Liabilities - 1.4% 1,079,908
- --- --------------------------------------- --------------- ------------
Net Assets - 100.0% $78,388,444
- --- --------------------------------------- --------------- ------------
###Security segregated as collateral for an open futures contract.
See notes to financial statements
12
<PAGE>
Portfolio of Investments - March 31, 1996
MFS MASSACHUSETTS MUNICIPAL BOND FUND
Municipal Bonds - 95.8%
Student Loan Revenue - 0.1%
AAA Massachusetts Education Loan Authority,
Letter of Credit, 9s, 2001 $ 130 $ 132,035
- --- --------------------------------------- --------------- ------------
General Obligation - 11.9%
NR Belmont, MA, ULT, 5s, 2015 $ 2,165 $ 2,009,639
A+ Commonwealth of Massachusetts, 0s, 2004 10,000 6,485,300
A+ Commonwealth of Massachusetts, 0s, 2005 2,000 1,222,360
A+ Commonwealth of Massachusetts, "A", 0s,
2005 2,000 1,243,260
AAA Commonwealth of Massachusetts, AMBAC,
6.75s, 2009 2,500 2,691,625
AAA Commonwealth of Massachusetts, FGIC,
0s, 2006 4,000 2,376,280
AAA Commonwealth of Massachusetts, FGIC,
7s, 2009 1,250 1,434,225
AAA Commonwealth of Massachusetts, MBIA,
7.5s, 2004 2,850 3,346,612
AAA Gloucester, MA, AMBAC, 7s, 2009 225 247,275
AAA Gloucester, MA, AMBAC, 7s, 2010 215 236,285
AAA Haverhill, MA, FGIC, 7s, 2012 1,250 1,359,900
NR Holyoke, MA, Electric Rev., 8s, 2001 690 740,046
AAA Holyoke, MA, MBIA, 8s, 2001 1,700 1,962,735
AAA Holyoke, MA, MBIA, 8.1s, 2005 500 595,360
AAA Lawrence, MA, AMBAC, 9.75s, 2002 600 744,636
NR Lowell, MA, 8.4s, 2009 1,000 1,149,760
NR Northbridge, MA, 7.6s, 2001 325 363,815
AAA Princeton, MA, AMBAC, 7.25s, 2009 490 537,471
NR Quabbin, MA, Regional School District,
MBIA, 5s, 2015 2,550 2,331,108
------------
$31,077,692
- --- --------------------------------------- --------------- ------------
State and Local Appropriation - 14.2%
A+ Massachusetts Bay Transportation
Authority, 5.5s, 2012 $ 5,000 $ 4,924,650
A+ Massachusetts Bay Transportation
Authority, 5.875s, 2015 1,965 1,994,888
A+ Massachusetts Bay Transportation
Authority, 6.2s, 2016 10,400 10,898,576
A+ Massachusetts Bay Transportation
Authority, 7s, 2021 5,000 5,700,300
A+ Massachusetts Bay Transportation
Authority, 5.75s, 2025 6,000 5,836,080
AAA Massachusetts Bay Transportation
Authority, AMBAC, 5.25s, 2017 8,370 7,709,272
------------
$37,063,766
- --- --------------------------------------- --------------- ------------
Refunded and Special Obligation - 14.2%
AAA Boston, MA, MBIA, 7.75s, 1998### $ 500 $ 547,265
A+ Commonwealth of Massachusetts, 6.875s,
2001 4,000 4,482,400
NR Holyoke, MA, 9.85s, 1997 380 421,401
NR Lowell, MA, 7.625s, 2001 4,875 5,628,285
AAA Massachusetts Bay Transportation
Authority, 8.5s, 1999 3,000 3,394,140
AAA Massachusetts Federally Assisted
Housing, ETM, 0s, 2023 4,285 785,226
AA Massachusetts Health & Education
Facilities Authority (Children's
Hospital), 7.75s, 1998 2,425 2,645,190
AAA Massachusetts Health & Education
Facilities Authority (Newton-Wellesley
Hospital), BIGI, 8s, 1998 1,710 1,880,709
NR Massachusetts Health & Education
Facilities Authority (Saint Elizabeth's
Hospital), FHA, 7.75s, 1997 1,250 1,337,025
Refunded and Special Obligation - continued
AAA Massachusetts Health & Education
Facilities Authority (South Shore
Hospital), MBIA, 8.125s, 1997 $ 1,070 $ 1,146,044
NR Massachusetts Health & Education
Facilities Authority (Suffolk
University), 8s, 2000 1,750 1,998,500
NR Massachusetts Industrial Finance Agency
(Cape Cod Health System), 8.5s, 2000 500 589,490
NR Massachusetts Industrial Finance
Agency, Tunnel Rev. (Mass. Turnpike),
9s, 2020 8,220 9,788,951
AAA Massachusetts Port Authority Rev., ETM,
12.75s, 2002 485 659,076
AAA Massachusetts Port Authority Rev., ETM,
13s, 2013 780 1,280,963
AAA Palmer, MA, AMBAC, 7.7s, 2000 500 572,635
------------
$37,157,300
- --- --------------------------------------- --------------- ------------
Single Family Housing Revenue - 2.4%
A+ Massachusetts Housing Finance Agency,
8.1s, 2020 $ 2,270 $ 2,379,005
A+ Massachusetts Housing Finance Agency,
8.1s, 2021 2,000 2,138,360
A+ Massachusetts Housing Finance Agency,
7.95s, 2023 965 1,008,174
A Massachusetts Housing Finance Agency,
7.5s, 2029 930 934,064
------------
$ 6,459,603
- --- --------------------------------------- --------------- ------------
Multi-Family Housing Revenue - 4.2%
BBB+ Massachusetts Housing Finance Agency,
8.4s, 2021 $ 2,190 $ 2,242,078
A+ Massachusetts Housing Finance Agency,
8.8s, 2021 1,995 2,066,122
BBB+ Massachusetts Housing Finance Agency,
8.2s, 2027 720 757,029
AAA Massachusetts Housing Finance Agency,
AMBAC, 6.65s, 2019 1,500 1,548,975
AAA Massachusetts Housing Finance Agency,
FNMA, 6.9s, 2025 1,700 1,803,615
AAA Massachusetts Housing Finance Agency,
FNMA, 7.65s, 2028 1,430 1,479,792
AAA Somerville, MA, Housing Authority Rev.
(Clarendon Hill), GNMA, 7.85s, 2010 1,000 1,067,330
------------
$10,964,941
- --- --------------------------------------- --------------- ------------
Insured Health Care Revenue - 3.9%
AAA Massachusetts Health & Education
Facilities Authority (Beth Israel
Hospital), AMBAC, 8.168s, 2025++++ $ 4,000 $ 3,994,000
AAA Massachusetts Health & Education
Facilities Authority (Brigham & Women's
Hospital), MBIA, 6.75s, 2024 2,000 2,157,400
AAA Massachusetts Health & Education
Facilities Authority (Newton-Wellesley
Hospital), MBIA, 6s, 2025 2,000 2,015,961
NR Massachusetts Health & Education
Facilities Authority (Youville), FHA,
6s, 2034 2,000 1,931,020
------------
$10,098,381
- --- --------------------------------------- --------------- ------------
Health Care Revenue - 18.1%
NR Boston, MA, Industrial Development
Finance Authority Rev. (Stonehedge
Convalescent), 10.75s, 2011 $ 755 $ 817,748
13
<PAGE>
Health Care Revenue - continued
A Massachusetts Health & Education
Facilities Authority (Beth Israel
Hospital), 7s, 2014 $3,000 $ 3,174,660
A Massachusetts Health & Education
Facilities Authority (Charlton Memorial
Hospital), 7.25s, 2013 1,700 1,797,410
AA Massachusetts Health & Education
Facilities Authority (Children's
Hospital), 6.125s, 2012 2,285 2,337,760
A Massachusetts Health & Education
Facilities Authority (Dana-Farber),
5.5s, 2027 2,500 2,233,101
BBB+ Massachusetts Health & Education
Facilities Authority (Emerson
Hospital), 8s, 2018 1,775 2,034,363
NR Massachusetts Health & Education
Facilities Authority (Fairview Extended
Care Facilities), 10.25s, 2021 2,000 2,274,620
A- Massachusetts Health & Education
Facilities Authority (Jordan Hospital),
6.875s, 2022 2,150 2,190,979
BB Massachusetts Health & Education
Facilities Authority (Massachusetts Eye
& Ear Infirmary), 7.375s, 2011 3,000 2,939,581
A Massachusetts Health & Education
Facilities Authority (New England
Deaconess), 6.875s, 2022 5,600 5,768,056
BBB Massachusetts Health & Education
Facilities Authority (Sisters of
Providence), 6.5s, 2008 1,900 1,885,389
NR Massachusetts Industrial Finance Agency
(Beverly Enterprises), 8.375s, 2009 4,040 4,322,396
NR Massachusetts Industrial Finance Agency
(Continental Healthcare), 11.875s, 2015 5,465 5,660,428
NR Massachusetts Industrial Finance Agency
(Evanswood), 7.625s, 2014 1,200 1,244,125
NR Massachusetts Industrial Finance Agency
(Martha's Vineyard Long-Term Care),
9.25s, 2022++ 3,000 2,352,000
NR Massachusetts Industrial Finance Agency
(Massachusetts Biomedical Research),
0s, 2004 5,000 3,155,450
NR Massachusetts Industrial Finance Agency
(Massachusetts Biomedical Research),
0s, 2010 5,300 2,203,104
NR Massachusetts Industrial Finance Agency
(Needham/Hamilton House), 11s, 2010 700 715,344
------------
$47,106,514
- --- --------------------------------------- --------------- ------------
Water and Sewer Utility Revenue - 7.9%
A Massachusetts Water Resources
Authority, 6.5s, 2019 $8,000 $ 8,668,000
A Massachusetts Water Resources
Authority, 5.5s, 2022 5,150 4,753,398
AAA Massachusetts Water Resources
Authority, MBIA, 5s, 2022 1,640 1,449,005
AAA Massachusetts Water Resources
Authority, MBIA, 5s, 2025 5,000 4,379,250
AA Massachusetts Water Resources Authority
(Pollution Abatement LN PJ), 5.2s, 2011 1,520 1,464,673
------------
$20,714,326
- --- --------------------------------------- --------------- ------------
Airport and Port Revenue - 4.8%
AA- Massachusetts Port Authority Rev., 5s,
2015 $5,600 $ 5,095,272
AAA Massachusetts Port Authority Rev.,
FGIC, 7.5s, 2020 4,500 4,988,476
BB+ Puerto Rico Port Authority Rev.
(American Airlines), 6.3s, 2023 2,370 2,385,120
------------
$12,468,868
- --- --------------------------------------- --------------- ------------
Industrial Revenue (Corporate Guarantee) - 1.2%
NR Massachusetts Industrial Finance Agency
(Automatic Data Processing, Inc.),
8.25s, 2019 $ 900 $ 923,517
BBB Massachusetts Industrial Finance Agency
(Boston Edison), 5.75s, 2014 1,900 1,803,576
NR Springfield, MA, Industrial Development
Finance Agency (Terminal Building),
10s, 2001 338 341,164
------------
$ 3,068,257
- --- --------------------------------------- --------------- ------------
Universities - 7.4%
A+ Massachusetts Health & Education
Facilities Authority (Boston College),
5.25s, 2023 $1,500 $ 1,368,705
AAA Massachusetts Health & Education
Facilities Authority (Boston
University), MBIA, 6s, 2022 1,175 1,180,205
AAA Massachusetts Health & Education
Facilities Authority (Boston
University), MBIA, 9.147s, 2031++++ 5,000 5,600,000
AAA Massachusetts Health & Education
Facilities Authority (Harvard
University), 5.375s, 2032 3,190 2,963,318
AAA Massachusetts Industrial Finance Agency
(Brandeis University), MBIA, 0s, 2004 1,000 656,670
AAA Massachusetts Industrial Finance Agency
(Brandeis University), MBIA, 0s, 2005 1,000 618,680
AAA Massachusetts Industrial Finance Agency
(Brandeis University), MBIA, 0s, 2009 1,000 478,980
AAA Massachusetts Industrial Finance Agency
(Brandeis University), MBIA, 0s, 2010 1,000 447,830
AAA Massachusetts Industrial Finance Agency
(Brandeis University), MBIA, 0s, 2011 500 208,675
NR Massachusetts Industrial Finance Agency
(Curry College), 8s, 2010 635 629,159
NR Massachusetts Industrial Finance Agency
(Curry College), 8s, 2014 2,000 2,016,620
NR Massachusetts Industrial Finance Agency
(Emerson College), 8.9s, 2018 1,000 1,107,871
AAA Massachusetts Industrial Finance Agency
(Lesley College), Connie Lee, 6.3s,
2025 2,000 2,036,760
------------
$19,313,473
- --- --------------------------------------- --------------- ------------
Other - 5.5%
NR Martha's Vineyard, MA, Land Bank (Land
Acquisition), 8.125s, 2011 $4,000 $ 4,101,200
NR Massachusetts Health & Education
Facilities Authority (Learning Center
for Deaf Children), 9.25s, 2014 2,250 2,402,797
NR Massachusetts Health & Education
Facilities Authority (Learning Center
for Deaf Children), 8s, 2020 1,500 1,492,770
BBB Massachusetts Industrial Finance Agency
(Dexter School), 7.5s, 2011 1,720 1,830,733
BBB Massachusetts Industrial Finance Agency
(Dexter School), 7.5s, 2021 2,900 3,101,087
14
<PAGE>
Other - continued
NR Nantucket Island, MA, Land Bank (Land
Acquisition), 7.75s, 2020 $1,200 $ 1,341,132
------------
$ 14,269,719
- --- --------------------------------------- --------------- ------------
Total Municipal Bonds (Identified Cost, $235,478,824) $249,894,875
- --- --------------------------------------- --------------- ------------
Call Option Purchased - 0.1%
- --- --------------------------------------- --------------- ------------
Principal Amount
of Contracts
Description/Expiration Date/Strike Price (000 Omitted)
- --- --------------------------------------- --------------- ------------
NR Georgia Municipal Electric Authority
Power Co. / 2003 / 103
(Premium Paid, $131,400) $ 10 $ 297,000
- --- --------------------------------------- --------------- ------------
Floating Rate Demand Notes - 2.4%
- --- --------------------------------------- --------------- ------------
Principal Amount
Issuer (000 Omitted)
A+ Lincoln County, WY, Pollution Control
Rev. (Exxon), due 2014 $ 200 $ 200,000
NR Uinta County, WY, Pollution Control
Rev. (Chevron), due 2020 6,100 6,100,000
- --- --------------------------------------- --------------- ------------
Total Floating Rate Demand Notes, at Identified Cost $ 6,300,000
- --- --------------------------------------- --------------- ------------
Total Investments (Identified Cost, $241,910,224) $256,491,875
Other Assets, Less Liabilities - 1.7% 4,321,235
- --- --------------------------------------- --------------- ------------
Net Assets - 100.0% $260,813,110
- --- --------------------------------------- --------------- ------------
++Security valued by or at the direction of the Trustees.
++++Inverse floating rate security.
###Security segregated as collateral for an open futures contract.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS NEW YORK MUNICIPAL BOND FUND
Municipal Bonds - 98.4%
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- --- --------------------------------------- --------------- ------------
General Obligation - 9.7%
AAA Brookhaven, NY, FGIC, 5.5s, 2013 $1,000 $ 986,430
BBB+ New York, NY, 7.2s, 2008 1,000 1,071,190
BBB+ New York, NY, 7.3s, 2010 880 954,333
BBB+ New York, NY, 7.3s, 2011 5,000 5,415,500
BBB+ New York, NY, 7.375s, 2013 1,600 1,735,264
BBB+ New York, NY, 8s, 2015 10 11,383
BBB+ New York, NY, 8.25s, 2016 160 185,004
BBB+ New York, NY, 8s, 2018 60 68,382
NR Oswego County, NY, 6.7s, 2009 1,000 1,115,960
AAA Port Byron, NY, Central School
District, AMBAC, 7.4s, 2012 500 599,695
AAA Port Byron, NY, Central School
District, AMBAC, 7.4s, 2013 500 603,485
AAA Port Byron, NY, Central School
District, AMBAC, 7.4s, 2014 500 607,070
AAA Port Byron, NY, Central School
District, AMBAC, 7.4s, 2015 500 607,095
NR Territory of Virgin Islands, 7.75s,
2006 415 455,068
AAA Washingtonville, NY, Central School
District, FGIC, 7.35s, 2008 550 648,917
AAA Washingtonville, NY, Central School
District, FGIC, 7.35s, 2009 550 648,873
------------
$ 15,713,649
- --- --------------------------------------- --------------- ------------
State and Local Appropriation - 23.7%
BBB Metropolitan Transportation Authority,
NY, Service Contract, 5.75s, 2007 $ 250 $ 249,347
State and Local Appropriation - continued
BBB Metropolitan Transportation Authority,
NY, Service Contract, 7.375s, 2008 $2,000 $ 2,234,520
BBB Metropolitan Transportation Authority,
NY, Service Contract, 0s, 2009 4,920 2,233,827
BBB Metropolitan Transportation Authority,
NY, Service Contract, 0s, 2012 4,700 1,742,760
BBB Metropolitan Transportation Authority,
NY, Service Contract, 0s, 2012 7,000 2,595,600
BBB New York Dormitory Authority Rev. (City
University), 8.125s, 2008 1,500 1,653,720
BBB New York Dormitory Authority Rev. (City
University), 5.75s, 2013 1,250 1,208,225
BBB New York Dormitory Authority Rev. (City
University), 5.625s, 2016 4,200 3,991,680
AAA New York Dormitory Authority Rev. (City
University), AMBAC, 5.75s, 2018 1,000 1,001,140
AAA New York Dormitory Authority Rev. (City
University), AMBAC, 5.75s, 2018 800 800,912
AAA New York Dormitory Authority Rev. (City
University), AMBAC, 6.3s, 2024 2,040 2,108,788
AAA New York Dormitory Authority Rev. (City
University), MBIA, 6.25s, 2019 1,300 1,331,005
AAA New York Dormitory Authority Rev.
(Mental Health Hospital), MBIA, 5.125s,
2021 2,500 2,264,725
A New York Local Government Assistance
Corp., 0s, 2014 3,750 1,303,237
BBB+ New York Medical Care Facilities
Finance Agency, Mental Health Services,
7.875s, 2008 245 273,995
BBB+ New York Medical Care Facilities
Finance Agency, Mental Health Services,
6.375s, 2014 1,000 1,020,620
BBB+ New York Medical Care Facilities
Finance Agency, Mental Health Services,
7.3s, 2021 250 275,230
BBB New York Medical Care Facilities
Finance Agency, Mental Health Services
(Huntington Mortgage), 6.5s, 2014 1,250 1,257,237
AAA New York Medical Care Facilities
Finance Agency, Mental Health Services,
MBIA, 6.15s, 2015 600 611,172
AAA New York, NY, Transportation
(Livingston Plaza), FSA, 5.25s, 2020 385 353,187
BBB New York Urban Development Corp., 5.7s,
2020 1,500 1,421,145
BBB New York Urban Development Corp.
(Correctional Facilities), 0s, 2009 7,145 3,362,865
AAA New York Urban Development Corp.
(Empire State Development Corp.), MBIA,
5.5s, 2019 2,000 1,924,280
AAA New York Urban Development Corp., MBIA,
5.75s, 2015 1,000 996,450
A Puerto Rico Public Buildings Authority,
Education & Health, 6.285s, 2016(S) 2,000 1,858,840
NR Troy, NY, Certificates of
Participation, Recreational Facilities
Rev., 9.75s, 2010**++ 905 90,500
NR United Nations Development Corp., 6s,
2026 350 345,233
------------
$ 38,510,240
- --- --------------------------------------- --------------- ------------
Refunded and Special Obligation - 12.3%
AAA New York Local Government Assistance
Corp., 7.25s, 2001 $2,500 $ 2,844,475
15
<PAGE>
Refunded and Special Obligation - continued
AAA New York Medical Care Facilities
Finance Agency (Buffalo General
Hospital), FHA, 7.7s, 1998 $ 500 $ 550,445
AAA New York Medical Care Facilities
Finance Agency (Catholic), FHA, 8.3s,
1998 515 563,976
AAA New York Medical Care Facilities
Finance Agency (Long Island Hospital),
8.1s, 1998 1,500 1,637,310
AAA New York Medical Care Facilities
Finance Agency (Presbyterian Hospital),
FHA, 7.7s, 2000 750 859,695
AAA New York Medical Care Facilities
Finance Agency (St. Luke's Hospital),
FHA, 7.45s, 2000 2,600 2,922,894
AAA New York Medical Care Facilities
Finance Agency, Mental Health Services,
7.875s, 2000 560 645,764
AAA New York Medical Care Facilities
Finance Agency, Mental Health Services,
7.875s, 2000 225 259,458
AAA New York Medical Care Facilities
Finance Agency, Mental Health Services,
7.3s, 2001 750 860,895
BBB+ New York, NY, 8s, 2001 490 574,917
BBB+ New York, NY, 8.25s, 2001 1,840 2,195,377
A- New York, NY, Municipal Water & Sewer
Finance Authority, 7s, 2001 530 593,674
A- New York, NY, Municipal Water & Sewer
Finance Authority, 7s, 2001 225 252,031
A- New York, NY, Municipal Water & Sewer
Finance Authority, 7.375s, 2001 2,000 2,287,560
AA- New York Power Authority Rev. (General
Purpose), 8s, 1998 380 412,083
BBB New York Urban Development Corp., State
Facilities Rev., 7.5s, 2001 1,000 1,148,870
AAA Puerto Rico Aqueduct & Sewer Authority,
9s, 2005 250 324,037
AAA Triborough Bridge & Tunnel Authority,
NY, 7.375s, 2000 1,000 1,114,320
------------
$20,047,781
- --- --------------------------------------- --------------- ------------
Single Family Housing Revenue - 4.4%
NR New York Mortgage Agency Rev., 7.375s,
2011 $1,295 $ 1,366,781
NR New York Mortgage Agency Rev., 8.05s,
2011 735 798,327
NR New York Mortgage Agency Rev., 6.45s,
2017 2,355 2,437,495
NR New York Mortgage Agency Rev., 8.05s,
2021 325 350,535
NR New York Mortgage Agency Rev., 8.05s,
2022 555 592,984
NR New York Mortgage Agency Rev., 7.75s,
2023 995 1,056,660
NR New York, NY, Housing Development Corp.
(South Bronx Cooperatives), 8.1s, 2023 580 604,313
------------
$ 7,207,095
- --- --------------------------------------- --------------- ------------
Insured Health Care Revenue - 7.2%
AAA New York Dormitory Authority Rev.
(Devereux Foundation), MBIA, 5s, 2015 $1,000 $ 914,210
AAA New York Dormitory Authority Rev. (St.
Vincent's Hospital), FHA, 7.375s, 2011 2,500 2,720,600
Insured Health Care Revenue - continued
AA New York Medical Care Facilities
Finance Agency (Montefiore Medical),
7.25s, 2009 $3,185 $ 3,416,804
AA New York Medical Care Facilities
Finance Agency (Montefiore Medical),
7.25s, 2024 1,750 1,869,140
AAA New York Medical Care Facilities
Finance Agency (Montefiore Medical),
AMBAC, FHA, 6.5s, 2029 2,550 2,705,907
------------
$11,626,661
- --- --------------------------------------- --------------- ------------
Health Care Revenue - 1.8%
NR Albany, NY, Industrial Development
Authority, Civic Facilities Rev.,
8.25s, 2004### $2,135 $ 2,248,283
NR Tompkins County, NY, Industrial
Development Authority, 7.875s, 2024 700 708,834
------------
$ 2,957,117
- --- --------------------------------------- --------------- ------------
Electric and Gas Utility Revenue - 5.5%
AAA New York Energy Research & Development
(Brooklyn Gas), MBIA, 5.5s, 2021 $1,500 $ 1,435,440
BB+ New York Energy Research & Development
(Lilco), 6.9s, 2022 2,000 2,005,120
AAA New York Power Authority, FGIC, 6.5s,
2008 2,500 2,797,525
A- Puerto Rico Electric Power, 0s, 2017 500 134,070
NR Virgin Islands Water & Power Authority,
Electric Systems Rev., 7.4s, 2011 2,450 2,560,862
------------
$ 8,933,017
- --- --------------------------------------- --------------- ------------
Water and Sewer Utility Revenue - 10.3%
AAA Buffalo, NY, Municipal Water Authority,
FGIC, 5s, 2025 $1,000 $ 894,370
A- New York Environmental Facilities
Corp., Pollution Control Rev., 5.75s,
2010 3,235 3,324,933
A New York Environmental Facilities
Corp., Pollution Control Rev., 6.875s,
2010 2,000 2,205,280
NR New York Environmental Facilities
Corp., Water Facilities Rev., 8.85s,
2015 2,500 2,770,725
A- New York, NY, Municipal Water & Sewer
Finance Authority, 6s, 2010 620 643,690
A- New York, NY, Municipal Water & Sewer
Finance Authority, 7.1s, 2012 2,000 2,183,200
A- New York, NY, Municipal Water & Sewer
Finance Authority, 7s, 2015 745 806,343
A- New York, NY, Municipal Water & Sewer
Finance Authority, 6s, 2017 200 198,056
A- New York, NY, Municipal Water & Sewer
Finance Authority, 7.6s, 2020 470 517,117
A- New York, NY, Municipal Water & Sewer
Finance Authority, 5.5s, 2023 1,500 1,360,740
AAA Suffolk County, NY, Water Authority,
MBIA, 5.1s, 2012 1,895 1,815,921
------------
$16,720,375
- --- --------------------------------------- --------------- ------------
Turnpike Revenue - 9.8%
AAA Buffalo & Fort Erie, NY, MBIA, 5.75s,
2025 $3,255 $ 3,187,784
A New York Thruway Authority, 5.75s, 2019 500 481,515
BBB Triborough Bridge & Tunnel Authority,
NY, 0s, 2012 360 138,686
A+ Triborough Bridge & Tunnel Authority,
NY, 6.625s, 2012 250 276,792
16
<PAGE>
Turnpike Revenue - continued
A+ Triborough Bridge & Tunnel Authority,
NY, 5.5s, 2017 $ 8,000 $ 7,748,660
AAA Triborough Bridge & Tunnel Authority,
NY, MBIA, 0s, 2017 10,825 3,246,309
BBB Virgin Islands Public Finance
Authority, Highway Rev., 7.7s, 2004 800 874,376
------------
$ 15,954,122
- --- --------------------------------------- --------------- ------------
Airport and Port Revenue - 1.8%
A New York, NY, Industrial Development
Authority, 6s, 2019 $ 2,000 $ 1,925,260
AAA Port Authority, NY & NJ, FGIC, 6.5s,
2019 1,000 1,050,220
-------------
$ 2,975,480
- --- --------------------------------------- --------------- ------------
Sales and Excise Tax Revenue - 1.0%
A Puerto Rico Highway Rev., 5s, 2036 $ 2,000 $ 1,671,300
- --- --------------------------------------- --------------- ------------
Industrial Revenue (Corporate Guarantee) - 2.7%
A+ Allegany County, NY, Industrial
Development Authority, Solid Waste Rev.
(Atlantic Richfield), 6.625s, 2016 $ 1,000 $ 1,039,580
NR Fulton County, NY, Industrial
Development Agency (Crossroads
Incubator), 8.75s, 2009 1,120 1,198,870
NR Monroe County, NY, Industrial
Development Agency (Weyerhaeuser Co.),
9s, 2006### 1,000 1,032,360
BB+ New York, NY, Industrial Development
Agency, Special Facilities Rev.
(American Airlines), 6.9s, 2024 1,000 1,038,570
------------
$ 4,309,380
- --- --------------------------------------- --------------- ------------
Universities - 4.8%
AAA New York Dormitory Authority Rev.
(Canisius College), CAPMAC, 0s, 2014 $ 1,550 $ 526,116
AAA New York Dormitory Authority Rev.
(Canisius College), CAPMAC, 0s, 2015 1,050 335,895
AAA New York Dormitory Authority Rev.
(Colgate University), MBIA, 6s, 2021 850 878,118
AA New York Dormitory Authority Rev.
(Cornell University), 7.375s, 2020 1,500 1,662,450
AAA New York Dormitory Authority Rev.
(Fordham University), FGIC, 5.5s, 2023 1,000 952,560
AA New York Dormitory Authority Rev.
(Menorah Campus), 7.4s, 2031 1,095 1,209,931
AA New York Dormitory Authority Rev.
(Vassar College), 5s, 2015 1,400 1,284,262
AA New York, NY, Industrial Development
Agency (Nightingale-Bamford School),
5.85s, 2020 1,000 943,470
------------
$ 7,792,802
- --- --------------------------------------- --------------- ------------
Other - 3.0%
AA Battery Park City Authority, 5.7s, 2020 $ 4,000 $ 3,743,880
NR Dutchess, NY, Industrial Development
Agency, Civic Facilities Rev., 8.625s,
2016 1,125 1,195,942
------------
$ 4,939,822
- --- --------------------------------------- --------------- ------------
Special Assessment District - 0.4%
A Grand Central, NY, Business Improvement
Dist. Capital, 5.25s, 2022 $ 810 $ 730,710
- --- --------------------------------------- --------------- ------------
Total Municipal Bonds (Identified Cost, $153,074,634) $160,089,551
- --- --------------------------------------- --------------- ------------
</TABLE>
<TABLE>
<CAPTION>
S&P Bond Principal Amount
Rating of Contracts
(Unaudited) Description/Expiration Date/Strike Price (000 Omitted) Value
- ---------- ------------------------------------------------------------- ----------------- -------------
<S> <C> <C> <C>
Call Option Purchased - 0.4%
A Georgia Municipal Electric Authority / 2003 / 102 $ 1 $ 20,790
A North Carolina Eastern Municipal Power Agency / 2003 / 102 5 192,250
A State of New Jersey, "D" / 2003 / 102 2 382,000
- ---------- ------------------------------------------------------------ --------------- -----------
Total Call Options Purchased (Premiums Paid, $555,000) $ 595,040
----------------------------------------------------------------------------------------------- -----------
Floating Rate Demand Notes -- 1.6%
----------------------------------------------------------------------------------------------- -----------
Principal Amount
Issuer (000 Omitted)
- ---------- ------------------------------------------------------------ --------------- -----------
NR New York, NY, City Municipal Water Finance Authority, due
2023 $ 300 $ 300,000
AAA New York, NY, City Municipal Water Finance Authority, due
2024 100 100,000
NR New York, NY, Job Development Authority, due 2007 2,125 2,125,000
- ---------- ------------------------------------------------------------ --------------- -----------
Total Floating Rate Demand Notes, at Identified Cost $ 2,525,000
----------------------------------------------------------------------------------------------- -----------
Total Investments (Identified Cost, $156,154,634) $163,209,591
Other Assets, Less Liabilities - (0.4)% (693,119)
Net Assets - 100.0% $162,516,472
----------------------------------------------------------------------------------------------- -----------
(S)Indexed security.
++Security valued by or at the direction of the Trustees.
**Non-income producing security - in default.
###Security segregated as collateral for an open futures contract.
See notes to financial statements
</TABLE>
Portfolio of Investments - March 31, 1996
MFS PENNSYLVANIA MUNICIPAL BOND FUND
Municipal Bonds - 96.9%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ------------------------------------------------ ----------------- --------------
<S> <C> <C> <C>
General Obligation - 15.7%
AAA Bangor, PA, Area School District
(Northampton), AMBAC, 5.4s, 2017 $ 750 $ 704,220
AAA Bedford, PA, Area School District,
MBIA, 5.5s, 2017 500 478,885
AAA Berks County, PA, FGIC, 0s, 2018 2,200 585,992
AAA Dauphin County, PA, General Authority
Hospital Rev., MBIA, 0s, 2020 940 218,700
A Dauphin County, PA, General Authority
Hospital Rev., Variable Rate Demand
Bond, 5.8s, 2026 400 389,624
BBB- Greene County, PA, 6s, 2010 100 99,645
AAA Lancaster, PA, School District, FGIC,
5.4s, 2013 1,300 1,259,986
AAA Montour Pittsburgh, PA, MBIA, 0s, 2019 1,190 312,113
AAA Northeastern York County, PA, School
District, FGIC, 0s, 2012 415 166,573
AAA Oley Valley, PA, School District,
AMBAC, 0s, 2011 810 346,348
AAA Philadelphia, PA, School District,
AMBAC, 5.5s, 2025 750 706,425
AAA Pittsburgh, PA, Public Improvement,
FGIC, 5.25s, 2011 750 727,687
A Southeastern Area, PA, Special Schools
Authority Rev., 0s, 2007 360 182,426
AAA Southern Fulton, PA, School District,
CAP GTY, 0s, 2016 460 136,735
AA- State of Pennsylvania, 6.25s, 2010 300 326,838
-------------
$6,642,197
- ------------------------------------------------ ----------------- --------------
17
<PAGE>
- --- --------------------------------------- --------------- -------------
State and Local Appropriation - 1.5%
AAA Philadelphia, PA, Municipal Authority
Rev., FGIC, 5.625s, 2014 $ 200 $ 194,892
NR Philadelphia, PA, Municipal Authority
Rev. (Justice Lease), 8.625s, 2016 400 435,312
-------------
$ 630,204
--- --------------------------------------- --------------- -------------
Refunded and Special Obligation - 10.3%
AAA Allegheny County, PA, Sanitation
Authority, FGIC, 7.45s, 1999 $ 200 $ 218,110
AAA Bethlehem, PA, Authority, Water Rev.,
MBIA, 6.1s, 2002 500 537,910
AAA Philadelphia, PA, Gas Works Rev., ETM,
6s, 2013 1,645 1,732,810
NR Philadelphia, PA, Hospitals & Higher
Educational Facilities Authority,
Hospital Rev., 7.25s, 2001 500 566,335
AAA Puerto Rico Highway and Special
Obligation & Transport Authority,
Highway Rev., 6.5s, 2002 250 279,050
AAA Schuylkill County, PA, Redevelopment
Authority Rev., FGIC, 7s, 2007 300 330,522
AAA Westmoreland County, PA, FGIC, ETM, 0s,
2018 1,000 271,130
AAA Westmoreland County, PA, MBIA, ETM,
5.25s, 2009 400 399,468
-------------
$4,335,335
--- --------------------------------------- --------------- -------------
Guaranteed Housing Revenue - 2.3%
A Harrisburg, PA, Authority Rev., 5.875s,
2021 $1,000 $ 979,960
--- --------------------------------------- --------------- -------------
Single Family Housing Revenue - 4.7%
AA+ Pennsylvania Housing Finance Authority,
6.75s, 2014 $ 500 $ 516,610
AA Pennsylvania Housing Finance Authority,
6.4s, 2016 500 506,855
AA+ Pennsylvania Housing Finance Authority,
6.65s, 2021 250 256,637
AA+ Pennsylvania Housing Finance Authority,
6.125s, 2024 500 498,930
A+ Philadelphia, PA, Redevelopment
Authority, 6.1s, 2010 200 196,438
-------------
$1,975,470
--- --------------------------------------- --------------- -------------
Multi-Family Housing Revenue - 4.0%
NR Montgomery, PA, Redevelopment Authority
(KBF Associates), 6.5s, 2025 $ 250 $ 241,100
AAA Pennsylvania Housing Finance Agency,
FNMA, 5.75s, 2014 275 270,617
AAA Pennsylvania Housing Finance Agency,
FNMA, 5.8s, 2022 800 779,992
A Pittsburgh, PA, Urban Development
Corp., 5.5s, 2010 400 379,812
-------------
$1,671,521
--- --------------------------------------- --------------- -------------
Insured Health Care Revenue - 11.8%
AAA Allegheny County, PA, Hospital
Authority (Magee Women's), FGIC, 0s,
2015 $1,000 $ 314,600
AAA Allegheny County, PA, Hospital
Authority (University of Pitts-MD),
MBIA, 5.35s, 2015 400 375,836
AAA Blair County, PA, Hospital Authority
(Altoona), AMBAC, 5.5s, 2008### 470 476,063
Insured Health Care Revenue - continued
AAA Butler County, PA, Hospital Authority,
Hospital Rev. (Butler Memorial
Hospital), FSA, 5.25s, 2016 $ 400 $ 367,200
AAA Dauphin County, PA, General Authority
Hospital Rev. (Hapsco Project), MBIA,
5.8s, 2002 355 373,680
AAA Dauphin County, PA, General Authority
Hospital Rev. (Hapsco Project), MBIA,
5.5s, 2013 1,000 956,770
AAA Delaware County, PA, Hospital Rev.
(Crozer Chester), MBIA, 5.3s, 2020 500 462,405
AAA Lancaster County, PA, Hospital Rev.
(Masonic), AMBAC, 5s, 2020 400 351,156
AAA Lehigh County, PA, Hospital Rev.
(Lehigh Valley), MBIA, 7s, 2016 250 284,475
AAA Sayre, PA, Health Care Facilities (VHA
PA), AMBAC, 6.375s, 2022 160 165,637
AAA Sewickley Valley, PA, Hospital
Authority (Sewickley Valley Hospital),
MBIA, 5.75s, 2016 850 836,834
-------------
$4,964,656
--- --------------------------------------- --------------- -------------
Health Care Revenue - 7.4%
A- Butler County, PA, Industrial
Development Authority (Sherwood Oaks),
5.75s, 2011 $ 400 $ 371,032
AA- Chester County, PA, Health & Education
(Main Line), 5.5s, 2015 335 311,275
BBB- Cumberland County, PA, Municipal
Refunding (Carlisle Hospital), 6.8s,
2023 500 483,580
NR Montgomery County, PA (AHF-Amber),
8.5s, 2023 210 205,493
AA Philadelphia, PA, Health & Educational
Facilities Authority (Children's
Hospital), 5.375s, 2014 500 465,255
BBB+ Philadelphia, PA, Health & Educational
Facilities Authority (Graduate Health),
6.25s, 2018 300 276,876
BBB Philadelphia, PA, Health & Educational
Facilities Authority (Jeanes Health),
6.6s, 2010 500 481,265
A- Philadelphia, PA, Health & Educational
Facilities Authority (Temple
University), 6.625s, 2023 250 255,870
A- Union County, PA, Hospital Authority
Rev. (Evangelical), 5.875s, 2023 300 271,176
-------------
$3,121,822
--- --------------------------------------- --------------- -------------
Electric and Gas Utility Revenue - 5.4%
BBB- Luzerne County, PA, Industrial
Development Authority, 6.05s, 2019 $ 300 $ 283,632
AAA Luzerne County, PA, Industrial
Development Authority, AMBAC, 7.2s,
2017 500 552,295
NR Pennsylvania Economic Development
Authority (Northampton Generating),
6.5s, 2013 250 240,943
BBB Philadelphia, PA, Gas Works Rev.,
6.375s, 2014 750 755,475
BBB Philadelphia, PA, Gas Works Rev.,
5.25s, 2015 250 220,560
NR Schuylkill County, PA, Industrial
Development Authority (Schuylkill
Energy Res.), 6.5s, 2010 235 235,220
-------------
$2,288,125
18
<PAGE>
- --- --------------------------------------- --------------- -------------
Water and Sewer Utility Revenue - 7.9%
AAA Bethlehem, PA, Water Rev., MBIA, 5.2s,
2021 $ 250 $ 227,310
AAA Center Township, PA, Sewer Refunding,
MBIA, 5.5s, 2016 300 289,380
AAA Lancaster, PA, Sewer Authority, FGIC,
6.85s, 2011 250 258,925
AAA Meadville, PA, Area Water Authority,
FSA, 5.125s, 2014 250 230,820
AAA Moon Township, PA, Water & Sewer, MBIA,
5.4s, 2013 500 477,940
BBB Philadelphia, PA, Water Rev., 5.75s,
2013 275 266,970
AAA Philadelphia, PA, Water Rev., FSA,
5.75s, 2013 300 298,299
AAA Philadelphia, PA, Water Rev., MBIA,
5.5s, 2014 500 478,725
AAA Philadelphia, PA, Water Rev., MBIA,
5.25s, 2023 500 453,065
NR Smithfield, PA, Sewer Authority, 6.2s,
2018 350 349,811
-------------
$ 3,331,245
--- --------------------------------------- --------------- -------------
Turnpike Revenue - 3.0%
AAA Delaware River Junction, PA, Port
Authority Rev., FGIC, 5.4s, 2014 $ 250 $ 241,088
AAA Delaware River Junction, PA, Toll
Bridge (Pennsylvania Bridge), FGIC,
6.25s, 2012 1,000 1,043,730
-------------
$ 1,284,818
--- --------------------------------------- --------------- -------------
Airport and Port Revenue - 3.0%
AAA Allegheny County, PA, Airport Rev.
(Greater Pitts), FGIC, 7.75s,
2019### $ 750 $ 782,040
AAA Dauphin County, PA, Airport Rev.
(Harris International), 5.5s, 2014 500 475,085
-------------
$ 1,257,125
--- --------------------------------------- --------------- -------------
Sales and Excise Tax Revenue - 5.1%
A Commonwealth of Puerto Rico, 5.5s, 2013 $ 500 $ 487,365
A Commonwealth of Puerto Rico, 5.5s, 2019 750 700,515
AAA Pennsylvania Inter-governmental
Cooperative Authority Special Tax,
MBIA, 5.6s, 2015 1,000 965,560
-------------
$ 2,153,440
--- --------------------------------------- --------------- -------------
Industrial Revenue (Corporate Guarantee) - 6.9%
BBB- Beaver County, PA, Industrial
Development Rev. (J. Ray McDermott
Project), 6.8s, 2009 $ 835 $ 840,895
A- Erie County, PA, Industrial Development
Authority, Environmental Improvement
(International Paper), 7.625s, 2018 250 278,405
NR Hampden, PA, Industrial Development
Authority (K-Mart), 5.75s, 2008 $ 250 $ 179,798
A New Morgan, PA, Industrial Development
Authority (Browning Ferris), 6.5s, 2019 500 512,795
NR Northampton County, PA, Industrial
Development Authority (Bethlehem
Steel), 7.55s, 2017 800 820,136
BBB- Pennsylvania Economic Development
Authority (MacMillan Bloedel), 7.6s,
2020 250 273,433
-------------
$ 2,905,462
--- --------------------------------------- --------------- -------------
Universities - 3.2%
AAA Cumberland County, PA, Municipal
(Messiah College), AMBAC, 5.125s, 2015 $ 300 $ 276,492
A+ Pennsylvania Higher Education
Facilities Authority Rev. (Thomas
Jefferson University), 6s, 2019 625 631,769
AA- Pennsylvania Higher Education
Facilities Authority Rev. (University
of Pennsylvania), 7s, 2008 400 451,672
-------------
$ 1,359,933
--- --------------------------------------- --------------- -------------
Other - 4.7%
BBB- Pennsylvania Convention Center Rev.,
6.75s, 2019 $ 250 $ 260,960
A Pennsylvania Finance Authority Rev.,
6.6s, 2009 900 963,027
AAA Pennsylvania Industrial Development
Authority Rev., AMBAC, 7s, 2007 300 341,490
AAA Pennsylvania Industrial Development
Authority Rev., AMBAC, 5.8s, 2009 400 410,720
-------------
$ 1,976,197
--- --------------------------------------- --------------- -------------
Total Municipal Bonds (Identified Cost, $40,666,042) $40,877,510
-------------------------------------------------------------------- -------------
Floating Rate Demand Notes - 1.6%
-------------------------------------------------------------------- -------------
AAA Allegheny County, PA, Hospital
(Presbyterian), MBIA, due 2020 $ 300 $ 300,000
AAA Allegheny County, PA, Hospital
(Presbyterian), MBIA, due 2020 300 300,000
A+ Delaware County, PA, Industrial
Development Authority, Airport
Facilities (UPS), due 2015 100 100,000
--- --------------------------------------- --------------- -------------
Total Floating Rate Demand Notes, at Identified Cost $ 700,000
-------------------------------------------------------------------- -------------
Total Investments (Identified Cost, $41,366,042) $41,577,510
Other Assets, Less Liabilities - 1.5% 622,426
-------------------------------------------------------------------- -------------
Net Assets - 100.0% $42,199,936
-------------------------------------------------------------------- -------------
###Security segregated as collateral for an open futures contract.
See notes to financial statements
</TABLE>
19
<PAGE>
Financial Statements
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
March 31, 1996 Fund Fund Fund Fund Fund Fund
- ----------------------- ---------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments -
Identified cost $83,056,189 $171,459,722 $72,373,827 $241,910,224 $156,154,634 $41,366,042
Unrealized
appreciation 4,045,900 5,433,403 4,934,709 14,581,651 7,054,957 211,468
-------- --------- -------- --------- --------- ----------
Total, at value $87,102,089 $176,893,125 $77,308,536 $256,491,875 $163,209,591 $41,577,510
Cash 92,694 66,935 113,954 74,295 185,566 16,108
Receivable for Fund
shares sold 66,189 337,543 22,199 1,146,165 40,903 15,139
Receivable for
investments sold 255,000 1,754,317 100,000 200,000 35,048 --
Interest receivable 1,471,146 2,652,332 1,225,093 4,139,616 2,387,788 685,899
Deferred organization
expenses -- 2,082 -- -- -- 3,237
Other assets 1,143 2,133 1,074 353 2,124 301
-------- --------- -------- --------- --------- ----------
Total assets $88,988,261 $181,708,467 $78,770,856 $262,052,304 $165,861,020 $42,298,194
-------- --------- -------- --------- --------- ----------
Liabilities:
Distributions payable $ 224,036 $ 417,772 $ 149,453 $ 610,427 $ 269,839 $ 71,333
Payable for Fund
shares reacquired 1,390 280,673 47,736 298,918 109,819 13,976
Payable for
investments purchased -- -- -- -- 2,620,992 --
Payable for daily
variation margin on
open futures
contracts -- -- 37,500 75,000 135,000 6,000
Payable to affiliates
-
Management fee 3,989 8,143 3,531 11,714 7,344 345
Shareholder servicing
agent fee 1,123 2,266 1,022 3,260 2,164 --
Distribution fee 55,188 49,721 46,973 168,871 92,443 3,621
Accrued expenses and
other liabilities 79,313 93,681 96,197 71,004 106,947 2,983
-------- --------- -------- --------- --------- ----------
Total liabilities $ 365,039 $ 852,256 $ 382,412 $ 1,239,194 $ 3,344,548 $ 99,140
-------- --------- -------- --------- --------- ----------
Net assets $88,623,222 $180,856,211 $78,388,444 $260,813,110 $162,516,472 $42,198,258
-------- --------- -------- --------- --------- ----------
Net assets consist of:
Paid-in capital $83,816,639 $183,304,572 $77,405,579 $252,056,620 $158,695,757 $43,331,602
Unrealized
appreciation on
investments 4,045,900 5,433,403 4,910,830 14,588,583 6,999,932 243,491
Accumulated
undistributed net
realized gain (loss)
on investments 677,369 (7,620,056) (3,786,105) (4,799,511) (2,748,611) (1,403,179)
Accumulated
undistributed
(distributions in
excess of) net
investment income 83,314 (261,708) (141,860) (1,032,582) (430,606) 28,022
-------- --------- -------- --------- --------- ----------
Total $88,623,222 $180,856,211 $78,388,444 $260,813,110 $162,516,472 $42,199,936
-------- --------- -------- --------- --------- ----------
Shares of beneficial
interest outstanding:
Class A 7,840,413 17,733,791 6,514,802 22,724,465 12,607,934 1,924,960
Class B 583,567 815,478 974,670 1,030,087 2,631,884 2,575,213
-------- --------- -------- --------- --------- ----------
Total shares of
beneficial interest
outstanding 8,423,980 18,549,269 7,489,472 23,754,552 15,239,818 4,500,173
-------- --------- -------- --------- --------- ----------
Net assets:
Class A $82,483,893 $172,906,525 $68,183,476 $249,497,114 $134,448,592 $18,029,769
Class B 6,139,329 7,949,686 10,204,968 11,315,996 28,067,880 24,170,167
-------- --------- -------- --------- --------- ----------
Total net assets $88,623,222 $180,856,211 $78,388,444 $260,813,110 $162,516,472 $42,199,936
-------- --------- -------- --------- --------- ----------
Class A shares:
Net asset value and
redemption price per
share
(net assets / shares
of beneficial
interest
outstanding) $10.52 $9.75 $10.47 $10.98 $10.66 $9.37
-------- --------- -------- --------- --------- ----------
Offering price per
share (100/95.25 of
net asset value per
share) $11.04 $10.24 $10.99 $11.53 $11.19 $9.84
-------- --------- -------- --------- --------- ----------
Class B shares:
Net asset value and
offering price per
share
(net assets / shares
of beneficial
interest
outstanding) $10.52 $9.75 $10.47 $10.99 $10.66 $9.39
-------- --------- -------- --------- --------- ----------
</TABLE>
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
20
<PAGE>
Financial Statements - continued
Statements of Operations
<TABLE>
<CAPTION>
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
Year Ended March 31, 1996 Fund Fund Fund Fund Fund Fund
- -------------------------- --------- ----------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income:
Interest income $5,708,575 $11,542,571 $5,204,374 $17,715,932 $10,461,924 $2,317,456
------- --------- ------- --------- -------- ----------
Expenses -
Management fee $ 500,417 $ 1,060,604 $ 458,694 $ 1,484,656 $ 934,490 $ 217,590
Trustees' compensation 15,465 14,012 17,650 15,688 15,399 14,606
Shareholder servicing
agent fee (Class A) 128,617 277,676 110,691 389,663 215,099 25,699
Shareholder servicing
agent fee (Class B) 11,529 16,982 21,131 22,357 58,317 49,233
Distribution and service
fee (Class A) 299,638 153,664 257,877 909,212 501,117 --
Distribution and service
fee (Class B) 52,407 64,683 96,049 101,622 265,077 174,424
Custodian fee 48,390 90,351 36,076 119,408 82,286 19,185
Printing 13,263 29,641 12,842 21,896 19,622 12,547
Postage 4,026 13,517 11,487 16,836 15,641 4,717
Auditing fees 32,455 34,455 31,580 18,880 18,755 27,955
Legal fees 960 2,451 2,678 11,957 5,684 10,522
Amortization of
organization expenses -- 2,235 -- -- -- 1,763
Miscellaneous 48,189 77,125 62,022 95,244 92,055 30,310
------- --------- ------- --------- -------- ----------
Total expenses $1,155,356 $ 1,837,396 $1,118,777 $ 3,207,419 $ 2,223,542 $ 588,551
Fees paid indirectly (7,254) (14,914) (5,461) (18,167) (5,732) (3,970)
Reduction of expenses by
investment adviser and
distributor (85,277) -- (73,392) -- (142,619) (370,367)
------- --------- ------- --------- -------- ----------
Net expenses $1,062,825 $ 1,822,482 $1,039,924 $ 3,189,252 $ 2,075,191 $ 214,214
------- --------- ------- --------- -------- ----------
Net investment income $4,645,750 $ 9,720,089 $4,164,450 $14,526,680 $ 8,386,733 $2,103,242
------- --------- ------- --------- -------- ----------
Realized and unrealized
gain (loss) on
investments:
Realized gain (loss)
(identified cost basis) -
Investment transactions $1,880,185 $ 645,820 $ 559,115 $ 3,133,465 $ 4,202,151 $ 340,107
Futures contracts (102,941) (2,322,083) (819,702) 23,017 (155,746) (731,486)
------- --------- ------- --------- -------- ----------
Net realized gain
(loss) on
investments $1,777,244 $(1,676,263) $ (260,587) $ 3,156,482 $ 4,046,405 $ (391,379)
------- --------- ------- --------- -------- ----------
Change in unrealized
appreciation
(depreciation) -
Investments $ (188,403) $ 3,800,153 $1,110,681 $ 526,159 $ (852,933) $ 774,678
Futures contracts -- (153,416) 100,268 6,932 (55,025) 12,088
------- --------- ------- --------- -------- ----------
Net unrealized gain
(loss) on investments $ (188,403) $ 3,646,737 $1,210,949 $ 533,091 $ (907,958) $ 786,766
------- --------- ------- --------- -------- ----------
Net realized and
unrealized gain
on investments $1,588,841 $ 1,970,474 $ 950,362 $ 3,689,573 $ 3,138,447 $ 395,387
------- --------- ------- --------- -------- ----------
Increase in net
assets from
operations $6,234,591 $11,690,563 $5,114,812 $18,216,253 $11,525,180 $2,498,629
======= ========= ======= ========= ======== ==========
</TABLE>
See notes to financial statements
21
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
Year Ended March 31, 1996 Fund Fund Fund Fund Fund Fund
- -------------------------- --------- ---------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 4,645,750 $ 9,720,089 $ 4,164,450 $ 14,526,680 $ 8,386,733 $ 2,103,242
Net realized gain (loss)
on investments 1,777,244 (1,676,263) (260,587) 3,156,482 4,046,405 (391,379)
Net unrealized gain
(loss) on investments (188,403) 3,646,737 1,210,949 533,091 (907,958) 786,766
------- -------- ------- -------- ------- ---------
Increase in net assets
from operations $ 6,234,591 $ 11,690,563 $ 5,114,812 $ 18,216,253 $ 11,525,180 $ 2,498,629
------- -------- ------- -------- ------- ---------
Distributions declared to
shareholders -
From net investment
income (Class A) $(4,413,702) $ (9,375,278) $ (3,749,712) $(14,053,457) $ (7,263,571) $ (990,676)
From net investment
income (Class B) (225,971) (326,899) (414,738) (473,223) (1,123,162) (1,117,148)
In excess of net
investment income
(Class A) -- -- (19,210) (35,743) (76,432) --
In excess of net
investment income
(Class B) -- -- (2,125) (1,204) (11,819) --
------- -------- ------- -------- ------- ---------
Total distributions
declared to shareholders $(4,639,673) $ (9,702,177) $ (4,185,785) $(14,563,627) $ (8,474,984) $(2,107,824)
------- -------- ------- -------- ------- ---------
Fund share (principal)
transactions -
Net proceeds from sale of
shares $ 6,801,657 $ 10,722,904 $ 9,527,957 $ 41,490,140 $ 34,552,591 $ 6,446,099
Issued in connection with
the acquisition of
the Advantage Fund -- -- -- -- 14,684,566 14,818,825
Net asset value of shares
issued to shareholders
in reinvestment of
distributions 1,862,845 4,417,313 2,180,065 6,631,937 5,133,804 1,301,093
Cost of shares reacquired (9,836,700) (30,608,486) (17,375,838) (62,188,200) (53,386,143) (4,865,944)
------- -------- ------- -------- ------- ---------
Increase (decrease) in
net assets from Fund
share transactions $(1,172,198) $(15,468,269 $ (5,667,816) $(14,066,123) $ 984,818 $17,700,073
------- -------- ------- -------- ------- ---------
Total increase
(decrease) in net
assets $ 422,720 $(13,479,883) $ (4,738,789) $(10,413,497) $ 4,035,014 $18,090,878
Net assets:
At beginning of period 88,200,502 194,336,094 83,127,233 271,226,607 158,481,458 24,109,058
------- -------- ------- -------- ------- ---------
At end of period $88,623,222 $180,856,211 $ 78,388,444 $260,813,110 $162,516,472 $42,199,936
======= ======== ======= ======== ======= =========
Accumulated undistributed
(distributions in excess
of) net investment
income included in net
assets at end of period $ 83,314 $ (261,708) $ (141,860) $ (1,032,582) $ (430,606) $ 28,022
======= ======== ======= ======== ======= =========
</TABLE>
<TABLE>
<CAPTION>
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
Year Ended March 31, 1995 Fund Fund Fund Fund Fund Fund
- -------------------------- --------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 4,679,690 $ 10,867,210 $ 4,725,659 $ 16,312,275 $ 8,740,078 $ 1,233,943
Net realized loss on
investments (720,688) (4,813,993) (3,196,176) (7,575,364) (4,956,654) (926,036)
Net unrealized gain on
investments 1,407,648 4,563,068 2,709,105 6,284,378 5,683,239 1,312,816
------- -------- ------- -------- -------- ---------
Increase in net assets
from operations $ 5,366,650 $ 10,616,285 $ 4,238,588 $ 15,021,289 $ 9,466,663 $ 1,620,723
------- -------- ------- -------- -------- ---------
Distributions declared to
shareholders -
From net investment
income (Class A) $(4,455,164) $(10,558,798) $ (4,347,433) $(15,941,100) $ (8,299,546) $ (918,914)
From net investment
income (Class B) (169,047) (299,458) (355,084) (341,011) (440,532) (308,983)
From net realized gain on
investments (Class A) -- -- (44,822) (438,055) (13,401)
From net realized gain on
investments (Class B) -- -- (3,726) (8,649) (4,722)
In excess of net
investment income
(Class A) -- -- -- -- (106,916) --
In excess of net
investment income
(Class B) -- -- -- -- (5,096) --
In excess of net realized
gain on investments
(Class A) (208,081) (1,025,561) (231,782) (334,517) (772,589) (45,614)
In excess of net realized
gain on investments
(Class B) (8,165) (37,275) (19,268) (6,605) (35,924) (16,075)
------- -------- ------- -------- -------- ---------
Total distributions
declared to shareholders $(4,840,457) $(11,921,092) $ (5,002,115) $(17,069,937) $ (9,660,603) $(1,307,709)
------- -------- ------- -------- -------- ---------
Fund share (principal)
transactions -
Net proceeds from sale of
shares $ 12,406,978 $ 19,194,317 $ 14,621,961 $ 25,180,128 $ 78,439,130 $ 7,920,007
Net asset value of shares
issued to shareholders
in reinvestment of
distributions 1,737,757 5,605,569 2,363,696 7,555,508 5,701,844 832,536
Cost of shares reacquired (10,820,302) (30,096,110) (25,603,342) (42,201,495) (94,352,331) (3,221,987)
------- -------- ------- -------- -------- ---------
Increase (decrease) in
net assets from Fund
share transactions $ 3,324,433 $ (5,296,224) $ (8,617,685) $ (9,465,859) $(10,211,357) $ 5,530,556
------- -------- ------- -------- -------- ---------
Total increase
(decrease) in net
assets $ 3,850,626 $ (6,601,031) $ (9,381,212) $(11,514,507) $(10,405,297) $ 5,843,570
Net assets:
At beginning of period 84,349,876 200,937,125 92,508,445 282,741,114 168,886,755 18,265,488
------- -------- ------- -------- -------- ---------
At end of period $ 88,200,502 $194,336,094 $ 83,127,233 $271,226,607 $158,481,458 $24,109,058
------- -------- ------- -------- -------- ---------
Accumulated undistributed
(distributions in excess
of) net investment
income included in net
assets at end of period $ (18,567) $ (321,022) $ (197,344) $ (1,034,592) $ (582,451) $ 8,529
======= ======== ======= ======== ======== =========
</TABLE>
See notes to financial statements
22
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Alabama Fund
- ----------------------- ------------------ -------- ---------- ------ ------ --------
Two
Year Months
Ended Ended Year Ended
March March January
31, 31, 31,
- ----------------------- -------- ------ -------- ---------- ------ ------ --------
1996 1995 1994 1994 1993 1992 1991
- ----------------------- -------- ------ -------- ---------- ------ ------ --------
Class A
- ----------------------- -------- ------ -------- ---------- ------ ------ --------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $ 10.34 $ 10.27 $ 10.98 $ 10.33 $ 9.95 $ 9.65 $ 9.53
------ ------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment
income(S) $ 0.55 $ 0.56 $ 0.09 $ 0.55 $ 0.56 $ 0.60 $ 0.59
Net realized and
unrealized gain
(loss) on
investments 0.18 0.09 (0.71) 0.69 0.41 0.41 0.08
------ ------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.73 $ 0.65 $ (0.62) $ 1.24 $ 0.97 $ 1.01 $ 0.67
------ ------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment
income $ (0.55) $ (0.55) $ (0.08) $ (0.54) $ (0.58) $ (0.65) $ (0.55)
From net realized gain
on investments -- -- -- (0.04) (0.01) (0.06) --
In excess of net
investment income++++ -- -- (0.01) (0.01) -- -- --
In excess of net
realized gain on
investments -- (0.03) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $ (0.55) $ (0.58) $ (0.09) $ (0.59) $ 0.59) $ (0.71) $ (0.55)
------ ------ ------ ------ ------ ------ ------
Net asset value - end
of period $ 10.52 $ 10.34 $ 10.27 $ 10.98 $ 10.33 $ 9.95 $ 9.65
====== ====== ====== ====== ====== ====== ======
Total return++ 7.13% 6.51% (5.66)%+++ 12.26% 10.08% 10.92% 7.31%
Ratios (to average net
assets)/Supplemental data(S):
Expenses## 1.14% 1.15% 1.18%++ 1.21% 1.08% 0.95% 0.57%+
Net investment income 5.18% 5.47% 5.17%+ 5.13% 5.79% 6.19% 6.63%+
Portfolio turnover 37% 30% 4% 12% 17% 23% 64%
Net assets at end of
period (000 omitted) $82,484 $83,805 $81,501 $87,344 $67,678 $48,476 $22,076
+ Annualized.
+ ++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For the fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the year ended January 31, 1992, the per share distribution in excess of net investment income was $0.004.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share and
the ratios would have been:
Net investment
income $ 0.54 $ 0.55 $ 0.09 $ 0.54 $ 0.55 $ 0.59 $ 0.52
Ratios (to average
net assets):
Expenses 1.24% 1.25% 1.28%+ 1.31% 1.18% 1.08% 1.33%+
Net investment
income 5.08% 5.37% 5.07%+ 5.03% 5.69% 6.06% 5.87%+
</TABLE>
See notes to financial statements
23
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Alabama Fund
- ----------------------------------------------------- ------------------ -------- ------------
Two
Year Months
Ended Ended
March March Year Ended
31, 31, January 31,
- ----------------------------------------------------- -------- ------ -------- ------------
1996 1995 1994 1994**
- ----------------------------------------------------- -------- ------ -------- ------------
Class B
- ----------------------------------------------------- -------- ------ -------- ------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.34 $ 10.27 $ 10.98 $ 10.93
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.46 $ 0.47 $ 0.08 0.18
Net realized and unrealized gain (loss) on
investments 0.18 0.09 (0.71) 0.07
------ ------ ------ ------
Total from investment operations $ 0.64 $ 0.56 $ (0.63) $ 0.25
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $ (0.46) $ (0.46) $ (0.08) $ (0.18)
From net realized gain on investments -- -- -- (0.02)
In excess of net realized gain on investments -- (0.03) -- --
------ ------ ------ ------
Total distributions declared to shareholders $ (0.46) $ (0.49) $ (0.08) $ (0.20)
------ ------ ------ ------
Net asset value - end of period $ 10.52 $ 10.34 $ 10.27 $ 10.98
====== ====== ====== ======
Total return 6.25% 5.64% (5.79)%+++ 2.29%+++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.96% 1.97% 2.01%+ 1.98%+
Net investment income 4.34% 4.63% 4.30%+ 3.98%+
Portfolio turnover 37% 30% 4% 12%
Net assets at end of period (000 omitted) $6,139 $ 4,396 $ 2,849 $ 2,269
</TABLE>
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
See notes to financial statements
24
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Arkansas Fund
--------------------- ---------------------- ---------- ------------- --------- --------- --------- ----------- ------------
Year Two Months Year Two Months
Ended Ended Year Ended Ended Ended Year Ended
March 31, March 31, January 31, March 31, March 31, January 31,
--------------------- --------- ---------- ---------- ------------- --------- --------- --------- ----------- ------------
1996 1995 1994 1994 1993* 1996 1995 1994 1994**
--------------------- --------- ---------- ---------- ------------- --------- --------- --------- ----------- ------------
Class A Class B
--------------------- --------- ---------- ---------- ------------- --------- --------- --------- ----------- ------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $ 9.66 $ 9.69 $ 10.47 $ 9.88 $ 9.53 $ 9.65 $ 9.69 $10.47 $10.42
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Income from
investment
operations# -
Net investment
income(S) $ 0.50 $ 0.53 $ 0.09 $ 0.56 $ 0.58 $ 0.42 $ 0.42 $ 0.07 $ 0.23
Net realized and
unrealized gain
(loss) on
investments 0.09 0.02 (0.77) 0.60 0.35 0.10 0.01 (0.78) (0.04)
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Total from
investment
operations $ 0.59 $ 0.55 $ (0.68) $ 1.16 $ 0.93 $ 0.52 $ 0.43 $(0.71) $ 0.19
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Less distributions declared to
shareholders -
From net
investment income $ (0.50) $ (0.53) $ (0.08) $ (0.55) $ (0.58) $(0.42) $(0.42) $(0.07) $(0.14)
From net realized
gain on
investments++++ -- -- -- 0.00 -- -- -- -- 0.00
In excess of net
investment
income++++++ -- -- (0.02) (0.02) -- -- -- 0.00 0.00
In excess of net
realized gain on
investments -- (0.05) -- -- -- -- (0.05) -- --
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Total
distributions
declared to
shareholders $ (0.50) $ (0.58) $ (0.10) $ (0.57) $ (0.58) $(0.42) $(0.47) $(0.07) $(0.14)
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Net asset value -
end of period $ 9.75 $ 9.66 $ 9.69 $ 10.47 $ 9.88 $ 9.75 $ 9.65 $ 9.69 $10.47
======== ========= ========= =========== ======= ======== ======== ========= ==========
Total return++ 6.19% 5.90% (6.61)%+++ 11.95% 10.11%+++ 5.43% 4.67% (6.81)%+++ 2.18%+++
Ratios (to average net
assets)/Supplemental data(S):
Expenses### 0.93% 0.75% 0.75%+ 0.63% 0.16%+ 1.76% 1.84% 1.82%+ 1.75%+
Net investment
income 5.10% 5.51% 5.21%+ 5.30% 6.04%+ 4.27% 4.40% 4.11%+ 3.87%+
Portfolio turnover 6% 24% 1% 3% 10% 6% 24% 1% 3%
Net assets at end
of period (000
omitted) $172,907 $187,105 $195,042 $203,542 $124,644 $7,950 $7,231 $5,895 $5,179
* For the period from the commencement of investment operations, February 3, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
### For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the year ended January 31, 1994, the per share distributions from net realized gain on investments and in excess of
net ealized gain on investments were $0.0015 and $0.0003, respectively, for both Class A and Class B shares.
++++++ For the year ended March 31, 1994 and the year ended January 31, 1994, the per share distributions in excess of net
investment income were $0.002 and $0.004, respectively, for Class B shares.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share and
the ratios would have been:
Net investment
income -- $ 0.52 $ 0.09 $ 0.53 $ 0.52 -- $ 0.41 $ 0.07 $ 0.12
Ratios (to average net assets):
Expenses -- 0.82% 0.96%+ 0.91% 0.75%+ -- 1.91% 2.02%+ 3.44%+
Net investment
income -- 5.43% 5.01%+ 5.01% 5.45%+ -- 4.33% 3.91%+ 2.18%+
</TABLE>
See notes to financial statements
25
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Georgia Fund
--------------------- ---------------------- ---------- ------------- --------- --------- --------- ----------- ------------
Year Two Months
Ended Ended Year Ended
March 31, March 31, January 31,
--------------------- --------- ---------- ---------- ------------- --------- --------- --------- ----------- ------------
1996 1995 1994 1994 1993 1992 1991 1990 1989*
--------------------- --------- ---------- ---------- ------------- --------- --------- --------- ----------- ------------
Class A
--------------------- --------- ---------- ---------- ------------- --------- --------- --------- ----------- ------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $ 10.35 $ 10.38 $ 11.30 $ 10.57 $ 10.22 $ 9.83 $ 9.73 $ 9.73 $ 9.53
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Income from
investment
operations# -
Net investment
income(S) $ 0.54 $ 0.57 $ 0.09 $ 0.57 $ 0.58 $ 0.61 $ 0.63 $ 0.66 $ 0.32
Net realized and
unrealized gain
(loss) on
investments 0.12 -- (0.92) 0.75 0.38 0.46 0.12 0.02 0.14
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Total from
investment
operations $ 0.66 $ 0.57 $ (0.83) $ 1.32 $ 0.96 $ 1.07 $ 0.75 $ 0.68 $ 0.46
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Less distributions declared to
shareholders -
From net
investment income $ (0.54) $ (0.56) $ (0.06) $ (0.55) $ (0.60) $ (0.66) $ (0.63) $ (0.66) $(0.26)
From net realized
gain on investments -- (0.01) -- (0.01) (0.01) (0.02) (0.02) (0.02) --
In excess of net
investment
income++++ 0.00 -- (0.03) (0.03) -- -- -- -- --
In excess of net
realized gain on
investments -- (0.03) -- -- -- -- -- -- --
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Total
distributions
declared to
shareholders $ (0.54) $ (0.60) $ (0.09) $ (0.59) $ (0.61) $ (0.68) $ (0.65) $ (0.68) $(0.26)
-------- --------- --------- ----------- ------- -------- -------- --------- ----------
Net asset value -
end of period $ 10.47 $ 10.35 $ 10.38 $ 11.30 $ 10.57 $ 10.22 $ 9.83 $ 9.73 $ 9.73
======== ========= ========= =========== ======= ======== ======== ========= ==========
Total return++ 6.48% 5.65% (7.34)%+++ 12.71% 9.56% 11.29% 8.06% 7.19% 7.57%+
Ratios (to average net
assets)/Supplemental data(S):
Expenses### 1.17% 1.14% 1.18%+ 1.21% 1.08% 0.99% 0.74% 0.42% 0.40%+
Net investment
income 5.11% 5.50% 5.05%+ 5.10% 5.75% 6.08% 6.46% 6.72% 6.18%+
Portfolio turnover 65% 56% 5% 14% 27% 36% 71% 99% --
Net assets at end
of period (000
omitted) $68,183 $74,432 $85,878 $94,407 $64,649 $47,869 $29,214 $12,628 $4,383
* For the period from the commencement of investment operations, June 6, 1988 to January 31, 1989.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the year ended March 31, 1996, the per share distribution in excess of net investment income for Class A shares was
$0.003.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share
and the ratios would have been:
Net investment
income $ 0.53 $ 0.56 $ 0.09 $ 0.56 $ 0.57 $ 0.60 $ 0.59 $ 0.57 $ 0.29
Ratios (to
average net
assets):
Expenses 1.27% 1.24% 1.28%+ 1.31% 1.18% 1.09% 1.11% 1.31% 1.07%+
Net investment
income 5.01% 5.40% 4.95%+ 5.00% 5.65% 5.98% 6.09% 5.83% 5.51%+
</TABLE>
See notes to financial statements
26
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Georgia Fund
- ----------------------------------------------------- ------------------ -------- ------------
Two
Year Months
Ended Ended
March March Year Ended
31, 31, January 31,
- ----------------------------------------------------- -------- ------ -------- ------------
1996 1995 1994 1994**
- ----------------------------------------------------- -------- ------ -------- ------------
Class B
- ----------------------------------------------------- -------- ------ -------- ------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.36 $ 10.38 $ 11.30 $ 11.26
------ ---- ------ ----------
Income from investment operations# -
Net investment income $ 0.45 $ 0.47 $ 0.07 $ 0.19
Net realized and unrealized gain (loss) on
investments 0.12 0.02 (0.91) 0.05
------ ---- ------ ----------
Total from investment operations $ 0.57 $ 0.49 $ (0.84) $ 0.24
------ ---- ------ ----------
Less distributions declared to shareholders -
From net investment income $ (0.46) $ (0.47) $ (0.07) $ (0.18)
From net realized gain on investments -- (0.01) -- (0.01)
In excess of net investment income++++ 0.00 -- (0.01) (0.01)
In excess of net realized gain on investments -- (0.03) -- --
------ ---- ------ ----------
Total distributions declared to shareholders $ (0.46) (0.51) $ (0.08) $ (0.20)
------ ---- ------ ----------
Net asset value - end of period $ 10.47 $ 10.36 $ 10.38 $ 11.30
====== ==== ====== ==========
Total return 5.52% 4.88% (7.47)%+++ 5.34%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.00% 1.96% 1.99%+ 1.97%+
Net investment income 4.27% 4.66% 4.17%+ 3.83%+
Portfolio turnover 65% 56% 5% 14%
Net assets at end of period (000 omitted) $10,205 $ 8,695 $ 6,631 $ 5,766
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January
31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares
outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
++++ For the year ended March 31, 1996, the per share distribution in excess of net investment income
for Class B shares was $0.002.
</TABLE>
See notes to financial statements
27
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Massachusetts Fund
- --------------------------------------------------------------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
- --------------------------------------- ----------- ----------- ----------- ----------- -----------
1996 1995 1994 1994 1993
- --------------------------------------- ----------- ----------- ----------- ----------- -----------
Class A
- --------------------------------------- ----------- ----------- ----------- ----------- -----------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.84 $ 10.90 $ 11.75 $ 11.41 $ 11.05
--------- --------- --------- --------- ---------
Income from investment operations# -
Net investment income $ 0.60 $ 0.64 $ 0.11 $ 0.64 $ 0.68
Net realized and unrealized gain
(loss) on investments 0.14 (0.03) (0.85) 0.58 0.39
--------- --------- --------- --------- ---------
Total from investment operations $ 0.74 $ 0.61 $ (0.74) $ 1.22 $ 1.07
--------- --------- --------- --------- --------
Less distributions declared to shareholders -
From net investment income $ (0.60) $ (0.64) $ (0.07) $ (0.64) $ (0.71)
From net realized gain on investments -- (0.02) -- (0.20) --
In excess of net investment income++++ 0.00 -- (0.04) (0.04) --
In excess of net realized gain on
investments -- (0.01) -- -- --
From paid-in capital -- -- -- -- --
--------- --------- --------- --------- --------
Total distributions declared to
shareholders $ (0.60) $ (0.67) $ (0.11) $ (0.88) $ (0.71)
--------- --------- --------- --------- --------
Net asset value - end of period $ 10.98 $ 10.84 $ 10.90 $ 11.75 $ 11.41
========= ========= ========= ========= =========
Total return++ 6.95% 5.89% (6.34)%+++ 11.02% 10.03%
Ratios (to average net assets)/Supplemental data:
Expenses### 1.17% 1.17% 1.19%+ 1.19% 1.08%
Net investment income 5.44% 6.01% 5.64%+ 5.71% 6.33%
Portfolio turnover 31% 31% 4% 30% 32%
Net assets at end of period (000
omitted) $249,497 $262,551 $277,748 $300,894 $270,778
</TABLE>
Financial Highlights - continued
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
1992 1991 1990 1989
---------------------------------------- ----------- ----------- ----------- ----------
---------------------------------------- ----------- ----------- ----------- ----------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Ne t asset value - beginning of period $ 10.68 $ 10.58 $ 10.65 $ 10.60
--------- --------- --------- ---------
Income from investment operations# -
Net investment income $ 0.73 $ 0.71 $ 0.72 $ 0.72
Net realized and unrealized gain (loss)
on investments 0.43 0.11 (0.07) 0.05
--------- --------- --------- ---------
Total from investment operations $ 1.16 $ 0.82 $ 0.65 $ 0.77
--------- --------- --------- ---------
Less distributions declared to
shareholders -
From net investment income $ (0.78) $ (0.72) $ (0.72) $ (0.72)
From net realized gain on investments -- -- -- --
In excess of net investment income++++ -- -- -- --
In excess of net realized gain on
investments -- -- -- --
From paid-in capital (0.01) -- -- --
--------- --------- --------- ---------
Total distributions declared to
shareholders $ (0.79) $ (0.72) $ (0.72) $ (0.72)
--------- --------- --------- ---------
Net asset value - end of period $ 11.05 $ 10.68 $ 10.58 $ 10.65
========= ========= ========= =========
Total return++ 11.23% 8.12% 6.28% 7.65%
Ratios (to average net
assets)/Supplemental data:
Expenses### 1.06% 1.07% 1.10% 1.07%
Net investment income 6.65% 6.74% 6.75% 6.90%
Portfolio turnover 51% 43% 52% 26%
Net assets at end of period (000
omitted) $239,311 $213,679 $215,381 $212,763
</TABLE>
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
++++ For the year ended March 31, 1996, the per share distribution in excess
of net investment income for Class A shares was $0.002.
See notes to financial statements
28
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Massachusetts Fund
- ---------------------------------------------------------------------------------------------------
Two Months
Year Ended Year Ended Ended Year Ended
January 31, March 31, March 31, January 31,
- -------------------------- ---------- --------- ---------- ------- ---------- ------------
1988 1987 1996 1995 1994 1994**
- -------------------------- ---------- --------- ---------- ------- ---------- ------------
Class A Class B
- -------------------------- ---------- --------- ---------- ------- ---------- ------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $ 11.25 $ 10.59 $ 10.84 $10.90 $11.75 $11.91
-------- ------- ------ ------ ------ -----
Income from investment
operations# -
Net investment income $ 0.71 $ 0.74 $ 0.52 $ 0.55 $ 0.09 $ 0.23
Net realized and
unrealized gain (loss)
on investments (0.65) 0.68 0.15 (0.02) (0.85) 0.04
-------- ------- ------ ------ ------ ------
Total from investment
operations $ 0.06 $ 1.42 $ 0.67 $ 0.53 $(0.76) $ 0.27
-------- ------- ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment
income $ (0.71) $ (0.75) $ (0.52) $(0.56) $(0.09) $(0.22)
From net realized gain on
investments -- (0.01) -- (0.02) -- (0.20)
In excess of net
investment income++++ -- -- 0.00 -- -- (0.01)
In excess of net realized
gain on investments -- -- -- (0.01) -- --
-------- ------- ------ ------ ------ --------
Total distributions
declared to
shareholders $ (0.71) $ (0.76) $ (0.52) $(0.59) $(0.09) $(0.43)
-------- ------- ------ ------ ------ -------
Net asset value - end of
period $ 10.60 $ 11.25 $ 10.99 $10.84 $10.90 $11.75
======== ======= ====== ====== ====== ======
Total return++ 0.80% 14.10% 6.27% 5.13% (6.46)%+++ 5.89%+
Ratios (to average net
assets)/Supplemental data:
Expenses### 1.04% 0.87% 1.90% 1.89% 1.91%+ 1.81%+
Net investment income 6.79% 6.83% 4.71% 5.27% 4.89%+ 4.62%+
Portfolio turnover 27% 7% 31% 31% 4% 30%
Net assets at end of
period (000 omitted) $224,219 $242,119 $11,316 $8,676 $4,993 $4,191
</TABLE>
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
++++ For the year ended March 31, 1996, the per share distribution in excess
of net investment income for Class B shares was $0.0013.
See notes to financial statements
29
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
New York Fund
- -------------------------------------------------------------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
- --------------------------------------- ----------- ----------- ----------- ----------- ---------
1996 1995 1994 1994 1993
- --------------------------------------- ----------- ----------- ----------- ----------- ---------
Class A
- --------------------------------------- ----------- ----------- ----------- ----------- ---------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.49 $ 10.50 $ 11.34 $ 10.78 $ 10.25
------ ------- --------- -------- --------
Income from investment operations# -
Net investment income(S) $ 0.55 $ 0.56 $ 0.09 $ 0.59 $ 0.63
Net realized and unrealized gain
(loss) on investments 0.17 0.05 (0.84) 0.74 0.58
------ ------- -------- -------- --------
Total from investment operations $ 0.72 $ 0.61 $ (0.75) $ 1.33 $ 1.21
------ ------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.55) $ (0.56) $ (0.06) $ (0.57) $ (0.65)
From net realized gain on investments -- -- -- (0.17) (0.03)
In excess of net investment income++++ 0.00 (0.01) (0.03) (0.03) --
In excess of net realized gain on
investments -- (0.05) -- -- --
From paid-in capital -- -- -- -- --
------ ------- -------- -------- -------
Total distributions declared to
shareholders $ (0.55) $ (0.62) $ (0.09) $ (0.77) $ (0.68)
------ ------- -------- -------- -------
Net asset value - end of period $ 10.66 $ 10.49 $ 10.50 $ 11.34 $ 10.78
====== ======= ======== ======== ========
Total return++ 6.98% 6.03% (6.58)%+++ 12.69% 12.23%
Ratios (to average net assets)/Supplemental
data(S):
Expenses### 1.10% 1.07% 1.03%+ 0.93% 0.53%
Net investment income 5.09% 5.43% 5.09%+ 5.21% 6.16%
Portfolio turnover 102% 147% 15% 51% 61%
Net assets at end of period (000
omitted) $134,449 $146,597 $162,621 $184,523 $135,749
</TABLE>
* For the period from the commencement of investment operations, June 6,
1988 to January 31, 1989.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
### For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
++++ For the year ended March 31, 1996, the per share distribution in excess of
net investment income for Class A shares was $0.0058.
(S) The investment adviser and/or the distributor voluntarily waived a portion
of their management and distribution fee, respectively, for the periods
indicated. If these fees had been incurred by the Fund, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income $0.54 $0.55 $0.07 $0.56 $0.57
Ratios (to average net assets):
Expenses 1.20% 1.18% 1.23%+ 1.23% 1.13%
Net investment income 4.99% 5.31% 4.88%+ 4.90% 5.56%
</TABLE>
Financial Highlights - continued
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
1992 1991 1990 1989*
---------------------------------------- ----------- ---------- ----------- ----------
---------------------------------------- ----------- ---------- ----------- ----------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.90 $ 9.74 $ 9.79 $ 9.53
------ ----- ------- ------
Income from investment operations# -
Net investment income(S) $ 0.65 $ 0.65 $ 0.68 $ 0.29
Net realized and unrealized gain
(loss) on investments 0.44 0.16 0.01 0.21
------ ----- ------- ------
Total from investment operations $ 1.09 $ 0.81 $ 0.69 $ 0.50
------ ----- ------- ------
Less distributions declared to
shareholders -
From net investment income $ (0.69) $ (0.65) $ (0.67) $(0.24)
From net realized gain on investments (0.05) -- (0.06) --
In excess of net investment income++++ -- -- -- --
In excess of net realized gain on
investments -- -- -- --
From paid-in capital -- -- (0.01) --
------ ----- ------- ------
Total distributions declared to
shareholders $ (0.74) $ (0.65) $ (0.74) $(0.24)
------ ----- ------- ------
Net asset value - end of period $ 10.25 $ 9.90 $ 9.74 $ 9.79
====== ===== ======= ======
Total return++ 11.42% 8.74% 7.33% 8.16%+
Ratios (to average net
assets)/Supplemental data(S):
Expenses### 0.65% 0.54% 0.40% 0.40%+
Net investment income 6.44% 6.73% 6.88% 5.93%+
Portfolio turnover 80% 188% 236% 32%
Net assets at end of period (000
omitted) $79,524 $37,385 $20,156 $6,412
* For the period from the commencement of investment operations, June 6,
1988 to January 31, 1989.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
### For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
++++ For the year ended March 31, 1996, the per share distribution in excess of
net investment income for Class A shares was $0.0058.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their
management and distribution fee, respectively, for the periods indicated. If these
fees had been incurred by the Fund, the net investment income per share and the
ratios would have been:
<S> <C> <C> <C> <C>
Net investment income $0.60 $0.61 $0.59 $0.26
Ratios (to average net assets):
Expenses 1.16% 0.95% 1.32% 1.09%+
Net investment income
5.93% 6.33% 5.96% 5.24%+
</TABLE>
See notes to financial statements
30
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
New York Fund
- ---------------------------------------------------------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
- ------------------------------------------------- ----------- ----------- ----------- -----------
1996 1995 1994 1994**
- ------------------------------------------------- ----------- ----------- ----------- -----------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.49 $10.50 $11.34 $11.46
------ ---- ------ ------
Income from investment operations# -
Net investment income(S) $ 0.47 $ 0.47 $ 0.07 $ 0.18
Net realized and unrealized gain (loss) on
investments 0.17 0.05 (0.83) 0.04
------ ---- ------ -----
Total from investment operations $ 0.64 $ 0.52 $(0.76) $ 0.22
------ ---- ------ -----
Less distributions declared to shareholders -
From net investment income $ (0.47) $(0.47) $(0.07) $(0.18)
From net realized gain on investments -- -- -- (0.15)
In excess of net investment income++++ 0.00 (0.01) (0.01) (0.01)
In excess of net realized gain on investments -- (0.05) -- --
------ ---- ------ ------
Total distributions declared to shareholders $ (0.47) $(0.53) $(0.08) $(0.34)
------ ---- ------ ------
Net asset value - end of period $ 10.66 $ 10.49 $10.50 $11.34
====== ==== ====== ======
Total return 6.10% 5.17% (6.71)%+++ 5.20%+
Ratios (to average net assets)/
Supplemental data(S):
Expenses### 1.92% 1.89% 1.87%+ 1.79%+
Net investment income 4.27% 4.58% 4.21%+ 3.90%+
Portfolio turnover 102% 147% 15% 51%
Net assets at end of period (000 omitted) $28,068 $11,885 $6,265 $4,828
</TABLE>
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
### For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++++ For the year ended March 31, 1996, the per share distribution in excess
of net investment income for Class B shares was $0.0048.
(S) The investment adviser and/or the distributor voluntarily waived a portion
of their management and distribution fee, respectively, for the periods
indicated. If these fees had been incurred by the Fund, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income -- $0.47 $0.07 $0.17
Ratios (to average net assets):
Expenses -- 1.91% 1.97%+ 2.00%+
Net investment income -- 4.57% 4.11%+ 3.69%+
</TABLE>
See notes to financial statements
31
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Pennsylvania Fund
- -------------------------------------------------------------------------------------------------------------------------
Two Months
Year Ended Ended Year Ended Year Ended
March 31, March 31, January 31, March 31,
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
1996 1995 1994 1994* 1996
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Class A Class B
- --------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.29 $ 9.15 $ 10.14 $ 9.53 $ 9.29
------ ---- ------ -------- --------
Income from investment operations# -
Net investment income(S) $ 0.54 $ 0.54 $ 0.09 $ 0.50 $ 0.50
Net realized and unrealized gain (loss)
on investments 0.09 0.18 (0.99) 0.62 0.07
------ ---- ------ ----- --------
Total from investment operations $ 0.63 $ 0.72 $ (0.90) $ 1.12 $ 0.57
------ ---- ------ ----- ------
Less distributions declared to shareholders -
From net investment income++++ $ (0.55) $ (0.54) $ (0.09) (0.50) $ (0.47)
From net realized gain on
investments -- (0.01) -- (0.01) --
In excess of net realized gain on
investments -- (0.03) -- -- --
------ ---- ------ ------ ------
Total distributions declared to
shareholders $ (0.55) $ (0.58) $ (0.09) $ (0.51) $ (0.47)
------ ---- ------ ------ ------
Net asset value - end of period $ 9.37 $ 9.29 $ 9.15 $ 10.14 $ 9.39
====== ==== ====== ====== =======
Total return++ 6.85% 8.14% (8.91)%+++ 12.12% 6.23%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 0.10% 0.01% 0.00%+ 0.00%+ 0.88%
Net investment income 5.76% 5.97% 5.43%+ 5.30%+ 4.98%
Portfolio turnover 40% 49% 1% 10% 40%
Net assets at end of period (000 omitted) $18,030 $16,411 $13,961 $13,987 $24,170
</TABLE>
* For the period from the commencement of investment operations, February 1,
1993 to January 31, 1994.
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
++++ For the two months ended March 31, 1994, Class B net investment income
includes distributions in excess of net investment income of less than
$0.001 per share.
(S) The Adviser voluntarily agreed to maintain expenses of the Fund at not
more than 1.30% and 1.95% of average daily net assets for Class A and
Class B shares, respectively. To the extent actual expenses were over/
under these limitations, the net investment income per share and the
ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income $0.45 $0.43 $0.06 $0.32 $0.41
Ratios (to average net assets):
Expenses 1.00% 1.18% 1.84%+ 1.94%+ 1.85%
Net investment income 4.86% 4.80% 3.60%+ 3.36%+ 4.01%
</TABLE>
Financial Highlights - continued
<TABLE>
<CAPTION>
- ------------------------------------------------ -------- ------ ----------
Two Months
Ended Year Ended
March 31, January 31,
- ------------------------------------------------ -------- ---------- ----------
1995 1994 1994**
- ------------------------------------------------ -------- ---------- ----------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 9.15 $10.15 $10.06
----- ------ -----
Income from investment operations# -
Net investment income(S) $ 0.45 $ 0.06 $ 0.17
Net realized and unrealized gain (loss)
on investments 0.18 (0.99) 0.10
----- ------ -----
Total from investment operations $ 0.63 $ (0.93) $ 0.27
----- ------ -----
Less distributions declared to shareholders -
From net investment income++++ $(0.45) $(0.07) $(0.17)
From net realized gain on
investments (0.01) -- (0.01)
In excess of net realized gain on
investments (0.03) -- --
------ ------ -----
Total distributions declared to
shareholders $(0.49) $(0.07) $(0.18)
------ ------ -----
Net asset value - end of period $ 9.29 $ 9.15 $10.15
====== ====== =====
Total return++ 7.07% (9.16)%+++ 6.76%+
Ratios (to average net assets)/Supplemental
data(S):
Expenses### 1.01% 1.00%+ 1.00%+
Net investment income 4.96% 4.37%+ 4.22%+
Portfolio turnover 49% 1% 10%
Net assets at end of period (000 omitted) $7,699 $4,304 $3,401
</TABLE>
* For the period from the commencement of investment operations, February 1,
1993 to January 31, 1994.
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based
on average shares outstanding.
### For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
++++ For the two months ended March 31, 1994, Class B net investment income
includes distributions in excess of net investment income of less than
$0.001 per share.
(S) The Adviser voluntarily agreed to maintain expenses of the Fund at not more
than 1.30% and 1.95% of average daily net assets for Class A and Class B
shares, respectively. To the extent actual expenses were over/under these
limitations, the net investment income per share and the ratios would have
been:
<TABLE>
<S> <C> <C> <C>
Net investment income $0.34 $ 0.04 $0.05
Ratios (to average net assets):
Expenses 2.26% 2.91%+ 2.50%+
Net investment income 3.72% 2.47%+ 1.29%+
</TABLE>
See notes to financial statements
32
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Municipal Series 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. The Trust presently
consists of nineteen Funds, as follows: MFS Municipal Income Fund, MFS
Alabama Municipal Bond Fund* (Alabama Fund), MFS Arkansas Municipal Bond
Fund* (Arkansas Fund), MFS California Municipal Bond Fund, MFS Florida
Municipal Bond Fund, MFS Georgia Municipal Bond Fund* (Georgia Fund), MFS
Louisiana Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS
Massachusetts Municipal Bond Fund* (Massachusetts Fund), MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund* (New York Fund), MFS
North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund*
(Pennsylvania Fund), MFS South Carolina Municipal Bond Fund, MFS Tennessee
Municipal Bond Fund, MFS Texas Municipal Bond Fund, MFS Virginia Municipal
Bond Fund, MFS Washington Municipal Bond Fund, and MFS West Virginia
Municipal Bond Fund. Each Fund, except MFS Municipal Income Fund, is
non-diversified.
The Funds denoted with an asterisk above are included within these financial
statements.
(2) Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Because each Fund invests
primarily in the securities of a single state and its political subdivisions,
each Fund is vulnerable to the effects of changes in the legal and economic
environment of the particular state.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Futures contracts and options listed on commodities exchanges are
valued at closing settlement prices. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Deferred Organization Expenses - Costs incurred by a Fund in connection with
its organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of operations of the Fund.
Futures Contracts - Each Fund may enter into futures contracts for the
delayed delivery of securities or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, each 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. Each Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
rates or securities prices. Investments in interest rate futures for purposes
other than hedging may be made to modify the duration of the portfolio
without incurring the additional transaction costs involved in buying and
selling the underlying securities. Should interest rates move unexpectedly,
the Fund may not achieve the anticipated benefits of the futures contracts
and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Trust's custodian bank calculates its fee based on
each Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by each
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Trust'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. Each 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 each 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 each Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for
federal income tax purposes because each Fund intends to meet certain
requirements of the Code applicable to regulated investment companies, which
will enable each 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.
Each Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains.
33
<PAGE>
During the year ended March 31, 1996, the following amounts were reclassified
from accumulated net realized gain on investments to accumulated
undistributed net investment income due to differences between book and tax
accounting for accrued market discount on disposal of securities:
Alabama Arkansas Pennsylvania
Fund Fund Fund
====== ====== ============
$95,804 $41,402 $24,075
With respect to the Georgia, Massachusetts and New York Funds, the following
amounts were reclassified to accumulated undistributed net investment income
and paid-in capital, from accumulated net realized gain on investments due to
differences between book and tax accounting for accrued market discount on
disposal of securities:
Georgia Massachusetts New York
Fund Fund Fund
===================================== ====== ============ =========
Accumulated undistributed
net investment income $76,819 $38,957 $240,096
Paid-in capital $ 1,473 $ 550 $ 65,936
These changes had no effect on the net asset value per share.
At March 31, 1996, the following Funds, for federal income tax purposes, had
capital loss carryforwards which may be applied against any net taxable
realized gains of each succeeding year until the earlier of their utilization
or expiration.
<TABLE>
<CAPTION>
Expiration Arkansas Georgia Massachusetts New York Pennsylvania
Date Fund Fund Fund Fund Fund
============== ========= ========= ============= =========== ============
<S> <C> <C> <C> <C> <C>
March 31, 2003 $ -- $2,399,843 $3,052,342 $2,754,263 $ 111,447
March 31, 2004 7,618,347 1,339,129 1,732,935 -- 1,259,709
---------- ---------- ---------- ---------- -----------
$7,618,347 $3,738,972 $4,785,277 $2,754,263 $1,371,156
========== ========== ========== ========== ===========
</TABLE>
Multiple Classes of Shares of Beneficial Interest - Each Fund offers both
Class A and Class B shares. The two classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on settled
shares outstanding, 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.
(3) Transactions with Affiliates
Investment Adviser - The Trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.55%
of each Fund's average daily net assets. The investment adviser voluntarily
waived a portion of its fee with respect to the Pennsylvania Fund, which is
reflected as a reduction of expenses in the Statement of Operations.
Under a temporary expense reimbursement agreement with MFS, MFS has
voluntarily agreed to pay all of the Pennsylvania Fund's operating expenses,
exclusive of management and distribution fees. The Pennsylvania Fund in turn
will pay MFS an expense reimbursement fee not greater than 0.40% of its
average daily net assets. To the extent that the expense reimbursement fee
exceeds the Fund's actual expenses, the excess will be applied to amounts
paid by MFS in prior years. At March 31, 1996, the aggregate unreimbursed
expenses owed to MFS by the Pennsylvania Fund amounted to $216,880, including
$34,522 incurred in the current year. During the year ended March 31, 1996,
MFS voluntarily waived the reimbursement fee of $158,044.
The Trust pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain of the
officers and Trustees of the Trust are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Trust has
an unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation for the year ended March 31, 1996
is a net periodic pension expense for each Fund, as follows:
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
Fund Fund Fund Fund Fund Fund
===== ====== ===== =========== ====== ============
$2,995 $2,542 $3,930 $4,218 $3,929 $2,293
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$2,545, $9,023, $3,327, $8,855, $5,042 and $2,811 as its portion of the sales
charge on sales of Class A shares of the Alabama, Arkansas, Georgia,
Massachusetts, New York and Pennsylvania Funds, respectively, for the year
ended March 31, 1996.
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A distribution plan provides that each Fund will pay MFD up to
0.35% per annum of its average daily net assets attributable to Class A
shares in order that MFD may pay expenses on behalf of the Fund related to
the distribution and servicing of its shares. These expenses include a
service fee to each securities dealer that enters into a sales agreement with
MFD of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class A shares which are attributable to that securities
dealer, a distribution fee to MFD of up to 0.10% per annum of the Fund's
average daily net assets attributable to Class A shares, commissions to
dealers and payments to MFD wholesalers for sales
34
<PAGE>
at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. Except in the case of the 0.25% per
annum first year service fee, service fees payable under the Arkansas Fund's
Class A distribution plan have been established by the Trustees of the Trust
at up to 0.10%, subject to increase on such date or dates as the Trustees of
the Trust may determine. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $4,676, $4,157,
$4,860, $77,307 and $21,318 for the Alabama, Arkansas, Georgia, Massachusetts
and New York Funds for the year ended March 31, 1996. Fees incurred under the
distribution plan during the year ended March 31, 1996 were 0.35% of average
daily net assets attributable to Class A shares on an annualized basis for
the Massachusetts Fund. MFD is currently waiving the 0.10% distribution fee
for the Alabama, Georgia, and New York Funds, which is reflected as a
reduction of expenses in the Statement of Operations. Distribution fee
payments under the distribution plan by the Arkansas Fund will commence on
such date to be determined by the Trustees. In the case of the Pennsylvania
Fund, payments of up to 0.25% per annum of the service fee 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 $50 million.
The Class B distribution plan provides that each Fund will pay MFD a
distribution fee of 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 shares.
The service fee is not charged to the Pennsylvania Fund Class B shares held
over one year. Except in the case of the 0.25% per annum first year service
fee, service fees payable under the Arkansas Fund's Class B distribution plan
have been established by the Trustees of the Trust at up to 0.10%, subject to
increase on such date or dates as the Trustees of the Trust may determine.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $249,
$717, $895, $826 and $4,533 for the Alabama, Arkansas, Georgia,
Massachusetts, New York and Pennsylvania Funds, respectively, for Class B
shares. Fees incurred under the distribution plan during the year ended March
31, 1996 were 1.00% of each of the Fund's average daily net assets
attributable to Class B shares on an annualized basis, except in the cases of
the Arkansas and Pennsylvania Funds, which were 0.84% and 0.77%,
respectively.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended March 31, 1996 on Class
A and Class B shares were as follows:
<TABLE>
<CAPTION>
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
CDSC imposed Fund Fund Fund Fund Fund Fund
============= ===== ====== ====== =========== ====== ============
<S> <C> <C> <C> <C> <C> <C>
Class A $ 8 $ -- $ 1 $ -- $ 186 $ 3
------ ------ ------ ------- ------- --------
Class B $2,531 $4,215 $10,865 $14,743 $29,930 $18,579
====== ====== ======= ======= ======= ========
</TABLE>
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
annual rate of up to 0.15% and up to 0.22% attributable to Class A and Class
B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, were as follows
(000 omitted):
<TABLE>
<CAPTION>
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
Fund Fund Fund Fund Fund Fund
============= ===== ====== ====== =========== ======== ============
<S> <C> <C> <C> <C> <C> <C>
Purchases $32,661 $12,100 $52,388 $81,654 $170,244 $31,918
Sales 32,678 29,757 59,586 99,955 167,629 14,860
</TABLE>
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Funds, as computed on a federal income tax basis,
are as follows (000 omitted):
<TABLE>
<CAPTION>
Alabama Arkansas Georgia Massachusetts New York Pennsylvania
Fund Fund Fund Fund Fund Fund
============== ====== ======= ====== =========== ======== ============
<S> <C> <C> <C> <C> <C> <C>
Aggregate cost $83,056 $171,460 $72,374 $241,910 $156,155 $41,366
====== ======= ====== ======== ======= =======
Gross unrealized
appreciation $ 4,546 $ 6,916 $ 5,088 $ 16,648 $ 9,039 $ 808
Gross unrealized
depreciation (500) (1,483) (153) (2,066) (1,984) (597)
------ ------- ------ --------- ------ ------
Net unrealized
appreciation $ 4,046 $ 5,433 $ 4,935 $ 14,582 $ 7,055 $ 211
====== ======= ====== ======== ======= =======
</TABLE>
35
<PAGE>
(5) Shares of Beneficial Interest
The 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>
<CAPTION>
Class A Shares Alabama Fund Arkansas Fund Georgia Fund
------------------ ------------------ --------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
====================================== ====== ======== ====== ======== ====== ==========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 461 $ 4,854 952 $ 9,317 599 $ 6,335
Shares issued to shareholders in
reinvestment of distributions 167 1,774 433 4,248 186 1,962
Shares reacquired (893) (9,492) (3,027) (29,685) (1,458) (15,415)
----- ------ ------ ------ ---- --------
Net decrease (265) $(2,864) (1,642) $(16,120) (673) $ (7,118)
===== ======= ===== ======= ==== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount Shares Amount
======================================= ====== ======== ====== ======== ====== ==========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,021 $ 10,353 1,828 $ 17,573 1,076 $ 10,979
Shares issued to
shareholders in reinvestment of
distributions 164 1,663 569 5,424 210 2,148
Shares reacquired (1,017) (10,194) (3,147) (29,660) (2,370) (23,804)
---- ------ ---- ------ ---- --------
Net increase
(decrease) 168 $ 1,822 (750) $ (6,663) (1,084) $(10,677)
====== ======== ====== ======== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund New York Fund Pennsylvania Fund
---------------- ---------------- ------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
======================================== ====== ====== ==== ====== ==== ========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 3,359 $ 37,357 2,667 $ 28,693 302 $ 2,857
Shares issued to shareholders in
reinvestment of distributions 576 6,381 415 4,457 70 659
Shares reacquired (5,434) (60,354) (4,446) (47,873) (213) 2,014)
------ ------ ---- ------ ---- --------
Net increase
(decrease) (1,499) $(16,616) (1,364) $(14,723) 159 $ 1,502
====== ====== ===== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1996 (000 Omitted) Shares Amounts Shares Amount Shares Amount
======================================== ====== ======= ====== ======= ======== =========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,947 $ 20,608 6,955 $ 71,200 438 $ 3,991
Shares issued to shareholders in
reinvestment of distributions 689 7,371 527 5,440 72 652
Shares reacquired (3,891) (41,117) (9,004) (92,427) (269) (2,402)
---- ------ ---- ------ ---- --------
Net increase
(decrease) (1,255) $(13,138) (1,522) $(15,787) 241 $ 2,241
==== ====== ==== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Alabama Fund Arkansas Fund Georgia Fund
----------------- ----------------- -------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
====================================== ===== ====== ===== ====== ===== ========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 183 $1,948 143 $1,406 301 $ 3,193
Shares issued to shareholders in
reinvestment of distributions 8 88 17 169 21 218
Shares reacquired (33) (345) (94) (923) (186) (1,961)
---- ------ --- ------ ----- -------
Net increase 158 $1,691 66 $ 652 136 $ 1,450
==== ====== === ===== ===== =======
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
====================================== ===== ====== ===== ====== ===== ========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 203 $2,054 167 $1,621 358 $ 3,643
Shares issued to shareholders in
reinvestment of distributions 7 74 19 181 21 216
Shares reacquired (62) (626) (46) (436) (178) (1,799)
--- ------ --- ------ ----- -------
Net increase 148 $1,502 140 $1,366 201 $ 2,060
=== ====== === ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund New York Fund Pennsylvania Fund
----------------- ----------------- -------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
====================================== ===== ====== ===== ====== ===== ========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 374 $ 4,133 544 $ 5,859 376 $ 3,589
Issued in connection with
the acquisition of the
Advantage Fund 1,405 14,685 1,604 14,819
Shares issued to
shareholders in
reinvestment of
distributions 23 251 63 676 68 642
Shares
reacquired (166) (1,834) (513) (5,513) (300) (2,852)
----- ------ ----- ------ ----- --------
Net increase 231 $ 2,550 1,499 $15,707 1,748 $16,198
===== ====== ===== ====== ===== ========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Class B Shares - continued Massachusetts Fund New York Fund Pennsylvania Fund
----------------- ----------------- -------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
====================================== ===== ====== ===== ====== ===== ========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 428 $ 4,572 700 $7,239 428 $3,928
Shares issued to shareholders in
reinvestment of distributions 17 184 25 262 20 181
Shares
reacquired (103) (1,084) (190) (1,925) (90) (820)
----- ------ ----- ------ ---- ------
Net increase 342 $ 3,672 535 $5,576 358 $3,289
===== ====== ===== ====== ==== ======
</TABLE>
(6) Line of Credit
The Trust entered into an agreement which enables each of the Funds to
participate with other funds managed by MFS in an unsecured line of credit
with a bank which permits borrowings up to $350 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 each of the Funds for the year ended March 31, 1996 ranged from $507 to
$10,834.
(7) Financial Instruments
The Trust 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. These financial instruments include
futures contracts. The notional or contractual amounts of these instruments
represent the investment a 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.
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Appreciation
Fund Description Expiration Contracts Positions (Depreciation)
================= ============================ =========== ======== ======== =============
<S> <C> <C> <C> <C> <C>
Georgia Fund U.S. Treasury Bonds June 1996 50 Short $(23,879)
Massachusetts Fund U.S. Treasury Bonds June 1996 100 Short $ 6,932
New York Fund U.S. Treasury Bonds June 1996 180 Short $(55,025)
Pennsylvania Fund U.S. Treasury Bonds June 1996 8 Short $ 32,023
</TABLE>
At March 31, 1996, each Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
The Trust 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 March 31, 1996:
<TABLE>
<CAPTION>
Principal
Amount
(000 Unrealized
Fund Description Index Omitted) Value Depreciation
============== =============================== =============== ========== ========= =============
<S> <C> <C> <C> <C> <C>
Alabama Fund Puerto Rico Telephone J. J. Kenny $1,000 $ 941,000 $ 59,000
Authority Rev., 5.59s, 2004
Arkansas Fund Puerto Rico Telephone J. J. Kenny $4,000 $3,674,000 $236,000
Authority Rev., 5.59s, 2004
Puerto Rico Public Buildings PSA Municipal $2,000 $1,858,840 $141,160
Authority, 6.285s, 2016 Swap
New York Fund Puerto Rico Public Buildings PSA Municipal $2,000 $1,858,840 $141,160
</TABLE>
Authority, 6.285s, 2016 Swap
(8) Acquisitions
At close of business on April 28, 1995, the New York Fund acquired all of the
assets and liabilities of The New York Portfolio, a series of The Advantage
Municipal Bond Fund (the Advantage Fund). The acquisition was accomplished by
a tax free exchange of 1,405,222 Class B shares of the Fund (valued at
$14,684,566) for 1,595,965 shares of the Advantage Fund's net assets on that
date ($14,684,566), including $719,185 of unrealized depreciation, which were
combined with those of the Fund. The aggregate net assets for Class B shares
after the acquisition were $26,723,476.
At close of business on April 28, 1995, the Pennsylvania Fund acquired all of
the assets and liabilities of The Pennsylvania Portfolio, a series of The
Advantage Municipal Bond Fund (the Advantage Fund). The acquisition was
accomplished by a tax free exchange of 1,603,769 Class B shares of the Fund
(valued at $14,818,825) for 1,580,698 shares of the Advantage Fund's net
assets on that date ($14,818,825) including $730,231 of unrealized
depreciation, which were combined with those of the Fund. The aggregate net
assets for Class B shares after the acquisition were $22,807,582.
37
<PAGE>
(9) Litigation
MFS has been named as a defendant in a lawsuit brought by the City of Troy,
NY (the City) alleging, among other things, that certain municipal securities
issued by Troy and purchased by MFS Municipal Series Trust-New York (the
Fund) were invalid at the time of issuance. The Fund is actual owner of the
securities. The lawsuit seeks to void the issuance of the securities and
seeks the return of all principal and interest payments previously made by
the City together with interest on such amounts. If the matter cannot be
resolved through settlement with the City and other parties, MFS and the
Fund, if named as defendant, intend vigorously to contest the case. This
lawsuit is in a preliminary state and involves significant complexities that
prevent the Fund from being able to predict whether any liability might
result. Management does not believe that any potential liability would be
material to the financial position of the Fund. Accordingly, no amount has
been accrued in the financial statements with respect to this matter. The
Fund has filed a separate lawsuit against the City, and certain other
parties, in which the Fund is seeking a determination that the securities are
valid and that the Fund is entitled to payment and/or damages. If such
securities are deemed invalid, then interest payments received from the City
are taxable. Given this uncertainty, the Fund is currently treating such
interest payments as taxable.
38
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Municipal Series Trust and Shareholders
of the Portfolios of MFS Municipal Series Trust:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of MFS Alabama Municipal Bond Fund,
MFS Arkansas Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS
Massachusetts Municipal Bond Fund, MFS New York Municipal Bond Fund, and MFS
Pennsylvania Municipal Bond Fund (portfolios of MFS Municipal Series Trust)
as of March 31, 1996, the related statements of operations for the year then
ended, the statements of changes in net assets for the years ended March 31,
1996 and 1995, and the financial highlights for each of the years in the
two-year period ended March 31, 1996, the two months ended March 31, 1994,
and each of the years in the eight-year period ended January 31, 1994. These
financial statements and financial highlights are the responsibility of the
Trust'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 March 31, 1996 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 each of the
aforementioned portfolios of MFS Municipal Series Trust at March 31, 1996,
the results of their operations, the changes in their net assets, and their
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 29, 1996
-------------------
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.
39
<PAGE>
MFS Investment Opportunities
Mutual Funds
The MFS Family of Funds(R), shown on the facing page, falls into the eight
general categories below. All offer full-time professional management, a
diversified portfolio, and a wide array of shareholder services.
Stock funds seek growth of capital rather than income through investments in
stocks.
Stock and bond funds seek current income and growth of capital through
investments in both stocks and bonds.
Bond funds seek current income through investments in debt securities.
World funds seek stock, balanced, and bond fund objectives through
investments in U.S. and foreign stocks and bonds.
Limited-maturity funds seek current income and preservation of capital
through investments in debt securities with remaining maturities of five
years or less.
National tax-free bond funds seek current income exempt from federal income
tax through investments in debt securities issued by states and
municipalities.(1)
State tax-free bond funds seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state
and its municipalities.(1)
Money market funds seek preservation of capital and current income through
investments in short-term debt securities.(2)
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information
for literature3 on MFS products and services: 1-800-637-2929, from 9 a.m. to
5 p.m. Eastern time any business day (leave a message anytime).
1 A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
2 Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain
a stable net asset value.
3 Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
40
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the
types of securities in their portfolios. For free prospectuses containing
more complete information, including the exchange privilege and all charges
and expenses, please contact your financial adviser or call MFS at
1-800-637-2929 any business day from 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime). This material should be read carefully before investing
or sending money.
Stock
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Capital Growth Fund
MFS Emerging Growth Fund
MFS Gold & Natural Resources Fund
MFS Growth Opportunities Fund
MFS Managed Sectors Fund
MFS OTC Fund
MFS Research Fund
MFS Value Fund
Stock and Bond
MFS Total Return Fund
MFS Utilities Fund
Bond
MFS Bond Fund
MFS Government Mortgage Fund
MFS Government Securities Fund
MFS High Income Fund
MFS Intermediate Income Fund
MFS Strategic Income Fund
Limited Maturity Bond
MFS Government Limited Maturity Fund
MFS Limited Maturity Fund
MFS Municipal Limited Maturity Fund
World
MFS/Foreign & Colonial Emerging
Markets Equity Fund
MFS/Foreign & Colonial International
Growth Fund
MFS/Foreign & Colonial International
Growth and Income Fund MFS World Asset Allocation Fund(SM)
MFS World Equity Fund
MFS World Governments Fund
MFS World Growth Fund
MFS World Total Return Fund
National Tax-Free Bond
MFS Municipal Bond Fund
MFS Municipal High Income Fund
(closed to new investors)
MFS Municipal Income Fund
State Tax-Free Bond
Alabama, Arkansas, California, Florida, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
Money Market
MFS Cash Reserve Fund
MFS Government Money Market Fund
MFS Money Market Fund
<PAGE>
MFS(R) Municipal
Series Trust
[DALBAR LOGO]
500 Boylston Street
Boston, MA 02116
MFS(R) Alabama Municipal Bond Fund
MFS(R) Arkansas Municipal Bond Fund
MFS(R) Georgia Municipal Bond Fund
MFS(R) Massachusetts Municipal Bond Fund
MFS(R) New York Municipal Bond Fund
MFS(R) Pennsylvania Municipal Bond Fund
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
[MFS LOGO]
54/254
55/255
46/246
45/245
52/252
MST-2B-4/96-32.5M 30/230
<PAGE>
[front cover]
[logo]
MFS(r)
THE FIRST NAME IN MUTUAL FUNDS
Annual Report for
Year Ended
March 31, 1996
MFS(r) Municipal Series Trust
For the States of: California, Florida
Louisiana, Mississippi, Texas and Washington
[photo of bridge]
<PAGE>
MFS(R) MUNICIPAL SERIES TRUST
Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey*
Private Investor; Former Chairman and Director (until 1991),
Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Marshall N. Cohan
Private Investor
Lawrence H. Cohn, M.D.
Chief of Cardiac Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE
Chief Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill
Private Investor;
Director, Rockefeller Financial Services, Inc.
(investment adviser)
Walter E. Robb, III
President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); Trustee, Landmark Funds
(mutual funds)
Arnold D. Scott*
Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames*
President and Director, Massachusetts Financial Services Company
J. Dale Sherratt
President, Insight Resources, Inc.
(acquisition planning specialists)
Ward Smith
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Managers
David R. King*
Geoffrey L. Schechter*
David B. Smith*
Treasurer
W. Thomas London*
*Affiliated with the Investment Adviser
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Deloitte & Touche llp
Investor Information
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458
anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
[DALBAR MFS #1 logo]
Top-Rated Service
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The
firm achieved a 3.49 overall score--on a scale of 1 to 4--in the 1995 survey.
A total of 71 firms responded, offering input on the quality of service they
received from 36 mutual fund companies nationwide. The survey contained
questions about service quality in 17 categories, including "knowledge of
phone service contacts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
<PAGE>
Letter to Shareholders
Dear Shareholders:
Declining interest rates and a favorable inflation outlook helped create
opportunities in the municipal market during the past 12 months. During the
fiscal year ended March 31, 1996, all classes of shares of the individual
state Funds available within the Trust generated positive total returns. For
the most part, these returns underperformed the 8.38% return of the Lehman
Brothers Municipal Bond Index (the Lehman Index), an unmanaged index of
municipal bond investments rated Baa or higher. However, although this index
is considered the benchmark for performance of municipal bonds, it is
comprised of municipal bonds issued nationwide, while each of the Funds in
the Trust is limited to investing in the bonds of a particular state. Because
individual indices do not exist for all of the states, we have provided a
discussion of each Fund's performance relative to the Lehman Index on the
following pages.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to
quarter. Thus, while one quarter may experience an annualized rate of growth
in Gross Domestic Product (GDP) of less than 1%, another quarter may see
annualized growth in excess of 3%--but, for the year, we believe growth could
stay within our expected range of 2% to 2-1/2%. While some increase in
consumer spending has taken place in the early months of this year,
consumers, who represent two-thirds of the economy, remain in a somewhat
weakened position, due in part to an increase in consumer installment debt in
excess of 30% over the past two years. Meanwhile, growth is also being
constrained by ongoing economic doldrums in Europe and Japan, important
markets for U.S. exports. Here again, we are seeing a few tentative signs,
particularly in Japan, of modest recoveries that could lead to improved
prospects for U.S. exporters. Also, the "lag effect" of increases in
short-term interest rates by the Federal Reserve Board in 1994 and into 1995
is helping to keep growth in check. This lag effect can last up to two years,
and although the Fed did reduce short-term rates late last year and earlier
this year, we expect it to continue its diligent anti-inflationary policies.
At the same time, it appears that inflation is likely to remain under control
this year, due in part to a continued moderation in wage pressures and the
subdued level of economic growth. Finally, we believe the current upward
pressure on energy prices bears close scrutiny, as energy is an important
component of the inflation outlook.
Municipal Bond Market
Interest rates on municipal bonds experienced dramatic swings during the
fiscal year ended March 31, 1996. Rates declined by approximately 70 basis
points (0.70%) during the first nine months of the fiscal year, as a
combination of slowing economic growth and reduced inflationary pressures
enabled the Federal Reserve to begin lowering interest rates. Positive news
out of Washington, D.C. regarding the possibility of a balanced budget
provided further impetus for the rally in fixed-income securities. In the
fourth quarter of the fiscal year, interest rates on municipal securities
increased by about 55 basis points (0.55%) as signs of a reemergence in
economic growth and rising commodity prices raised inflationary concerns.
Further driving interest rates higher was the apparent failure of the federal
government to reach agreement on a balanced budget.
The overall 15-basis point (0.15%) decline in tax-exempt yields during the
fiscal year ended March 31, 1996 was dwarfed by the approximately 70-basis
point (0.70%) decline in yields on long-term U.S. Treasury securities during
the same period, driving the yield ratio of 30-year AAA-rated municipals to
U.S. Treasuries from 79% to 86%. The dramatic underperformance by tax-exempt
securities can be attributed to investors' fears concerning major tax reform,
more specifically, the potential of the implementation of a flat tax and the
removal of municipal bonds' special tax status. While these fears have
subsided somewhat recently as it appears that major tax reform is improbable,
tax-exempt securities are still trading at levels reflective of some modest
prospect of tax reform.
Supply continues to provide a positive foundation for the municipal bond
market. In 1995, new issuance totalled approximately $156 billion, a decline
of 5% from the previous year and nearly one-half of 1993's record level. More
importantly, during 1995 the outstanding supply of municipal bonds declined
by approximately $45 billion. It is expected that new issuance will again be
in the range of $160 billion, barring any sharp decline in interest rates,
and that the outstanding supply will again decline, by approximately $30
billion. Given the favorable technical outlook for municipal bonds and their
current yield ratios compared to U.S. Treasuries, we believe that tax-exempt
securities represent good value (although principal value and interest on
Treasury securities are guaranteed by the U.S. government if held to
maturity).
Portfolio Strategy
Although the structure of each Fund is impacted by the unique market dynamics
of its state, we strive to manage all the Funds in a similar style. We are
generally constructive on the municipal market, although recent volatility
and the aforementioned signs of growth have raised some concerns. Therefore,
we have shortened the durations of some of the longer-term Funds to lessen
their interest rate sensitivity. We have also sought to purchase bonds that
came to market at relatively high yields, which tend to be relatively more
defensive and help us maintain dividend levels.
The focus on credit issues in the municipal market has grown with the Orange
County, California bankruptcy filing, the deterioration of Washington, D.C.'s
financial condition, and many other local problems. At the same time, with
the volatility in interest rates, we feel it is appropriate to maintain very
high quality across the Funds' portfolios. Finally, the rapidly changing
credit landscape
1
<PAGE>
Letter to Shareholders -- continued
may present many opportunities that, with our research team, we hope to
identify and take advantage of to enhance the value of the Funds.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
/s/ David R. King /s/ Geoffrey L. Schechter /s/ David B. Smith
David R. King, Geoffrey L. Schechter, and David B. Smith
Portfolio Managers
April 12, 1996
The performance of the individual state Funds listed on the following page
includes the reinvestment of distributions but excludes the effects of any
sales charges. Each Fund's results have been compared to the Lehman Index.
The portfolio of each Fund will tend to be structured with respect to
maturity and coupon and sector distribution, reflecting our views on interest
rates, credit quality, and financing trends. However, each Fund's performance
will differ because of supply/demand and credit quality conditions, which
vary from state to state.
2
<PAGE>
California
The Fund's total returns for the fiscal year ended March 31, 1996 of 7.86%
for Class A shares, 6.93% for Class B shares, and 6.77% for Class C shares
underperformed the 8.38% return of the Lehman Index. Class A shares
outperformed, and Class B and Class C shares slightly underperformed, the
average California tax-exempt municipal bond fund's return of 7.27%, as
reported by Lipper Analytical Services, over the same period.
The Fund benefited from its holdings of high-quality discount bonds during
the period of declining interest rates. With the recent upturn of interest
rates experienced since February 1996, the Fund has moved to hedge its
interest rate sensitivity in an effort to dampen volatility. The Fund
continues to manage its credit exposure by focusing on high-quality and/or
insured, essential-purpose revenue bonds, general obligation bonds, and
tax-backed issues.
Florida
For the 12 months ended March 31, 1996, the Fund had total returns of 7.81%
for Class A shares and 6.88% for Class B shares, compared to the 8.38% return
for the Lehman Index and the 7.13% average return for Florida state
tax-exempt funds, according to Lipper Analytical Services. Its aggressive
structure worked to its advantage during the first three quarters when
interest rates were declining, but to its disadvantage over the last quarter
when interest rates rose and bond prices declined. The Fund's duration, or
interest rate sensitivity, has recently been reduced in an attempt to lessen
the share-price volatility going forward.
Louisiana
During the fiscal year ended March 31, 1996, the total returns of 7.38% for
Class A shares and 6.48% for Class B shares underperformed the 8.38% return
of the Lehman Index. The average return for Louisiana state tax-exempt funds
was 6.78%, according to Lipper Analytical Services. The underperformance is
primarily attributable to the defensive posture the Fund maintained during
the first two months of the fiscal year, when interest rates were generally
declining, and the more aggressive posture that the Fund maintained during
the fourth quarter of the fiscal year, a period marked by rising interest
rates.
Mississippi
During the fiscal year ended March 31, 1996, the total returns of 7.99% for
Class A shares and 7.11% for Class B shares modestly underperformed the 8.38%
return of the Lehman Index. The underperformance is primarily attributable to
the defensive posture that the Fund maintained during the first two months of
the fiscal year, when interest rates were generally declining, and the more
aggressive stance that was maintained during the fourth quarter of the fiscal
year, a period marked by rising interest rates.
Texas
During the fiscal year ended March 31, 1996, the total returns of 7.39% for
Class A shares and 6.38% for Class B shares modestly underperformed the 8.38%
return of the Lehman Index and the 7.56% average return for Texas state
tax-exempt funds, according to Lipper Analytical Services. The
underperformance is primarily attributable to the defensive posture that the
Fund maintained during the first two months of the fiscal year, when interest
rates were generally declining, and the more aggressive posture that was
maintained during the fourth quarter of the fiscal year, a period marked by
rising interest rates.
Washington
The Fund's total returns for the fiscal year ended March 31, 1996 of 9.20%
for Class A shares and 8.24% for Class B shares compared favorably to the
8.38% return of the Lehman Index. Both Class A and Class B shares of the Fund
outperformed the average Washington tax-exempt municipal bond fund's return
of 8.02%, as reported by Lipper Analytical Services, over the same period.
Much of this outperformance can be attributed to the Fund's substantial
holdings of high-quality, non-callable bonds.
Portfolio Manager Profiles
David King has been a member of the MFS investment staff since 1985. A
graduate of the University of New Hampshire and the Babson College Graduate
School of Business Administration, he began his career at MFS as a member of
the Fixed Income Department and was named Assistant Vice President -
Investments in 1987. In 1988 he was named Vice President - Investments. Mr.
King is a Chartered Financial Analyst (C.F.A.) and currently has portfolio
management responsibility for the Florida state Fund.
Geoffrey Schechter joined MFS in 1993 as an Investment Officer in the Fixed
Income Department. A graduate of the University of Texas and the Boston
University Graduate School of Business Administration, he was named Assistant
Vice President - Investments in 1994, Vice President - Investments in 1995
and currently has portfolio management responsibilities for the Louisiana,
Mississippi and Texas state Funds. Mr. Schechter is a Certified Public
Accountant (C.P.A.) and a C.F.A.
David Smith has been a member of the MFS investment staff since 1988. A
graduate of Union College and the Babson College Graduate School of Business
Administration, he began his career at MFS as a Senior Treasury Analyst in
the Corporate Treasury Department. He was named a Research Analyst in the
Fixed Income Department in 1989, Investment Officer in 1990, Assistant Vice
President - Investments in 1991 and Vice President - Investments in 1993. Mr.
Smith is a C.F.A. and currently has portfolio management responsibilities for
the California and Washington state Funds.
3
<PAGE>
Objective and Policies
The investment objective for each state Fund is to provide current income
exempt from federal income taxes and from the personal income taxes, if any,
of the state to which the Fund's name relates.
Each state Fund seeks to achieve its investment objective by investing its
assets primarily in municipal debt instruments. Each Fund may purchase
instruments, the interest on which may be subject to an alternative minimum
tax. Generally, each state Fund will invest at least two-thirds of its assets
in tax-exempt securities in the three highest grades (A or above) of
recognized rating agencies or comparable unrated securities. Each state Fund
may also enter into options and futures transactions and purchase securities
on a "when-issued" basis. A small portion of income may be subject to state,
federal, and/or alternative minimum tax. Capital gains, if any, are subject
to capital gains tax.
Performance
The following information illustrates the growth of a hypothetical $10,000
investment for each Fund's Class A shares for the periods indicated in
comparison to various market indicators. Fund results reflect the deduction
of the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do
not reflect any fees or expenses. You cannot invest in an index. All results
reflect the reinvestment of all dividends and capital gains.
Please note that effective September 7, 1993, Class B shares were offered and
on January 3, 1994, Class C shares were offered for certain funds.
Information on the performance of these classes of shares appears on the
following pages.
Please note that the performance of other classes will be greater than or
less than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
4
<PAGE>
Performance - continued
MFS CALIFORNIA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 10-Year Period Ended
March 31, 1996)
[mountain chart]
Days MFS California Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
4/1/86 0 9,525 10,000 10,000
3/31/87 365 10,629 11,097 10,304
3/31/88 731 10,495 11,376 10,705
3/31/89 1095 11,432 12,196 11,238
3/31/90 1460 12,542 13,482 11,826
3/31/91 1825 13,548 14,726 12,405
3/31/92 2191 14,973 16,197 12,800
3/31/93 2556 17,063 18,225 13,195
3/31/94 2921 17,285 18,648 13,526
3/31/95 3286 18,124 20,034 13,912
3/31/96 3652 19,548 21,713 14,307
[legend]
(solid rule) MFS California Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
MFS California Municipal Bond Fund (Class A) including 4.75% sales
charge +2.73% +2.94% +6.56% +6.93%
- ----------------------------------------------------------------------- ------- ------- ------- ---------
MFS California Municipal Bond Fund (Class A) at net asset value +7.86% +4.64% +7.61% +7.45%
- ----------------------------------------------------------------------- ------- ------- ------- ---------
MFS California Municipal Bond Fund (Class B) with CDSC+ +2.93% -- -- +0.67%*
- ----------------------------------------------------------------------- ------- ------- ------- ---------
MFS California Municipal Bond Fund (Class B) without CDSC +6.93% -- -- +1.72%*
- ----------------------------------------------------------------------- ------- ------- ------- ---------
MFS California Municipal Bond Fund (Class C) +6.77% -- -- +1.81%#
- ----------------------------------------------------------------------- ------- ------- ------- ---------
Average California tax-exempt municipal bond fund** +7.27% +5.07% +7.48% +7.18%
- ----------------------------------------------------------------------- ------- ------- ------- ---------
Lehman Brothers Municipal Bond Index** +8.38% +6.01% +8.08% +8.06%
- ----------------------------------------------------------------------- ------- ------- ------- ---------
Consumer Price Index(S)** +2.84% +2.73% +2.89% +3.65%
- ----------------------------------------------------------------------- ------- ------- ------- ---------
</TABLE>
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Source: Lipper Analytical Services, Inc.
#For the period from the commencement of offering of Class C shares, January
3, 1994 to March 31, 1996. Class C shares have no initial sales charge or
CDSC but, along with Class B shares, have higher annual fees and expenses
than Class A shares. Class C share purchases made on or after April 1, 1996,
will be subject to a 1% CDSC if redeemed within 12 months of purchase.
(S)The Consumer Price Index is a popular measure of change in prices.
5
<PAGE>
Performance -- continued
MFS FLORIDA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from February 3,
1992 to March 31, 1996)
[mountain chart]
Days MFS Florida Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
2/3/92 0 9,525 10,000 10,000
3/31/92 57 9,487 10,007 10,087
3/31/93 422 10,855 11,260 10,398
3/31/94 787 11,031 11,521 10,659
3/31/95 1152 11,701 12,377 10,963
3/31/96 1518 12,615 13,415 11,274
[legend]
(solid rule) MFS Florida Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 Year 3 Years 5 Years through 3/31/96
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C>
MFS Florida Municipal Bond Fund (Class A) including 4.75% sales charge +2.68% +3.43% -- +5.74%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Florida Municipal Bond Fund (Class A) at net asset value +7.81% +5.13% -- +6.99%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Florida Municipal Bond Fund (Class B) with CDSC+ +2.88% -- -- +0.75%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Florida Municipal Bond Fund (Class B) without CDSC +6.88% -- -- +1.81%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Average Florida tax-exempt municipal bond fund +7.13% +5.28% -- +7.02%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% -- +7.30%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Consumer Price Index(S) +2.84% +2.73% -- +2.92%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
</TABLE>
*For the period from the commencement of offering of Class A shares, February
3, 1992 to March 31, 1996.
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on February 1, 1992. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
6
<PAGE>
Performance -- continued
MFS LOUISIANA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from February 1,
1993 to March 31, 1996)
[mountain chart]
Days MFS Louisiana Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
2/1/93 0 9,525 10,000 10,000
3/31/93 58 9,606 10,252 10,070
3/31/94 423 9,833 10,490 10,323
3/31/95 788 10,539 11,269 10,617
3/31/96 1154 11,317 12,214 10,919
[legend]
(solid rule) MFS Louisiana Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 Year 3 Years 5 Years through 3/31/96
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C>
MFS Louisiana Municipal Bond Fund (Class A) including 4.75% sales
charge +2.29% +3.90% -- +3.99%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Louisiana Municipal Bond Fund (Class A) at net asset value +7.38% +5.62% -- +5.59%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Louisiana Municipal Bond Fund (Class B) with CDSC+ +2.48% -- -- +1.34%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Louisiana Municipal Bond Fund (Class B) without CDSC +6.48% -- -- +2.40%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Average Louisiana tax-exempt municipal bond fund +6.78% +5.08% -- +5.63%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% -- +6.52%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Consumer Price Index(S) +2.84% +2.73% -- +2.81%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
</TABLE>
*For the period from the commencement of offering of Class A shares, February
1, 1993 to March 31, 1996.
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on February 1, 1993. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
7
<PAGE>
Performance -- continued
MFS MISSISSIPPI MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from September 1,
1992 to March 31, 1996)
[mountain chart]
Days MFS Mississippi Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
9/1/92 0 9,525 10,000 10,000
3/31/93 211 10,073 10,629 10,192
3/31/94 576 10,312 10,876 10,447
3/31/95 941 10,939 11,684 10,745
3/31/96 1307 11,812 12,663 11,050
[legend]
(solid rule) MFS Mississippi Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 Year 3 Years 5 Years through 3/31/96
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C>
MFS Mississippi Municipal Bond Fund (Class A) including 4.75% sales
charge +2.81% +3.77% -- +4.03%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Mississippi Municipal Bond Fund (Class A) at net asset value +7.99% +5.45% -- +5.43%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Mississippi Municipal Bond Fund (Class B) with CDSC+ +3.11% -- -- +1.56%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Mississippi Municipal Bond Fund (Class B) without CDSC +7.11% -- -- +2.63%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Average other state tax-exempt municipal bond fund +6.99% +5.40% -- +5.56%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% -- +6.37%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Consumer Price Index(S) +2.84% +2.73% -- +2.84%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
</TABLE>
*For the period from the commencement of offering of Class A shares, August
6, 1992 to March 31, 1996.
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on August 1, 1992. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
8
<PAGE>
Performance -- continued
MFS TEXAS MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from February 3,
1992 to March 31, 1996)
[mountain chart]
Days MFS Texas Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
2/3/92 0 9,525 10,000 10,000
3/31/92 57 9,524 10,007 10,087
3/31/93 422 10,919 11,260 10,398
3/31/94 787 11,208 11,521 10,659
3/31/95 1152 12,039 12,377 10,963
3/31/96 1518 12,929 13,415 11,274
[legend]
(solid rule) MFS Texas Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 Year 3 Years 5 Years through 3/31/96
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C>
MFS Texas Municipal Bond Fund (Class A) including 4.75% sales charge +2.33% +4.09% -- +6.37%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Texas Municipal Bond Fund (Class A) at net asset value +7.39% +5.79% -- +7.63%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Texas Municipal Bond Fund (Class B) with CDSC+ +2.38% -- -- +1.48%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Texas Municipal Bond Fund (Class B) without CDSC +6.38% -- -- +2.54%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Average Texas tax-exempt municipal bond fund +7.56% +5.59% -- +7.58%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% -- +7.30%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Consumer Price Index(S) +2.84% +2.73% -- +2.92%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
</TABLE>
*For the period from the commencement of offering of Class A shares, February
3, 1992 to March 31, 1996.
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on February 1, 1992. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
9
<PAGE>
Performance -- continued
MFS WASHINGTON MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from September 1,
1992 to March 31, 1996)
[mountain chart]
Days MFS Washington Lehman Brothers Consumer
Municipal Bond Fund-A Municipal Bond Index Price Index
9/1/92 0 9,525 10,000 10,000
3/31/93 211 10,169 10,629 10,192
3/31/94 576 10,321 10,876 10,447
3/31/95 941 11,332 11,684 10,745
3/31/96 1307 12,375 12,663 11,050
[legend]
(solid rule) MFS Washington Municipal Bond Fund (Class A)
(short dashed rule) Lehman Brothers Municipal Bond Index
(long dashed rule) Consumer Price Index
Average Annual Total Returns
<TABLE>
<CAPTION>
Life of Class
1 Year 3 Years 5 Years through 3/31/96
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C>
MFS Washington Municipal Bond Fund (Class A) including 4.75% sales
charge +3.99% +5.03% -- +5.84%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Washington Municipal Bond Fund (Class A) at net asset value +9.20% +6.76% -- +7.26%*
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Washington Municipal Bond Fund (Class B) with CDSC+ +4.24% -- -- +2.76%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
MFS Washington Municipal Bond Fund (Class B) without CDSC +8.24% -- -- +3.83%++
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Average Washington tax-exempt municipal bond fund +8.02% +5.65% -- +6.47%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Lehman Brothers Municipal Bond Index +8.38% +6.01% -- +6.37%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
Consumer Price Index(S) +2.84% +2.73% -- +2.84%**
- ----------------------------------------------------------------------- ------- ------- ------- ----------------
</TABLE>
*For the period from the commencement of offering of Class A shares, August
7, 1992 to March 31, 1996.
+These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
++For the period from the commencement of offering of Class B shares,
September 7, 1993 to March 31, 1996.
**Benchmark comparisons begin on August 1, 1992. Source: Lipper Analytical
Services, Inc.
(S)The Consumer Price Index is a popular measure of change in prices.
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost. All results for the California,
Louisiana, Mississippi, Texas and Washington Funds reflect the applicable
expense subsidy which is explained in the Notes to Financial Statements. Had
these subsidies not been in effect, the results would have been less
favorable. These subsidies may be rescinded at any time.
10
<PAGE>
Federal Income Tax Information on Distributions
(For the year ended March 31, 1996)
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Sources of Distributions Paid+++ Fund Fund Fund Fund Fund Fund
------------------------------ -------- ------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
(Class A) $0.30824 $0.51688 $0.56189 $0.52200 $0.57271 $0.56000
(Class B) 0.25917 0.42912 0.48153 0.44528 0.48666 0.48066
(Class C) 0.25245 -- -- -- -- --
Short-term capital gains:
(Class A) 0.00176 0.00362 0.00111 -- 0.01129 --
(Class B) 0.00176 0.00362 0.00111 -- 0.01129 --
(Class C) 0.00176 -- -- -- -- --
</TABLE>
+++Estimated at time of report.
Tax Form Summary
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
Exempt-Interest Dividends
For federal income tax purposes, at least 98% of the total dividends paid by
each Fund from net investment income during the year ended March 31, 1996 is
designated as an exempt-interest dividend.
11
<PAGE>
Portfolio of Investments - March 31, 1996
MFS CALIFORNIA MUNICIPAL BOND FUND
Municipal Bonds - 97.1%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
<S> <C> <C> <C>
General Obligation - 11.7%
AAA Castaic, CA, FGIC, 0s, 2019 $10,000 $ 2,423,600
AAA Palm Springs, CA, MBIA, 6.125s, 2020 4,000 4,075,120
AA- Palos Verdes, CA, Library District, 6.7s, 2016 1,250 1,310,550
AAA Roseville, CA, FGIC, 0s, 2020 4,000 935,960
AA- Santa Monica, CA, Malibu Unified School District,
5.75s, 2018 1,475 1,478,569
A State of California, 10s, 2007 1,055 1,495,515
A State of California, 0s, 2009 3,100 1,479,909
A State of California, 6.5s, 2010 1,235 1,364,058
A State of California, 5.75s, 2023 2,415 2,334,943
AAA State of California, 5.9s, 2025 5,000 5,001,400
AAA State of California, AMBAC, 7.2s, 2008 1,600 1,876,208
AAA State of California, AMBAC, 6.3s, 2010 6,000 6,540,720
AAA State of California, AMBAC, 7s, 2010 2,000 2,320,720
AAA Sulphur Springs, CA, MBIA, 0s, 2016 2,215 656,017
AAA Walnut Valley, CA, AMBAC, 6s, 2011 1,600 1,683,376
-----------
$34,976,665
- ---------- ------------------------------------------------- -------------- -----------
State and Local Appropriation - 14.0%
AAA Banning, CA, Certificates of Participation, Water
System Improvement, AMBAC, 8s, 2019 $ 1,000 $ 1,270,090
A- California Public Works Board, Lease Rev., 6.75s,
2012 3,200 3,386,944
A- California Public Works Board, Lease Rev.
(Department of Corrections), 7.4s, 2010 5,000 5,821,150
NR Fortuna, Parlier & Susanville, CA, Certificates
of Participation, "B", 7.375s, 2017 930 966,428
AAA Grossmont, CA, Union High School District,
Certificates of Participation, MBIA, 0s, 2006 6,000 3,424,980
AAA Los Angeles, CA, Convention & Exhibition Center
Authority, Certificates of Participation, AMBAC,
0s, 2005 2,400 1,476,768
AAA Los Angeles County, CA, MBIA, 0s, 2013 3,380 1,187,056
AAA Oakland, CA, Financing Authority Lease Rev.
(Oakland Administration Buildings), AMBAC,
5.75s, 2021 3,000 2,887,590
A+ Pasadena, CA, Certificates of Participation
(Pasadena Parking Facility), 6.25s, 2018 3,460 3,585,252
A- Pomona, CA, Public Financing, 6.25s, 2010 4,020 4,111,335
A Puerto Rico Public Buildings Authority, 5.91s,
2016 (Municipal Swap)(section) 1,000 929,420
A Riverside County, CA, Asset Leasing Corp., "A",
6.25s, 2019 1,210 1,205,463
A- San Francisco, CA, City & County Redevelopment
Agency, Lease Rev., 5.5s, 2018 5,000 4,540,250
A- San Joaquin County, CA, Certificates of
Participation (General Hospital), 6.625s, 2020 4,235 4,272,776
AAA Visalia, CA, Unified School District,
Certificates of Participation, MBIA, 0s, 2005 4,655 2,834,336
-----------
$41,899,838
- ---------- ------------------------------------------------- -------------- -----------
Refunded and Special Obligation - 14.8%
NR California Educational Facilities Authority Rev.
(St. Mary's College), 7.5s, 2000 $ 1,000 $ 1,139,410
Refunded and Special Obligation - continued
A+ California Health Facilities Financing Authority
(AIDS Hospice Foundation), CHFC, 7.15s, 2000 $ 3,040 $ 3,365,919
NR California Health Facilities Financing Authority
(Brookside Hospital), 8.1s, 1997 1,000 1,082,430
NR California Health Facilities Financing Authority
(Daughters of Charity Queen Angel), 9.25s, 2015 300 307,314
AA- California Health Facilities Financing Authority
(St. Joseph Health System), 6.9s, 1999 1,000 1,095,280
AA- California Health Facilities Financing Authority
(St. Joseph Hospital), 6.75s, 2001 2,710 3,021,216
A California Health Facilities Financing Authority
(Valley Memorial Hospital), 7.9s, 1997 500 531,300
AAA California Health Facilities Financing Authority
Rev., AMBAC, 7.625s, 1998 1,205 1,325,006
AAA Concord, CA, Redevelopment Agency, Tax
Allocation, BIGI, 8s, 1998 40 43,993
AAA Concord, CA, Redevelopment Agency, Tax Allocation
(Central Concord), BIGI, 8s, 1998 370 406,937
AAA Corona, CA, Certificates of Participation (Corona
Community Hospital), 8s, 2005 585 709,915
NR Hemet Valley, CA, Hospital District, 8.25s, 1998 4,705 5,188,956
AAA Los Angeles, CA, Convention & Exhibition Center
Authority, Certificates of Participation, 9s,
2005 1,900 2,476,498
AA- Los Angeles, CA, Department of Water and Power,
Electric Plant Rev., 7.9s, 2028 1,000 1,092,230
A Los Angeles, CA, Wastewater System Rev., 6.8s,
1999 500 546,060
AAA Los Angeles, CA, Wastewater System Rev., "B",
8.125s, 1997 2,500 2,709,050
AAA Northern California Power Agency, Public Power
Rev. (Hydro-Electric), 8s, 1998 290 313,664
AAA Oakland, CA, Redevelopment Agency, Certificates
of Participation, AMBAC, 8.125s, 1997 750 796,185
A- Pomona, CA, Public Financing Authority Rev., "J",
7.875s, 2000 7,155 8,244,850
NR Pomona, CA, Single Family Mortgage Rev., FNMA,
GNMA, 7.375s, 2010 2,000 2,354,760
AAA Pomona, CA, Single Family Mortgage Rev., GNMA,
7.5s, 2000 2,000 2,476,640
AAA Sacramento, CA, Municipal Utility District,
Electric Rev., "W", 7.875s, 1998 2,500 2,756,025
A Tracy, CA, Hospital Rev., Certificates of
Participation (Tracy Community Hospital), CHFC,
8.625s, 1997 2,000 2,110,400
-----------
$44,094,038
- ---------- ------------------------------------------------- -------------- -----------
Single Family Housing Revenue - 1.5%
AA- California Housing Finance Agency, 7.75s, 2010 $ 1,210 $ 1,281,886
AA- California Housing Finance Agency, 8.1s, 2016 2,500 2,557,250
12
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
Single Family Housing Revenue - continued
A+ Riverside County, CA, 0s, 2014 $ 1,875 $ 262,468
AAA San Bernardino County, CA, Single Family Mortgage
Rev., GNMA, 7.65s, 2023 225 237,524
AAA Santa Ana, CA, Home Mortgage Rev., "A", FGIC,
8.875s, 2017 10 10,156
AAA Southern California Home Finance Authority,
Single Family Mortgage Rev., GNMA, 7.625s, 2023 260 271,372
-----------
$ 4,620,656
- ---------- ------------------------------------------------- -------------- -----------
Multi-Family Housing Revenue - 7.2%
A+ California Housing Finance Agency (Multi-Unit
Rental Housing), 6.7s, 2015 $ 2,750 $ 2,842,043
NR Escondido, CA, Community Development Authority
(Las Villas del Norte), 8.875s, 2005 4,290 4,215,826
AAA Palmdale, CA, Multi-Family Housing Rev., FNMA,
7.375s, 2024 1,000 1,061,460
BBB Thousand Oaks, CA, Redevelopment Agency (Shadow
Hills Project), 7s, 2021 8,900 9,155,964
A+ Yolo County, CA, Housing Authority Mortgage Rev.
(Walnut Park Apartments), FHA, 7.2s, 2033 4,150 4,366,588
-----------
$21,641,881
- ---------- ------------------------------------------------- -------------- -----------
Insured Health Care Revenue - 7.7%
A Apple Valley, CA, Hospital Rev. (St. Mary's
Hospital), CHFC, 6.75s, 2012### $ 4,880 $ 5,023,960
A California Health Facilities Financing Authority
(American Baptist Homes West), CHFC, 7.65s, 2014 4,420 4,673,929
AAA California Health Facilities Financing Authority
(Sutter Health), MBIA, 7s, 2009 1,000 1,068,590
AAA California Health Facilities Financing Authority
(Unihealth America), AMBAC, 7.625s, 2015 45 48,500
A+ California Statewide Communities Development
Authority, Certificates of Participation, CHFC,
0s, 2007 6,645 3,221,895
A+ California Statewide Communities Development
Authority, Certificates of Participation, CHFC,
0s, 2008 6,345 2,868,955
A California Statewide Communities Development
Authority, Certificates of Participation, CHFC,
6.75s, 2021 3,000 3,080,610
AAA Desert Hospital District, CA, Hospital Rev.,
CGIC, 8.684s, 2020++++ 3,000 3,172,500
-----------
$23,158,939
- ---------- ------------------------------------------------- -------------- -----------
Health Care Revenue - 3.7%
A- California Health Facilities Financing Authority
(Good Samaritan), 6.6s, 2000 $ 1,300 $ 1,367,587
A- California Health Facilities Financing Authority
(Good Samaritan), 6.65s, 2001 500 528,665
AA California Health Facilities Financing Authority
(Kaiser Permanente), 7s, 2018 1,000 1,067,260
AA California Statewide Communities Development
Authority (St. Joseph's), 6.625s, 2021 4,205 4,425,889
A West Covina, CA (Queen of the Valley Hospital),
6.5s, 2014 3,615 3,657,259
-----------
$11,046,660
- ---------- ------------------------------------------------- -------------- -----------
Electric and Gas Utility Revenue - 8.1%
AAA East Bay, CA, Municipal Utilities District, MBIA,
5s, 2021 $ 2,000 $ 1,767,660
AA- Los Angeles, CA, Department of Water and Power,
Electric Plant Rev., 7.25s, 2030 1,000 1,122,750
AA- Los Angeles, CA, Department of Water and Power,
Electric Plant Rev., 7.1s, 2031 1,050 1,177,039
AAA M-S-R Public Power Agency (San Juan), MBIA,
6.75s, 2020 3,000 3,394,170
A+ Modesto, CA, Irrigation District, Certificates of
Participation (Geyser), 5s, 2017 4,300 3,713,824
AAA Northern California Public Power Refunding
(Geothermal), "93A", AMBAC, 5.85s, 2010 1,000 1,039,940
AAA Sacramento, CA, Municipal Utilities District,
MBIA, 5.25s, 2020 7,500 6,879,450
NR Southern California Public Power Authority
(Southern Transmission Project), 0s, 2005 8,000 4,967,200
-----------
$24,062,033
- ---------- ------------------------------------------------- -------------- -----------
Water and Sewer Utility Revenue - 12.1%
AA California Department of Water, 5.5s, 2022 $ 2,800 $ 2,597,140
AA California Department of Water Resources, Central
Valley Project Rev., 7s, 2012 1,495 1,700,129
AAA Eastern Municipal Water District, FGIC, 5.25s,
2023 2,000 1,827,200
AAA Fairfield-Suisun, CA, Sewer District Rev., MBIA,
0s, 2006 2,080 1,221,542
AA Long Beach, CA, Water Rev., 6.125s, 2019 2,000 2,021,120
AAA Los Angeles County, CA, Financing Authority Rev.,
MBIA, 5s, 2023 4,500 3,957,750
AA Metropolitan Water District, 5s, 2020 7,000 6,158,390
AA Metropolitan Water District, Linked Savers, RIBS,
5.75s, 2018 10,000 9,905,500
BBB+ Mojave, CA, Water Agency (Morongo Basin), 6.6s,
2022 1,400 1,441,048
AAA Redding, CA, Wastewater Rev., FGIC, 5.5s, 2018 1,500 1,436,175
AAA Sacramento, CA, Area Flood Control Agency, FGIC,
5.375s, 2025 1,500 1,402,545
AA San Francisco, CA, Utility Water Rev., 0s, 2019 2,100 510,132
AAA San Jose-Santa Clara, CA, Water Financing
Authority, FGIC, 5.375s, 2020 2,000 1,866,820
-----------
$36,045,491
- ---------- ------------------------------------------------- -------------- -----------
Turnpike Revenue - 1.0%
BBB- Foothill/Eastern Transportation Corridor Agency,
CA, 0s, 2011 $ 5,000 $ 2,993,350
- ---------- ------------------------------------------------- -------------- -----------
Airport and Port Revenue - 1.9%
AAA California Maritime, Infrastructure Authority,
AMBAC, 5s, 2020 $ 1,750 $ 1,528,328
AAA San Francisco, CA, City & County Airports
Commission, International Airport Rev., FGIC,
6.5s, 2019 4,000 4,165,840
-----------
$ 5,694,168
- ---------- ------------------------------------------------- -------------- -----------
13
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
Sales and Excise Tax Revenue - 5.1%
AAA Chico, CA (Southeast Chico Redevelopment), FGIC,
6.625s, 2021 $1,735 $ 1,839,777
AAA Los Angeles County, CA, Metropolitan
Transportation Authority, AMBAC, 5.25s, 2023 2,000 1,827,200
AAA Los Angeles County, CA, Metropolitan
Transportation Authority, AMBAC, 5s, 2025 5,000 4,414,050
AAA Los Angeles County, CA, Metropolitan
Transportation Authority, FGIC, 5s, 2021 8,000 7,069,200
-----------
$ 15,150,227
- ---------- ------------------------------------------------- -------------- -----------
Industrial Revenue (Corporate Guarantee) - 0.7%
NR California Pollution Control Financing Authority
(Frito-Lay, Inc.), 6.375s, 2004 $1,025 $ 1,088,560
A California Pollution Control Financing Authority
(Pacific Gas & Electric Co.), 6.625s, 2009 1,000 1,056,420
-----------
$ 2,144,980
- ---------- ------------------------------------------------- -------------- -----------
Universities - 3.8%
NR California Educational Facilities Authority Rev.
(College & University), 6s, 2012 $1,400 $ 1,324,386
A- California State University Housing System Rev.,
6.75s, 2010 1,705 1,866,975
A- California State University Housing System Rev.,
6.75s, 2011 3,570 3,893,692
AAA University of California, MBIA, 6.375s, 2024 4,000 4,165,000
-----------
$ 11,250,053
- ---------- ------------------------------------------------- -------------- -----------
Special Assessment District - 2.4%
AAA Anaheim, CA, Public Financing Authority
(Redevelopment Project Alpha), MBIA, 0s, 2005 $3,210 $ 1,945,292
AAA Brea, CA, Public Finance Authority, MBIA, 0s,
2005 2,235 1,384,292
AAA Brea, CA, Public Finance Authority, MBIA, 0s,
2006 3,415 1,989,306
AAA Concord, CA, Redevelopment Agency, Tax
Allocation, BIGI, 8s, 2018 40 43,515
AAA Walnut, CA, Public Finance Authority (Walnut
Improvement), MBIA, 0s, 2007 1,150 622,564
AAA Walnut, CA, Public Finance Authority (Walnut
Improvement), MBIA, 0s, 2008 1,125 570,240
AAA Walnut, CA, Public Finance Authority (Walnut
Improvement), MBIA, 0s, 2009 1,175 556,550
-----------
$ 7,111,759
- ---------- ------------------------------------------------- -------------- -----------
Other - 1.4%
AAA California Public Capital Improvements Financing
Authority Rev., BIGI, 8.1s, 2018 $1,890 $ 2,024,870
AAA South Coast Air Quality Management District,
AMBAC, 0s, 2005 3,480 2,145,629
-----------
$ 4,170,499
- ---------- ------------------------------------------------- -------------- -----------
Total Municipal Bonds (Identified Cost, $277,854,789) $290,061,237
- ----------------------------------------------------------------------------------- -------------
Floating Rate Demand Notes - 1.4%
California Health Facilities (St. Joseph Health
System), due 7/01/13 $2,040 $ 2,040,000
California Pollution Control Financing Authority
(Shell Oil Corp.), due 11/01/00 500 500,000
Floating Rate Demand Notes - continued
California Pollution Control Financing Authority
(Shell Oil Corp.), due 10/01/08 $300 $ 300,000
California Pollution Control Financing Authority
(Shell Oil Corp.), due 10/01/11 700 700,000
Uinta County, WY, Pollution Control Rev. (Chevron
USA, Inc.), due 8/15/20 700 700,000
- ---------- ------------------------------------------------- -------------- -----------
Total Floating Rate Demand Notes, at Identified Cost $ 4,240,000
- ----------------------------------------------------------------------------------- -------------
Call Option Purchased - 0.1%
Issuer/Expiration Date/Strike Price Principal Amount
of Contracts
(000 Omitted)
--------------------------------------------------------------- ---------------- -------------
State of New Jersey, "D"/2003/102
(Premium Paid, $225,000) $ 2 $ 382,000
--------------------------------------------------------------- ---------------- -------------
Total Investments (Identified Cost, $282,319,789) $294,683,237
Other Assets, Less Liabilities - 1.4% 4,161,202
- ----------------------------------------------------------------------------------- -------------
Net Assets - 100.0% $298,844,439
- ----------------------------------------------------------------------------------- -------------
</TABLE>
###Security segregated as collateral for an open futures contract.
(section)Indexed security.
++++Inverse floating rate security.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS FLORIDA MUNICIPAL BOND FUND
Municipal Bonds - 96.6%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
<S> <C> <C> <C>
General Obligation - 9.3%
AA Florida Board of Education, Capital Outlay,
9.125s, 2014 $2,600 $3,618,316
AA Palm Beach County, FL, 6.5s, 2010 2,000 2,207,260
AA State of Florida, 9.875s, 2009 1,100 1,576,971
AA State of Florida, 6.4s, 2022 2,000 2,127,080
-----------
$9,529,627
- ---------- ------------------------------------------------- -------------- -----------
State and Local Appropriation - 4.2%
AAA Bay County, FL, School Board, Certificates of
Participation, AMBAC, 6.75s, 2012### $ 1,000 $1,111,200
AAA Collier County, FL, School Board, Certificates of
Participation, FSA, 5s, 2016 1,250 1,121,563
AAA Palm Beach County, FL, School Board, Certificates
of Participation, AMBAC, 6.375s, 2015 2,000 2,103,260
-----------
$4,336,023
- ---------- ------------------------------------------------- -------------- -----------
Refunded and Special Obligation - 6.7%
AAA Broward County, FL, School District, 7.125s, 1999 $ 250 $ 273,975
AAA Florida Board of Education, Capital Outlay,
7.25s, 2000 510 572,149
AAA Florida Board of Education, Capital Outlay, ETM,
9.125s, 2014 400 564,664
AAA Florida Turnpike Authority Rev., AMBAC, 7.125s,
2001 1,250 1,418,300
AAA Gainesville, FL, Utility Systems Rev., AMBAC,
7.25s, 1998 500 545,395
14
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
Refunded and Special Obligation - continued
A Hillsborough County, FL, Capital Improvement
Rev., 6.75s, 2022 $1,500 $ 1,682,700
AAA Orange County, FL, Tourist Development Tax Rev.,
AMBAC, 7.25s, 2000 500 564,665
A- Puerto Rico Electric Power Authority Rev., 7s,
2001 240 272,133
AAA Puerto Rico Highway & Transportation Authority,
Highway Rev., 6.625s, 2002 100 112,292
AAA Puerto Rico Public Buildings Authority, 6.875s,
2002 740 840,921
-----------
$ 6,847,194
- ---------- ------------------------------------------------- -------------- -----------
Single Family Housing Revenue - 1.1%
NR Dade County, FL, Housing Finance Authority, FNMA,
GNMA, 7s, 2024 $ 75 $ 77,500
AAA Dade County, FL, Housing Finance Authority, FSA,
6.95s, 2012 1,000 1,043,990
-----------
$ 1,121,490
- ---------- ------------------------------------------------- -------------- -----------
Multi-Family Housing Revenue - 1.5%
NR Florida Housing Finance Agency (Southlake
Apartments), 8.7s, 2021 $ 1,500 $ 1,513,845
- ---------- ------------------------------------------------- -------------- -----------
Insured Health Care Revenue - 11.3%
AAA Brevard County, FL, Health Facilities Authority
Rev. (Wuesthoff Memorial), MBIA, 6.5s, 2007 $ 1,000 $ 1,085,430
AAA Brevard County, FL, Health Facilities Authority
Rev. (Wuesthoff Memorial), MBIA, 5s, 2013 1,000 913,780
AAA Brevard County, FL, Health Facilities Authority
Rev. (Wuesthoff Memorial), MBIA, 7.2s, 2013 1,000 1,117,920
AAA Charlotte County, FL, Public Facilities Authority
Rev. (Bon Secours), FSA, 7.826s, 2027 ++++ 2,500 2,518,750
AAA Hillsborough County, FL, Industrial Development
Authority (University Community Hospital), 6.5s,
2019 1,000 1,097,260
AAA Jacksonville, FL, Hospital Rev. (Baptist
Medical), MBIA, 7.3s, 2019 1,900 2,053,995
AAA Jacksonville, FL, Hospital Rev. (University
Community Hospital), Connie Lee, 6.6s, 2013 500 528,410
AAA Tallahassee, FL, Health Facilities Rev.
(Tallahassee Memorial Regional Medical), MBIA,
6.625s, 2013 1,000 1,096,060
AAA Tampa, FL, Alleghany Health System (St. Joseph
Hospital), MBIA, 6.5s, 2023 1,000 1,087,490
-----------
$11,499,095
- ---------- ------------------------------------------------- -------------- -----------
Health Care Revenue - 9.2%
NR Brevard County, FL, Health Facilities Authority
Rev. (Friendly Village), 9.25s, 2012 $ 375 $ 387,881
BBB+ Escambia County, FL, Health Facilities Authority
(Baptist Hospital), 6s, 2014 2,500 2,347,550
BBB+ Escambia County, FL, Health Facilities Authority
(Baptist Hospital & Baptist Manor), 6.75s, 2014 1,000 1,017,830
NR Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (Cypress Village),
7s, 2014 1,250 1,271,875
Health Care Revenue - continued
NR Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (National Benevolent
Assn./Cypress), 6.4s, 2016 $1,825 $ 1,773,353
NR Orange County, FL, Industrial Development
Authority Rev. (Friendly Village), 9.25s, 2012 335 347,418
A+ Palm Beach County, FL, Health Facilities
Authority Rev. (Good Samaritan Health System),
6.3s, 2022 1,750 1,763,020
NR St. Petersburg, FL, Health Facilities Rev.
(Swanholm Nursing), 10s, 2022 490 531,263
-----------
$ 9,440,190
- ---------- ------------------------------------------------- -------------- -----------
Electric and Gas Utility Revenue - 27.2%
AAA Charlotte County, FL, Utility Systems Rev., FGIC,
6.875s, 2021 $ 500 $ 554,350
AAA Escambia County, FL, Utilities Authority, FGIC,
0s, 2015 2,000 667,540
AAA Escambia County, FL, Utilities District, Utility
Systems Rev., FGIC, 6.25s, 2015 1,500 1,604,730
AA- Hillsborough County, FL, Industrial Development
Authority, Pollution Control Rev. (Tampa
Electric Co.), 8s, 2022 3,000 3,498,000
AA Jacksonville, FL, Electric Authority Rev., 0s,
2010 4,995 2,193,105
AA- Lakeland, FL, Electric & Water Rev., 0s, 2011 5,000 2,058,550
AA- Lakeland, FL, Electric & Water Rev., 0s, 2012 3,000 1,157,070
BBB- Martin County, FL, Industrial Development
Authority (Indiantown Cogeneration Project),
7.875s, 2025 3,625 4,061,595
AA- Orlando, FL, Utilities Commission, Water &
Electric Rev., 6.75s, 2017 2,500 2,836,875
NR Palm Beach County, FL, Industrial Development
Rev. (Osceola Power Project), 6.85s, 2014 3,000 3,046,830
NR Palm Beach County, FL, Solid Waste Industrial
Development Rev. (Osceola Power Project), 6.95s,
2022 1,500 1,517,550
A- Puerto Rico Electric Power Authority Rev.,
6.125s, 2008 2,400 2,516,016
AAA Puerto Rico Electric Power Authority Rev., FSA,
6s, 2016 2,000 2,029,400
-----------
$27,741,611
- ---------- ------------------------------------------------- -------------- -----------
Water and Sewer Utility Revenue - 5.2%
AAA Bradenton, FL, Utility System Rev., FGIC, 0s,
2008 $ 1,000 $ 507,040
AAA Miramar, FL, Wastewater Improvement, FGIC, 6.75s,
2016 1,500 1,631,580
AAA Seminole, FL, Water & Sewer Improvement Rev.,
MBIA, 6s, 2019 3,000 3,120,120
-----------
$ 5,258,740
- ---------- ------------------------------------------------- -------------- -----------
Turnpike Revenue - 3.2%
AAA Florida Turnpike Authority Rev., 5s, 2019 $ 2,000 $ 1,791,980
AAA Lee County, FL, Transportation Facility Rev.,
MBIA, 5.75s, 2022 1,500 1,486,155
-----------
$ 3,278,135
- ---------- ------------------------------------------------- -------------- -----------
15
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
Airport and Port Revenue - 7.4%
AAA Dade County, FL, MBIA, 5.125s, 2016### $ 1,000 $ 921,680
AAA Dade County, FL, Aviation Rev., MBIA, 5.75s, 2015 1,500 1,466,970
AAA Dade County, FL, Aviation Rev., MBIA, 6.6s, 2022 1,000 1,057,430
BB Hillsborough County, FL, Aviation Authority Rev.
(Delta Air Lines), 6.8s, 2024 1,500 1,530,720
B- Hillsborough County, FL, Aviation Authority Rev.
(US Air), 8.6s, 2022 2,400 2,569,152
-----------
$ 7,545,952
- ---------- ------------------------------------------------- -------------- -----------
Sales and Excise Tax Revenue - 3.6%
AAA Dade County, FL, 0s, 2024 $ 2,000 $ 369,580
AAA Dade County, FL, 0s, 2026 3,660 600,533
AAA Jacksonville, FL, Excise Tax Rev., FGIC, 0s, 2010 1,000 434,130
AAA Jacksonville, FL, Excise Tax Rev., FGIC, 0s, 2011 1,000 403,710
A Puerto Rico Highway & Transportation Authority
Rev., 6.625s, 2018 1,000 1,101,570
AAA Sunrise, FL, Public Facilities Rev., MBIA, 0s,
2020 3,100 729,926
-----------
$ 3,639,449
- ---------- ------------------------------------------------- -------------- -----------
Industrial Revenue (Corporate Guarantee) - 5.8%
BBB Escambia County, FL, Pollution Control Rev.
(Champion International Corp.), 6.95s, 2007 $ 2,500 $ 2,628,750
BBB Escambia County, FL, Pollution Control Rev.
(Champion International Corp.), 6.8s, 2012 1,000 1,043,820
BBB Escambia County, FL, Pollution Control Rev.
(Champion International Corp.), 6.9s, 2022 1,000 1,041,650
AAA Hillsborough County, FL, FGIC, 0s, 2016 1,485 451,737
AAA Hillsborough County, FL, FGIC, 0s, 2017 2,485 712,921
-----------
$ 5,878,878
- ---------- ------------------------------------------------- -------------- -----------
Other - 0.9%
AAA Hillsborough County, FL, MBIA, 5s, 2015 $ 1,000 $ 909,700
- ---------- ------------------------------------------------- -------------- -----------
Total Municipal Bonds (Identified Cost, $94,420,132) $ 98,539,929
- ----------------------------------------------------------------------------------- -------------
Floating Rate Demand Notes - 1.9%
Hillsborough County, FL, Pollution Control Rev.
(Tampa Electric Co.), due 5/15/18 $ 800 $ 800,000
Jacksonville, FL, Pollution Control Rev. (Florida
Power & Light Co.), due 5/01/29 1,100 1,100,000
- ---------- ------------------------------------------------- -------------- -----------
Total Floating Rate Demand Notes, at Identified Cost $ 1,900,000
- ----------------------------------------------------------------------------------- -------------
Total Investments (Identified Cost, $96,320,132) $100,439,929
Other Assets, Less Liabilities - 1.5% 1,560,968
- ----------------------------------------------------------------------------------- -------------
Net Assets - 100.0% $102,000,897
- ----------------------------------------------------------------------------------- -------------
</TABLE>
###Security segregated as collateral for an open futures contract.
++++Inverse floating rate security.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS LOUISIANA MUNICIPAL BOND FUND
Municipal Bonds - 99.2%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
<S> <C> <C> <C>
General Obligation - 13.3%
A Commonwealth of Puerto Rico, 5.4s, 2025 $1,000 $ 917,680
AAA New Orleans, LA, AMBAC, 0s, 2008 1,800 911,268
AAA New Orleans, LA, AMBAC, 0s, 2016 1,000 295,580
AAA Orleans Parish, LA, School Board, MBIA, 6s, 2009 555 583,039
AAA State of Louisiana, AMBAC, 6.1s, 2011 250 261,045
AAA State of Louisiana, AMBAC, 6.5s, 2011 250 267,873
-----------
$3,236,485
- ---------- ------------------------------------------------- -------------- -----------
State and Local Appropriation - 6.7%
AAA Louisiana Public Facilities Authority Lease Rev.
(Orleans Parish School Board), FSA, 5.65s, 2011 $1,000 $ 978,690
BBB Natchitoches Parish, LA, 7.2s, 2015 650 660,485
-----------
$1,639,175
- ---------- ------------------------------------------------- -------------- -----------
Refunded and Special Obligation - 1.2%
AAA Puerto Rico Public Buildings Authority, 6.875s,
2002 $ 250 $ 284,095
- ---------- ------------------------------------------------- -------------- -----------
Single Family Housing Revenue - 8.0%
NR East Baton Rouge, LA, FNMA, GNMA, 6.8s, 2028 $ 460 $ 469,577
NR Louisiana Housing Finance Agency, Single Family
Mortgage Rev., FNMA, GNMA, 7.8s, 2026 1,000 1,090,230
AAA Puerto Rico Housing Bank & Finance Agency, FNMA,
GNMA, 6.25s, 2029 400 401,840
-----------
$1,961,647
- ---------- ------------------------------------------------- -------------- -----------
Insured Health Care Revenue - 6.8%
AAA Jefferson Parish, LA, Hospital Service District
No. 2, Hospital Rev., MBIA, 5.75s, 2016 $ 250 $ 245,552
AAA St. Tammany Parish, LA, Hospital Rev., Connie
Lee, 6.125s, 2009 500 509,650
AAA St. Tammany Parish, LA, Hospital Rev., Connie
Lee, 6.25s, 2014 500 512,130
AAA Tangipahoa Parish, LA, Hospital Service District
No. 1, Hospital Rev., AMBAC, 6.125s, 2014 400 405,800
-----------
$1,673,132
- ---------- ------------------------------------------------- -------------- -----------
Health Care Revenue - 6.1%
A- St. Tammany Parish, LA, Hospital Service District
#1, Hospital Rev., 6.5s, 2017 $1,000 $ 983,780
NR Westside Habilitation Center, Cheneyville, LA,
8.375s, 2013 500 498,910
-----------
$1,482,690
- ---------- ------------------------------------------------- -------------- -----------
Electric and Gas Utility Revenue - 11.0%
AAA Alexandria, LA, Utilities Rev., FGIC, 5.25s,
2012### $1,065 $1,012,517
BB+ Calcasieu Parish, Inc., LA, Pollution Control
Rev. (Gulf States Utilities Co.), 6.75s, 2012### 800 804,472
BBB St. Charles Parish, LA, Environmental Improvement
Rev. (Louisiana Power & Light Co.), 6.875s, 2024 250 256,650
AAA St. Charles Parish, LA, Environmental Improvement
Rev. (Louisiana Power & Light Co.), AMBAC,
6.875s, 2024 330 347,787
BB+ West Feliciana Parish, LA, Pollution Control
Rev., 7.7s, 2014 250 268,707
-----------
$2,690,133
- ---------- ------------------------------------------------- -------------- -----------
16
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
Water and Sewer Utility Revenue - 7.3%
A Commonwealth of Puerto Rico, Aqueduct & Sewer
Authority Rev., 6.25s, 2012 $ 500 $ 527,655
AA- Louisiana Public Facilities Authority Rev. (Baton
Rouge Water Works Co.), 6.4s, 2010 500 520,550
AAA Terrebonne Parish, LA, Waterworks Rev., FGIC,
5.95s, 2012 730 740,643
-----------
$ 1,788,848
- ---------- ------------------------------------------------- -------------- -----------
Turnpike Revenue - 4.3%
AAA Greater New Orleans, LA, MBIA, 6s, 2016 $ 500 $ 507,040
A- Mississippi River Bridge Authority, 6.75s, 2012 500 536,635
-----------
$ 1,043,675
- ---------- ------------------------------------------------- -------------- -----------
Sales and Excise Tax Revenue - 10.0%
A Commonwealth of Puerto Rico Highway, 5.5s, 2026 $ 500 $ 462,645
AAA East Baton Rouge Parish, LA, FGIC, 5.4s, 2018 1,000 943,600
AAA East Baton Rouge Parish, LA, FGIC, 5.9s, 2020 500 499,815
AAA Louisiana Stadium & Exposition District, FGIC,
5.9s, 2012 240 240,955
AAA Regional Transit Authority, LA, Sales Tax Rev.,
FGIC, 0s, 2012 800 294,872
-----------
$ 2,441,887
- ---------- ------------------------------------------------- -------------- -----------
Industrial Revenue (Corporate Guarantee) - 12.0%
A- DeSoto Parish, LA, Environmental Improvement Rev.
(International Paper Co.), 7.7s, 2018 $ 750 $ 842,160
A- DeSoto Parish, LA, Environmental Improvement Rev.
(International Paper Co.), 6.55s, 2019 250 252,902
A Natchitoches Parish, LA, Solid Waste Disposal
Rev. (Williamette Industries), 5.875s, 2023 830 785,031
NR Port New Orleans, LA, Industrial Development Rev.
(Avondale Industries), 8.5s, 2014 500 552,595
A+ Vidalia, LA (Alcoa), 5.875s, 2013 500 496,830
-----------
$ 2,929,518
- ---------- ------------------------------------------------- -------------- -----------
Universities - 8.4%
AAA Louisiana Public Facilities Authority, FGIC,
5.875s, 2012 (Corporate Swap Rate)(section) $1,060 $ 1,061,516
AAA Louisiana State University & Agriculture, FGIC,
5.75s, 2014 1,000 988,620
-----------
$ 2,050,136
- ---------- ------------------------------------------------- -------------- -----------
Other - 4.1%
AAA State of Louisiana, Public Finance Authority (Our
Lady of the Lake), FSA, 5.9s, 2021 $1,000 $ 990,970
- ---------- ------------------------------------------------- -------------- -----------
Total Municipal Bonds (Identified Cost, $23,509,388) $24,212,391
- ----------------------------------------------------------------------------------- -------------
Floating Rate Demand Notes - 4.9%
East Baton Rouge Parish, LA, Pollution Control
Rev. (Exxon), due 11/01/19 $1,000 $ 1,000,000
St. Charles Parish, LA, Pollution Control Rev.
(Shell Oil Co.), due 11/01/21 200 200,000
- ---------- ------------------------------------------------- -------------- -----------
Total Floating Rate Demand Notes, at Identified Cost $ 1,200,000
- ----------------------------------------------------------------------------------- -------------
Value
---------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $24,709,388) $25,412,391
Other Assets, Less Liabilities - (4.1)% (993,905)
- ----------------------------------------------------------------------------------- -------------
Net Assets - 100.0% $24,418,486
- ----------------------------------------------------------------------------------- -------------
</TABLE>
###Security segregated as collateral for an open futures contract.
(section)Indexed security.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS MISSISSIPPI MUNICIPAL BOND FUND
Municipal Bonds - 96.7%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
<S> <C> <C> <C>
General Obligation - 10.0%
AAA DeSoto County, MS, School District, MBIA, 4.75s,
2014 $1,440 $ 1,260,922
NR Gulfport, MS, 5s, 2011 1,085 1,021,191
AAA Hinds County, MS, MBIA, 6.25s, 2010 1,660 1,789,131
AAA Hinds County, MS, MBIA, 6.25s, 2011 1,285 1,376,184
BBB+ Jackson County, MS, Road Improvement, 6.5s, 2008 425 451,035
AA- State of Mississippi, 5.1s, 2012 750 712,530
AA- State of Mississippi, 6.75s, 2014 1,800 1,949,994
-----------
$ 8,560,987
- ---------- ------------------------------------------------- -------------- -----------
State and Local Appropriation - 16.5%
NR Hinds Community College, MS, District M
Conference and Training Center, 6.5s, 2014 $1,320 $ 1,335,352
NR Hinds County, MS, School District, Certificates
of Participation (Utica Project), 7.25s, 2012 1,000 1,098,600
AAA Medical Center Educational Building Corp., MS
(University of Mississippi Medical Center),
MBIA, 5.65s, 2009 2,000 1,993,540
AAA Medical Center Educational Building Corp., MS
(University of Mississippi Medical Center),
MBIA, 5.9s, 2023 3,750 3,694,612
A Puerto Rico Public Buildings Authority, 5.91s,
2016 (Municipal Swap)(section) 1,000 929,420
AAA State of Mississippi, Certificates of
Participation (Marshall County Correctional
Facility), MBIA, 5.625s, 2015 3,310 3,158,071
NR State of Mississippi, Certificates of
Participation (Rehabilitation Services), 6.1s,
2014 2,000 2,008,280
-----------
$14,217,875
- ---------- ------------------------------------------------- -------------- -----------
Refunded and Special Obligation - 5.9%
AAA Commonwealth of Puerto Rico, Public Improvement,
6.8s, 2002 $1,500 $ 1,698,510
AAA Puerto Rico Highway & Transportation Authority,
Highway Rev., 6.625s, 2002 100 112,292
AA- State of Mississippi, 6s, 2002### 3,000 3,221,670
-----------
$ 5,032,472
- ---------- ------------------------------------------------- -------------- -----------
Single Family Housing Revenue - 4.7%
NR Mississippi Home Corp., GNMA, 6.5s, 2024 $2,650 $ 2,677,163
NR Mississippi Home Corp., GNMA, 6.625s, 2027 1,350 1,378,890
-----------
$ 4,056,053
- ---------- ------------------------------------------------- -------------- -----------
17
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
Multi-Family Housing Revenue - 4.6%
AAA Gulfport, MS, Community Development (Oakview
Apartments), FNMA, 7.4s, 2025 $1,755 $ 1,861,669
AAA Jackson, MS, Elderly Housing Corp., Mortgage Rev.
(Delhaven Manor), "C", FHA, 7.375s, 2024 1,985 2,105,231
-----------
$ 3,966,900
- ---------- ------------------------------------------------- -------------- -----------
Insured Health Care Revenue - 17.4%
AAA Alcorn County, Corinth, MS (Magnolia Regional
Health Center), AMBAC, 5.75s, 2013 $2,000 $ 1,948,000
AAA Gulfport, MS, Hospital Facilities (Memorial
Hospital), MBIA, 6.125s, 2015 2,500 2,564,525
AAA Gulfport, MS, Hospital Facilities (Memorial
Hospital), MBIA, 6.2s, 2018 1,000 1,027,650
AAA Hinds County, MS, Rev. (Methodist Hospital &
Rehabilitation Center), AMBAC, 5.6s, 2012 3,055 3,028,635
AAA Mississippi Hospital Equipment & Facilities
Authority Rev. (Baptist), MBIA, 6.5s, 2010 1,190 1,276,977
AAA Mississippi Hospital Equipment & Facilities
Authority Rev. (Baptist), MBIA, 6s, 2013 1,000 1,017,320
AAA Mississippi Hospital Equipment & Facilities
Authority Rev. (North Mississippi Health
Services), AMBAC, 5.25s, 2013 1,615 1,512,270
AAA Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation), Connie
Lee, 6.7s, 2018 2,500 2,611,575
-----------
$14,986,952
- ---------- ------------------------------------------------- -------------- -----------
Health Care Revenue - 3.9%
NR Adams County, MS, Hospital Rev. (Jefferson Davis
Memorial Hospital), 8s, 2016 $1,000 $ 1,064,650
NR Mississippi Hospital Equipment & Facilities
Authority Rev. (Magnolia Hospital), 7.375s, 2021 1,500 1,413,495
NR Mississippi Hospital Equipment & Facilities
Authority Rev. (Rankin Medical Center), 5.7s,
2023 1,000 910,510
-----------
$ 3,388,655
- ---------- ------------------------------------------------- -------------- -----------
Electric and Gas Utility Revenue - 6.2%
BBB- Claiborne County, MS, Pollution Control Rev.
(System Energy Resources, Inc.), 7.3s, 2025 $1,000 $ 1,045,220
BBB- Claiborne County, MS, Pollution Control Rev.
(System Energy Resources, Inc.), 6.2s, 2026 2,000 1,931,480
NR Warren County, MS, Pollution Control Rev.
(Mississippi Power & Light), 7s, 2022 1,000 1,037,550
NR Washington County, MS, Pollution Control Rev.
(Mississippi Power & Light), 7s, 2022 1,230 1,274,354
-----------
$ 5,288,604
- ---------- ------------------------------------------------- -------------- -----------
Water and Sewer Utility Revenue - 12.4%
AAA Clarksdale, MS, Sewer & Wastewater Treatment
System Rev., MBIA, 6.1s, 2012 $1,885 $ 1,925,207
Water and Sewer Utility Revenue - continued
AAA Columbus, MS, Water & Sewer Rev., MBIA, 6.5s,
2013 $1,000 $ 1,069,670
AAA Gautier, MS, Utility District, Utility Systems
Rev., FGIC, 6.375s, 2019 1,300 1,347,684
AAA Harrison County, MS, Wastewater Management
District, Wastewater Treatment, FGIC, 6.5s, 2006 1,375 1,479,858
AAA Harrison County, MS, Wastewater Management
District, Wastewater Treatment, FGIC, 5.875s,
2025 1,500 1,488,690
AAA Meridian, MS, Water & Sewer Rev., AMBAC, 6s, 2010 1,500 1,539,555
AAA Meridian, MS, Water & Sewer Rev., AMBAC, 6.2s,
2012 650 674,070
AAA Meridian, MS, Water & Sewer Rev., AMBAC, 6.2s,
2013 400 414,812
AAA Meridian, MS, Water & Sewer Rev., AMBAC, 4.625s,
2014 390 337,658
AAA Meridian, MS, Water & Sewer Rev., AMBAC, 4.625s,
2015 410 353,383
-----------
$10,630,587
- ---------- ------------------------------------------------- -------------- -----------
Sales and Excise Tax Revenue - 4.6%
A Commonwealth of Puerto Rico Highway, 5.5s, 2026 $2,000 $ 1,850,580
A Puerto Rico Highway & Transportation Authority
Rev., 6.625s, 2018 1,900 2,092,983
-----------
$ 3,943,563
- ---------- ------------------------------------------------- -------------- -----------
Industrial Revenue (Corporate Guarantee) - 9.3%
A- Jackson County, MS, Solid Waste Disposal
Facilities Rev. (International Paper), 5.55s,
2017 $1,300 $ 1,228,097
A Lowndes County, MS, Solid Waste Disposal &
Pollution Control Rev. (Weyerhaeuser), 6.8s,
2022 4,250 4,666,203
BBB Mississippi Business Finance Corp. (Jackson
Municipal Airport/Airborne Freight), 7.15s, 2007 985 1,054,983
A- Warren County, MS, Pollution Control Rev.
(International Paper), 6.6s, 2019 1,000 1,013,740
-----------
$ 7,963,023
- ---------- ------------------------------------------------- -------------- -----------
Other - 1.2%
AAA Jackson, MS, Redevelopment Authority (Jackson
Street Area), MBIA, 5.7s, 2013 $1,035 $ 1,019,309
- ---------- ------------------------------------------------- -------------- -----------
Total Municipal Bonds (Identified Cost, $80,566,958) $83,054,980
- ----------------------------------------------------------------------------------- -------------
Floating Rate Demand Notes - 1.5%
- ----------------------------------------------------------------------------------- -------------
Jackson County, MS, Pollution Control Rev.
(Chevron USA, Inc.), due 12/01/16 $ 100 $ 100,000
Jackson County, MS, Pollution Control Rev.
(Chevron USA, Inc.), due 6/01/23 200 200,000
Perry County, MS, Pollution Control Rev. (Leaf
River Forest), due 3/01/02 1,000 1,000,000
- ---------- ------------------------------------------------- -------------- -----------
Total Floating Rate Demand Notes, at Identified Cost $ 1,300,000
- ----------------------------------------------------------------------------------- -------------
Total Investments (Identified Cost, $81,866,958) $84,354,980
Other Assets, Less Liabilities - 1.8% 1,555,385
- ----------------------------------------------------------------------------------- -------------
Net Assets - 100.0% $85,910,365
- ----------------------------------------------------------------------------------- -------------
</TABLE>
###Security segregated as collateral for an open futures contract.
(section)Indexed security.
See notes to financial statements
18
<PAGE>
Portfolio of Investments - March 31, 1996
MFS TEXAS MUNICIPAL BOND FUND
Municipal Bonds - 103.8%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ----------------------------------------------------------- ---------------- -------------
<S> <C> <C> <C>
General Obligation - 29.0%
AAA Brownsville, TX, Public Improvement, AMBAC, 0s, 2011 $ 250 $ 107,628
NR Burleson, TX, Independent School District, PSF, 0s, 2021 2,405 539,033
AAA Garland, TX, Independent School District, PSF, 5.5s, 2015 1,245 1,202,060
NR Robstown, TX, Independent School District, PSF, 0s, 2016 1,480 452,806
AA State of Texas, 6.8s, 2010 1,000 1,038,140
AAA Valwood, TX, Public Improvement Authority, MBIA, 0s, 2005 500 302,475
NR Wylie, TX, Independent School District, PSF, 6.9s, 2013 1,100 1,229,877
-----------
$ 4,872,019
- ---------- ----------------------------------------------------------- -------------- -----------
State and Local Appropriation - 9.8%
AAA State of Texas, Public Finance Authority, MBIA, 6.25s, 2009 $1,000 $ 1,085,640
AAA State of Texas, Public Finance Authority, Building Rev.,
MBIA, 0s, 2013 1,500 558,270
-----------
$ 1,643,910
- ---------- ----------------------------------------------------------- -------------- -----------
Refunded and Special Obligation - 6.9%
AA Arlington, TX, Permanent Improvement, 6.7s, 2002### $ 100 $ 110,309
AAA Coastal Water Authority, TX, Water Conveyance Systems Rev.,
AMBAC, 6.25s, 2017 250 258,730
NR Mesquite, TX, Independent School District, PSF, 6.7s, 2001 400 438,520
AAA Puerto Rico Public Buildings Authority, 6.875s, 2002 250 284,095
AAA Texas National Research Laboratory Commission Finance
Corp., 7.1s, 2001 60 68,162
-----------
$ 1,159,816
- ---------- ----------------------------------------------------------- -------------- -----------
Single Family Housing Revenue - 2.3%
NR Midland, TX, Housing Finance Corp., 8.15s, 2011 $ 294 $ 302,964
AA State of Texas, 7s, 2025 85 89,481
-----------
$ 392,445
- ---------- ----------------------------------------------------------- -------------- -----------
Insured Health Care Revenue - 4.9%
AAA Bexar County, TX, Health (Baptist), MBIA, 6.75s, 2019 $ 750 $ 817,538
- ---------- ----------------------------------------------------------- -------------- -----------
Health Care Revenue - 2.7%
AA Harris County, TX, Health Facilities Development Corp.
(Texas Children's Hospital), 5.5s, 2019 $ 500 $ 460,380
- ---------- ----------------------------------------------------------- -------------- -----------
Electric and Gas Utility Revenue - 5.2%
AAA Brazos River Authority, TX, Rev. (Houston Power & Light),
AMBAC, 6.375s, 2012 $ 250 $ 260,410
AAA Texas Municipal Power Agency Rev., AMBAC, 0s, 2011 500 204,985
AAA Texas Municipal Power Agency Rev., MBIA, 0s, 2016 1,350 403,015
-----------
$ 868,410
- ---------- ----------------------------------------------------------- -------------- -----------
Water and Sewer Utility Revenue - 18.0%
AAA Bexar, TX, Metropolitan Water District, MBIA, 5.875s, 2022 $ 500 $ 497,690
AAA Colorado River, TX, Municipal Water District, Water Rev.,
AMBAC, 6.625s, 2021 250 270,783
Water and Sewer Utility Revenue - continued
A Commonwealth of Puerto Rico, Aqueduct & Sewer Authority
Rev., 6.25s, 2012 $ 500 $ 527,655
AAA Houston TX, Water & Sewage, AMBAC., 0s, 2010 2,000 868,600
AAA Texas Water Resources Finance Authority Rev., AMBAC, 7.5s,
2013 800 859,144
-----------
$ 3,023,872
- ---------- ----------------------------------------------------------- -------------- -----------
Sales and Excise Tax Revenue - 2.8%
A Commonwealth of Puerto Rico Highway, 5.5s, 2026 $ 500 $ 462,645
- ---------- ----------------------------------------------------------- -------------- -----------
Airport and Port Revenue - 9.1%
BB+ Dallas-Fort Worth, TX, International Airport (American
Airlines), 7.5s, 2025 $1,200 $ 1,276,896
BB Dallas-Fort Worth, TX, International Airport Facilities
Improvement Corp. Rev. (Delta Airlines), 7.125s, 2026 250 257,083
-----------
$ 1,533,979
- ---------- ----------------------------------------------------------- -------------- -----------
Industrial Revenue (Corporate Guarantee) - 13.1%
BBB Angelina & Neches River Authority, TX, Solid Waste Disposal
Rev. (Champion International), 7.375s, 2015### $ 100 $ 106,892
BBB Gulf Coast Waste Disposal Authority, TX (Champion
International), 7.45s, 2026 100 106,900
BBB Gulf Coast Waste Disposal Authority, TX, Solid Waste
Disposal Rev. (Champion International), 7.25s, 2017 100 105,913
A+ Red River, TX, Pollution Control (Hoescht Celanese Corp.),
6.875s, 2017 750 792,726
A Texas City, TX, Industrial Development Corp. (ARCO Pipe
Line), 7.375s, 2020 500 593,660
A Trinity River Authority, TX (Texas Instruments, Inc.),
6.2s, 2020 500 498,715
-----------
$ 2,204,806
- ---------- ----------------------------------------------------------- -------------- -----------
Total Municipal Bonds (Identified Cost, $16,410,627) $17,439,820
-------------------------------------------------------------------------------------------- -------------
Floating Rate Demand Note - 0.6%
- --------------------------------------------------------------------------------------------- -------------
Lubbock, TX, Health Facilities (St. Joseph Health System),
due 7/01/13, at Identified Cost $ 100 $ 100,000
- ---------- ----------------------------------------------------------- -------------- -----------
Total Investments (Identified Cost, $16,510,627) $17,539,820
Other Assets, Less Liabilities - (4.4)% (733,822)
- --------------------------------------------------------------------------------------------- -------------
Net Assets - 100.0% $16,805,998
- --------------------------------------------------------------------------------------------- -------------
</TABLE>
###Security segregated as collateral for an open futures contract.
See notes to financial statements
Portfolio of Investments - March 31, 1996
MFS WASHINGTON MUNICIPAL BOND FUND
Municipal Bonds - 97.4%
<TABLE>
<CAPTION>
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ----------------------------------------------------------- ---------------- -------------
<S> <C> <C> <C>
General Obligation - 34.3%
NR Cowlitz County, WA, School District No. 4, 6.7s, 2011 $ 150 $ 156,981
AA+ King County, WA, 6.125s, 2012 500 520,160
AA- King County, WA, School District No. 415, 5.55s, 2011 500 503,930
A+ Kitsap County, WA, 6.75s, 2011 410 442,054
AAA Lewis County, WA, AMBAC, 6.25s, 2012 250 257,162
19
<PAGE>
Portfolio of Investments -- continued
Municipal Bonds -- continued
S&P Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- ---------- ------------------------------------------------- ---------------- -------------
General Obligation - continued
AA+ Pike Place Market Preservation & Development Authority, WA,
Special Obligation, 6.5s, 2017 $ 185 $ 191,246
AA+ Seattle, WA, 6.5s, 2012 170 177,869
A+ Seattle, WA, 5.65s, 2020 500 485,950
AAA Thurston County, WA, FGIC, 0s, 2010 1,000 439,930
AA State of Washington, 0s, 2008 1,500 765,630
AA State of Washington, 6.4s, 2017 1,000 1,090,620
AA State of Washington, 5.5s, 2018 1,150 1,134,027
-----------
$ 6,165,559
- ---------- ----------------------------------------------------------- -------------- -----------
State and Local Appropriation - 0.6%
A State of Washington, Certificates of Participation (State
Office Building), 6s, 2012 $ 100 $ 101,115
- ---------- ----------------------------------------------------------- -------------- -----------
Refunded and Special Obligation - 5.2%
A+ Douglas County, WA, Public Utility District No. 001, Wells
Hydroelectric, 7.7s, 2000 $ 185 $ 209,881
AAA Puerto Rico Highway and Special Obligation & Transport
Authority, Highway Rev., 6.5s, 2002 200 223,240
AAA Puerto Rico Public Buildings Authority, 6.875s, 2002 250 284,095
A+ Snohomish County, WA, Public Utility District No. 1,
Electric Rev., 6.8s, 2020 100 114,080
AA State of Washington, 6.7s, 2001 100 109,302
-----------
$ 940,598
- ---------- ----------------------------------------------------------- -------------- -----------
Multi-Family Housing Revenue - 2.0%
NR Bellingham, WA, Housing Authority Rev. (Pacific Rim
Project), 6.5s, 2022 $ 250 $ 252,005
NR King County, WA, Housing Authority Rev. (Sprintwood Manor),
6.5s, 2012 100 102,406
-----------
$ 354,411
- ---------- ----------------------------------------------------------- -------------- -----------
Insured Health Care Revenue - 7.9%
AAA Washington Health Care Facilities Authority Rev. (Allenmore
Hospital), FGIC, 6.5s, 2013 $ 150 $ 154,586
AAA Washington Health Care Facilities Authority Rev.
(Franciscan Health/St. Claire), MBIA, 6.7s, 2021 250 264,477
AAA Washington Health Care Facilities Authority Rev. (Multicare
Medical/ Tacoma), FGIC, 5.75s, 2022 500 484,810
AAA Washington Health Care Facilities Authority Rev. (Virginia
Mason Group/ Seattle), MBIA, 6.3s, 2017 500 515,420
-----------
$ 1,419,293
- ---------- ----------------------------------------------------------- -------------- -----------
Electric and Gas Utility Revenue - 23.0%
A+ Douglas County, WA, Public Utility District No. 001, Wells
Hydroelectric, 7.7s, 2008 $ 315 $ 357,648
A+ Grant County, WA, Public Utility District No. 2 (Wanapum
Hydroelectric), 6.375s, 2023### 1,000 1,027,190
Electric and Gas Utility Revenue - continued
A+ Grant County, WA, Public Utility District No. 2 (Wanapum
Hydroelectric), 6.75s, 2023 $ 255 $ 265,396
AAA Seattle, WA, Municipal Light & Power Rev., MBIA, 5.7s, 2020 400 389,192
AA Washington Public Power Supply System, Nuclear Project No.
1 Rev., 7s, 2008 500 563,595
AA Washington Public Power Supply System, Nuclear Project No.
2 Rev., 6s, 2012 500 494,715
AA Washington Public Power Supply System, Nuclear Project No.
3 Rev., 0s, 2015 1,500 441,870
AA Washington Public Power Supply System, Nuclear Project No.
3 Rev., 6.5s, 2018 100 103,002
AAA Washington Public Power Supply System, Nuclear Project No.
3 Rev., MBIA, 7.125s, 2016 425 489,324
-----------
$ 4,131,932
- ---------- ----------------------------------------------------------- -------------- -----------
Water and Sewer Utility Revenue - 14.1%
AAA Richland, WA, Water & Sewer System Rev., MBIA, 6.25s, 2012 $ 500 $ 511,135
AA- Seattle, WA, Municipality of Metropolitan Seattle, Sewer
Rev., 6.2s, 2032 500 510,405
AA Seattle, WA, Water Systems Rev., 5.5s, 2018 750 702,420
AA Seattle, WA, Water Systems Rev., 5.25s, 2023 675 607,000
A- Soos Creek, WA, Water & Sewer District, Water & Sewer Rev.,
0s, 2010 200 86,858
A+ Vancouver, WA, Water & Sewer Rev., 6.5s, 2012 100 104,746
-----------
$ 2,522,564
- ---------- ----------------------------------------------------------- -------------- -----------
Industrial Revenue (Corporate Guarantee) - 5.4%
A Port of Seattle, WA, Industrial Development Corp.
(Weyerhaeuser Co.), 5.6s, 2014 $1,000 $ 967,150
- ---------- ----------------------------------------------------------- -------------- -----------
Universities - 4.9%
AAA University of Washington, Housing & Dining, MBIA, 5, 2021 $1,000 $ 881,630
- ---------- ----------------------------------------------------------- -------------- -----------
Total Municipal Bonds (Identified Cost, $16,974,115) $17,484,252
-------------------------------------------------------------------------------------------- -------------
Floating Rate Demand Note - 1.1%
- --------------------------------------------------------------------------------------------- -------------
Uinta County, WY, Pollution Control Rev. (Chevron USA,
Inc.), due 8/15/20, at Identified Cost $ 200 $ 200,000
- ---------- ----------------------------------------------------------- -------------- -----------
Total Investments (Identified Cost, $17,174,115) $17,684,252
Other Assets, Less Liabilities - 1.5% 276,669
- --------------------------------------------------------------------------------------------- -------------
Net Assets - 100.0% $17,960,921
-------------------------------------------------------------------------------------------- -------------
</TABLE>
###Security segregated as collateral for an open futures contract.
See notes to financial statements
20
<PAGE>
Financial Statements
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
March 31, 1996 Fund Fund Fund Fund Fund Fund
--------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments -
Identified cost $282,319,789 $ 96,320,132 $24,709,388 $81,866,958 $16,510,627 $17,174,115
Unrealized appreciation 12,363,448 4,119,797 703,003 2,488,022 1,029,193 510,137
--------- --------- --------- --------- --------- -----------
Total, at value $294,683,237 $100,439,929 $25,412,391 $84,354,980 $17,539,820 $17,684,252
Cash 145,817 66,798 41,612 122,599 35,785 37,200
Receivable for Fund shares sold 3,793,477 260,405 56,899 29,814 8,283 23,429
Receivable for investments sold 5,000 977,310 1,005,083 3,909,633 7,019 --
Interest receivable 4,420,047 1,840,071 422,872 1,664,808 242,974 271,306
Deferred organization expenses -- 1,928 5,223 4,776 1,562 1,542
Other assets 3,958 12,290 245 1,123 267 1,991
--------- --------- --------- --------- --------- -----------
Total assets $303,051,536 $103,598,731 $26,944,325 $90,087,733 $17,835,710 $18,019,720
--------- --------- --------- --------- --------- -----------
Liabilities:
Distributions payable $ 737,484 $ 266,264 $ 63,854 $ 203,408 $ 37,446 $ 34,074
Payable for Fund shares
reacquired 294,396 322,984 33,008 64,474 -- --
Payable for investments
purchased 2,911,275 927,080 2,400,192 3,811,404 968,303 --
Payable for daily variation
margin on open futures
contracts 112,500 11,250 21,906 67,500 21,375 22,500
Payable to affiliates -
Management fee 9,713 4,627 400 3,517 275 294
Shareholder servicing agent fee 3,840 1,344 -- 66 -- --
Distribution fee 10,509 4,175 1,543 3,279 1,078 680
Accrued expenses and other
liabilities 127,380 60,110 4,936 23,720 1,235 1,251
--------- --------- --------- --------- --------- -----------
Total liabilities $ 4,207,097 $ 1,597,834 $ 2,525,839 $ 4,177,368 $ 1,029,712 $ 58,799
--------- --------- --------- --------- --------- -----------
Net assets $298,844,439 $102,000,897 $24,418,486 $85,910,365 $16,805,998 $17,960,921
========= ========= ========= ========= ========= ===========
Net assets consist of:
Paid-in capital $297,771,186 $103,809,469 $25,030,643 $87,637,106 $17,159,102 $17,803,161
Unrealized appreciation on
investments 12,349,625 4,179,852 676,212 2,460,510 1,004,005 495,810
Accumulated undistributed net
realized loss on investments (10,879,050) (5,983,831) (1,302,554) (4,154,247) (1,399,201) (345,504)
Accumulated undistributed
(distributions in excess of)
net investment income (397,322) (4,593) 14,185 (33,004) 42,092 7,454
--------- --------- --------- --------- --------- -----------
Total $298,844,439 $102,000,897 $24,418,486 $85,910,365 $16,805,998 $17,960,921
========= ========= ========= ========= ========= ===========
Shares of beneficial interest
outstanding:
Class A 47,083,897 8,915,370 2,097,927 7,962,256 1,375,324 1,505,363
Class B 6,285,326 1,471,451 512,751 1,226,320 295,499 309,843
Class C 787,784 -- -- -- -- --
--------- --------- --------- --------- --------- -----------
Total shares of beneficial
interest outstanding 54,157,007 10,386,821 2,610,678 9,188,576 1,670,823 1,815,206
========= ========= ========= ========= ========= ===========
Net assets:
Class A $259,816,854 $ 87,552,627 $19,622,000 $74,435,499 $13,832,260 $14,896,064
Class B 34,674,687 14,448,270 4,796,486 11,474,866 2,973,738 3,064,857
Class C 4,352,898 -- -- -- -- --
--------- --------- --------- --------- --------- -----------
Total net assets $298,844,439 $102,000,897 $24,418,486 $85,910,365 $16,805,998 $17,960,921
========= ========= ========= ========= ========= ===========
Class A shares:
Net asset value and redemption
price per share (net assets /
shares of beneficial interest
outstanding) $5.52 $9.82 $9.35 $9.35 $10.06 $9.90
========= ========= ========= ========= ========= ===========
Offering price per share
(100/95.25 of net asset value
per share) $5.80 $10.31 $9.82 $9.82 $10.56 $10.39
========= ========= ========= ========= ========= ===========
Class B shares:
Net asset value and offering
price per share (net assets /
shares of beneficial interest
outstanding) $5.52 $9.82 $9.35 $9.36 $10.06 $9.89
========= ========= ========= ========= ========= ===========
Class C shares:
Net asset value, offering price,
and redemption price per share
(net assets / shares of
beneficial interest
outstanding) $5.53 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= ===========
</TABLE>
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
21
<PAGE>
Financial Statements - continued
Statements of Operations
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Year Ended March 31, 1996 Fund Fund Fund Fund Fund Fund
--------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income:
Interest income $18,670,294 $6,346,027 $1,326,461 $5,371,501 $1,131,165 $1,067,165
--------- --------- --------- --------- --------- -----------
Expenses -
Management fee $ 1,682,313 $ 575,039 $ 120,124 $ 497,667 $ 105,033 $ 100,775
Trustees' compensation 43,348 15,712 14,605 14,829 15,100 14,672
Shareholder servicing agent fee
(Class A) 404,221 135,934 27,182 118,488 24,402 23,042
Shareholder servicing agent fee
(Class B) 72,333 30,583 8,066 24,187 6,158 6,437
Shareholder servicing agent fee
(Class C) 5,924 -- -- -- -- --
Distribution and service fee
(Class B) 262,715 111,506 31,106 87,645 23,617 22,954
Distribution and service fee
(Class C) 39,494 -- -- -- -- --
Custodian fee 124,851 53,356 11,356 43,090 10,044 9,237
Printing 35,702 13,542 6,667 15,101 5,806 5,373
Postage 13,152 10,682 3,683 6,266 3,488 3,881
Auditing fees 32,680 31,580 28,805 28,905 27,955 27,955
Legal fees 4,829 4,991 2,282 1,921 3,413 2,614
Registration fees -- -- 18,398 -- 16,588 16,433
Amortization of organization
expenses -- 2,068 1,746 3,558 1,873 1,151
Miscellaneous 82,296 70,760 6,605 49,714 5,970 7,028
--------- --------- --------- --------- --------- -----------
Total expenses $ 2,803,858 $1,055,753 $ 280,625 $ 891,371 $ 249,447 $ 241,552
Fees paid indirectly (34,184) (12,260) (3,480) (1,309) (331) (3,347)
Reduction of expenses by
investment adviser and
distributor (457,078) (38,724) (202,172) (393,395) (187,202) (178,481)
--------- --------- --------- --------- --------- -----------
Net expenses $ 2,312,596 $1,004,769 $ 74,973 $ 496,667 $ 61,914 $ 59,724
--------- --------- --------- --------- --------- -----------
Net investment income $16,357,698 $5,341,258 $1,251,488 $4,874,834 $1,069,251 $1,007,441
--------- --------- --------- --------- --------- -----------
Realized and unrealized gain
(loss) on investments:
Realized gain (loss) (identified
cost basis) -
Investment transactions $ 4,036,092 $2,452,059 $ (86,073) $ 149,432 $ 321,299 $ 61,825
Futures contracts (379,339) (532,353) (197,360) (618,036) (154,502) 43,893
--------- --------- --------- --------- --------- -----------
Net realized gain (loss) on
investments $ 3,656,753 $1,919,706 $ (283,433) $ (468,604) $ 166,797 $ 105,718
--------- --------- --------- --------- --------- -----------
Change in unrealized
appreciation (depreciation) -
Investments $ 2,732,066 $ 368,754 $ 435,166 $2,383,651 $ 75,588 $ 477,478
Futures contracts (13,823) 163,512 14,591 96,635 5,849 (14,327)
--------- --------- --------- --------- --------- -----------
Net unrealized gain on
investments $ 2,718,243 $ 532,266 $ 449,757 $2,480,286 $ 81,437 $ 463,151
--------- --------- --------- --------- --------- -----------
Net realized and unrealized
gain on investments $ 6,374,996 $2,451,972 $ 166,324 $2,011,682 $ 248,234 $ 568,869
--------- --------- --------- --------- --------- -----------
Increase in net assets from
operations $22,732,694 $7,793,230 $1,417,812 $6,886,516 $1,317,485 $1,576,310
========= ========= ========= ========= ========= ===========
</TABLE>
See notes to financial statements
22
<PAGE>
Financial Statements -- continued
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Year Ended March 31, 1996 Fund Fund Fund Fund Fund Fund
--------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 16,357,698 $ 5,341,258 $ 1,251,488 $ 4,874,834 $ 1,069,251 $ 1,007,441
Net realized gain (loss) on
investments 3,656,753 1,919,706 (283,433) (468,604) 166,797 105,718
Net unrealized gain on
investments 2,718,243 532,266 449,757 2,480,286 81,437 463,151
--------- --------- --------- --------- --------- -----------
Increase in net assets from
operations $ 22,732,694 $ 7,793,230 $ 1,417,812 $ 6,886,516 $ 1,317,485 $ 1,576,310
--------- --------- --------- --------- --------- -----------
Distributions declared to
shareholders -
From net investment income
(Class A) $ (14,676,735) $ (4,746,329) $(1,078,113) $ (4,360,203) $ (932,830) $ (865,865)
From net investment income
(Class B) (1,505,089) (605,261) (186,912) (514,631) (136,331) (141,808)
From net investment income
(Class C) (175,874) -- -- -- -- --
In excess of net investment
income (Class A) (237,111) (4,074) -- (11,291) -- --
In excess of net investment
income (Class B) (24,316) (519) -- (1,333) -- --
In excess of net investment
income (Class C) (2,841) -- -- -- -- --
--------- --------- --------- --------- --------- -----------
Total distributions declared to
shareholders $ (16,621,966) $ (5,356,183) $(1,265,025) $ (4,887,458) $(1,069,161) $(1,007,673)
--------- --------- --------- --------- --------- -----------
Fund share (principal)
transactions -
Net proceeds from sale of shares $ 95,667,192 $ 43,564,467 $ 7,355,841 $ 10,936,455 $ 2,848,106 $ 1,540,290
Net asset value of shares issued
to shareholders in reinvestment
of distributions 7,228,615 1,872,446 591,791 2,349,051 579,547 586,545
Cost of shares reacquired (115,238,042) (48,433,974) (3,254,234) (17,836,086) (7,460,884) (2,805,790)
--------- --------- --------- --------- --------- -----------
Increase (decrease) in net
assets from Fund share
transactions $ (12,342,235) $ (2,997,061) $ 4,693,398 $ (4,550,580) $(4,033,231) $ (678,955)
--------- --------- --------- --------- --------- -----------
Total increase (decrease) in
net assets $ (6,231,507) $ (560,014) $ 4,846,185 $ (2,551,522) $(3,784,907) $ (110,318)
Net assets:
At beginning of period 305,075,946 102,560,911 19,572,301 88,461,887 20,590,905 18,071,239
--------- --------- --------- --------- --------- -----------
At end of period $ 298,844,439 $102,000,897 $24,418,486 $ 85,910,365 $16,805,998 $17,960,921
========= ========= ========= ========= ========= ===========
Accumulated undistributed
(distributions in excess of)
net investment income included
in net assets at end of period $ (397,322) $ (4,593) $ 14,185 $ (33,004) $ 42,092 $ 7,454
========= ========= ========= ========= ========= ===========
</TABLE>
See notes to financial statements
23
<PAGE>
Financial Statements -- continued
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Year Ended March 31, 1995 Fund Fund Fund Fund Fund Fund
--------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 18,123,133 $ 6,140,573 $ 1,046,286 $ 5,130,366 $ 1,236,034 $ 1,107,314
Net realized loss on investments (13,230,556) (7,415,954) (959,194) (3,420,916) (1,461,157) (372,115)
Net unrealized gain on
investments 8,579,734 7,473,153 1,146,721 3,106,779 1,623,234 916,248
--------- --------- --------- --------- --------- -----------
Increase in net assets from $ $ $
operations $ 13,472,311 6,197,772 $ 1,233,813 4,816,229 1,398,111 $ 1,651,447
--------- --------- --------- --------- --------- -----------
Distributions declared to
shareholders -
From net investment income $ $ $ $
(Class A) (16,697,698) (5,649,584) $ (922,531) (4,753,634) (1,132,237) $ (977,079)
From net investment income
(Class B) (1,163,387) (462,308) (109,353) (398,325) (95,908) (122,848)
From net investment income
(Class C) (145,036) -- -- -- -- --
From net realized gain on
investments (Class A) -- (425,441) (38,988) (14,334) (62,387) --
From net realized gain on
investments (Class B) -- (36,769) (5,437) (1,273) (4,944) --
In excess of net investment
income (Class A) -- -- -- (30,589) -- --
In excess of net investment
income (Class B) -- -- -- (2,563) -- --
In excess of net realized gain
on investments (Class A) (252,101) (336,075) (43,294) (231,411) (58,780) (12,874)
In excess of net realized gain
on investments (Class B) (20,873) (29,046) (6,038) (20,544) (4,659) (1,694)
In excess of net realized gain
on investments (Class C) (2,849) -- -- -- -- --
--------- --------- --------- --------- --------- -----------
Total distributions declared to
shareholders $ (18,281,944) $ (6,939,223) $(1,125,641) $ (5,452,673) $(1,358,915) $(1,114,495)
--------- --------- --------- --------- --------- -----------
Fund share (principal)
transactions -
Net proceeds from sale of shares $ 77,112,097 $ 67,775,415 $ 6,579,848 $ 22,690,809 $ 5,266,676 $ 2,662,499
Net asset value of shares issued
to shareholders in reinvestment
of distributions 7,886,955 2,464,452 629,725 2,809,324 791,694 590,085
Cost of shares reacquired (111,856,077) (83,511,284) (2,755,026) (22,467,966) (4,204,171) (5,624,138)
--------- --------- --------- --------- --------- -----------
Increase (decrease) in net
assets from Fund share
transactions $ (26,857,025) $(13,271,417) $ 4,454,547 $ 3,032,167 $ 1,854,199 $(2,371,554)
--------- --------- --------- --------- --------- -----------
Total increase (decrease) in
net assets $ (31,666,658) $(14,012,868) $ 4,562,719 $ 2,395,723 $ 1,893,395 $(1,834,602)
Net assets:
At beginning of period 336,742,604 116,573,779 15,009,582 86,066,164 18,697,510 19,905,841
--------- --------- --------- --------- --------- -----------
At end of period $ 305,075,946 $102,560,911 $19,572,301 $ 88,461,887 $20,590,905 $18,071,239
========= ========= ========= ========= ========= ===========
Accumulated undistributed
(distributions in excess of)
net investment income included
in net assets at end of period $ (311,246) $ (112,130) $ 17,127 $ (33,152) $ 600 $ 4,761
========= ========= ========= ========= ========= ===========
</TABLE>
See notes to financial statements
24
<PAGE>
Financial Statements -- continued
Financial Highlights
<TABLE>
<CAPTION>
California Fund
- ------------------------------- ---------------------------------------------------------------------------------------------
Two Eleven
Months Months
Year Ended Ended Ended Year Ended
March 31, March 31, January 31, February 28,
- ------------------------------- ------------------ -------- ----------- ----------- ------- ------ --------
1996 1995 1994 1994 1993 1992 1991 1990
- ------------------------------- ------- ------- -------- ----------- ----------- ------- ------ --------
Class A
- ------------------------------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 5.41 $ 5.47 $ 5.95 $ 5.88 $ 5.42 $ 5.26 $ 5.19 $ 5.06
----- ----- ------ --------- --------- ----- ---- ------
Income from investment
operations# -
Net investment income(section) $ 0.30 $ 0.31 $ 0.05 $ 0.30 $ 0.34 $ 0.35 $ 0.33 $ 0.33
Net realized and unrealized
gain (loss) on investments 0.11 (0.05) (0.48) 0.14 0.47 0.20 0.07 0.13
----- ----- ------ --------- --------- ----- ---- ------
Total from investment
operations $ 0.41 $ 0.26 $ (0.43) $ 0.44 $ 0.81 $ 0.55 $ 0.40 $ 0.46
----- ----- ------ --------- --------- ----- ---- ------
Less distributions declared to shareholders -
From net investment income++++ $ (0.30) $ (0.31) $ (0.04) $ (0.29) $ (0.34) $ (0.37) $ (0.33) $ (0.33)
From net realized gain on
investments -- -- -- (0.07) (0.01) (0.02) -- --
In excess of net investment
income 0.00 0.00 (0.01) (0.01) -- -- -- --
In excess of net realized gain
on investments -- (0.01) -- -- -- -- -- --
----- ----- ------ --------- --------- ----- ---- ------
Total distributions declared
to shareholders $ (0.30) $ (0.32) $ (0.05) $ (0.37) $ (0.35) $ (0.39) $ (0.33) $ (0.33)
----- ----- ------ --------- --------- ----- ---- ------
Net asset value - end of period $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 5.88 $ 5.42 $ 5.26 $ 5.19
===== ===== ====== ========= ========= ===== ==== ======
Total return++ 7.86% 4.85% (7.21)%+++ 7.64%+++ 15.55% 10.69% 8.03% 9.28%
Ratios (to average net assets)/Supplemental data(section):
Expenses## 0.66% 0.69% 0.68%+ 0.60%+ 0.39% 0.40% 0.87% 1.00%
Net investment income 5.48% 5.80% 5.27%+ 4.99%+ 6.18% 6.53% 6.39% 6.35%
Portfolio turnover 69% 57% 8% 38% 64% 73% 102% 243%
Net assets at end of period
(000 omitted) $259,817 $272,161 $313,790 $356,419 $272,179 $177,291 $84,551 $68,879
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were $0.0049
and $0.0027, respectively.
(section) The investment adviser and/or the distributor voluntarily waived a portion of their management fee and/or
distribution fee, respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.29 $ 0.30 $ 0.05 $ 0.29 $ 0.32 $ 0.33 -- --
Ratios (to average net
assets):
Expenses 0.81% 0.84% 0.83%+ 0.78%+ 0.77% 0.79% -- --
Net investment income 5.33% 5.65% 5.12%+ 4.82%+ 5.80% 6.14% -- --
</TABLE>
See notes to financial statements
25
<PAGE>
Financial Statements -- continued
Financial Highlights - continued
<TABLE>
<CAPTION>
California Fund
----------------------- ---------------------------------------------------------------------------------------------------
Two Months
Year Ended Year Ended Ended Year Ended
February 28, March 31, March 31, January 31,
----------------------- ----------- ------- ------- ------- ----------- ------- ---------- ------------
1989 1988 1987 1986* 1996 1995 1994 1994**
----------------------- ----------- ------- ------- ------- ----------- ------- ---------- ------------
Class A Class B
----------------------- ----------- ------- ------- ------- ----------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 5.08 $ 5.38 $ 5.07 $ 4.76 $ 5.41 $ 5.47 $ 5.95 $ 6.02
--------- ----- ----- ----- --------- ----- -------- ----------
Income from investment
operations# -
Net investment
income(section) $ 0.32 $ 0.31 $ 0.32 $ 0.20 $ 0.26 $ 0.25 $ 0.04 $ 0.10
Net realized and
unrealized gain
(loss) on investments (0.02) (0.29) 0.34 0.28 0.11 (0.05) (0.48) --
--------- ----- ----- ----- --------- ----- -------- ----------
Total from investment
operations $ 0.30 $ 0.02 $ 0.66 $ 0.48 $ 0.37 $ 0.20 $ (0.44) $ 0.10
--------- ----- ----- ----- --------- ----- -------- ----------
Less distributions declared to
shareholders -
From net investment
income++++ $ (0.32) $ (0.31) $ (0.33) $ (0.17) $ (0.26) $ (0.25) $ (0.04) $ (0.10)
From net realized gain
on investments -- (0.01) (0.02) -- -- -- -- (0.07)
In excess of net
realized gain on
investments -- -- -- -- -- (0.01) -- --
--------- ----- ----- ----- --------- ----- -------- ----------
Total distributions
declared to
shareholders $ (0.32) $ (0.32) $ (0.35) $ (0.17) $ (0.26) $ (0.26) $ (0.04) $ (0.17)
--------- ----- ----- ----- --------- ----- -------- ----------
Net asset value - end
of period $ 5.06 $ 5.08 $ 5.38 $ 5.07 $ 5.52 $ 5.41 $ 5.47 $ 5.95
========= ===== ===== ===== ========= ===== ======== ==========
Total return++ 6.07% 0.83% 13.57% 9.77%+++ 6.93% 3.73% (7.38)%+++ 1.68%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 1.28% 1.20% 1.04% 0.95%+ 1.54% 1.76% 1.69%+ 1.60%+
Net investment income 6.35% 6.33% 6.25% 7.34%+ 4.59% 4.72% 4.18%+ 3.64%+
Portfolio turnover 188% 240% 54% 23% 69% 57% 8% 38%
Net assets at end of
period (000 omitted) $59,212 $59,479 $62,368 $17,488 $34,675 $29,057 $21,252 $19,360
* For the period from the commencement of investment operations, June 18, 1985 to February 28, 1986.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the year ended March 31, 1996, the two months ended March 31, 1994 and the period ended January 31, 1994, the per
share distributions in excess of net investment income were $0.0041, $0.002 and $0.003, respectively, for Class B shares.
(section) The investment adviser and/or the distributor voluntarily waived a portion of their management fee and/or
distribution fee, respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income -- -- -- $ 0.25 $ 0.24 $ 0.04 $ 0.09
Ratios (to average net assets):
Expenses -- -- -- 1.69% 1.91% 1.83%+ 1.81%+
Net investment income -- -- -- 4.43% 4.57% 4.04%+ 3.43%+
</TABLE>
See notes to financial statements
26
<PAGE>
Financial Statements -- continued
Financial Highlights - continued
<TABLE>
<CAPTION>
California Fund
- -------------------------------------------------------------------- ---------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
- -------------------------------------------------------------------- ----------- ------- --------- -------------
1996 1995 1994 1994***
- -------------------------------------------------------------------- ----------- ------- --------- -------------
Class C
- -------------------------------------------------------------------- ----------- ------- --------- -------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.42 $ 5.48 $ 5.95 $ 5.89
--------- ----- ------- -----------
Income from investment operations# -
Net investment income(section) $ 0.25 $ 0.26 $ 0.03 $ 0.01
Net realized and unrealized gain (loss) on investments 0.11 (0.06) (0.46) 0.06
--------- ----- ------- -----------
Total from investment operations $ 0.36 $ 0.20 $(0.43) $ 0.07
--------- ----- ------- -----------
Less distributions declared to shareholders -
From net investment income++++ $(0.25) $(0.25) $(0.04) $(0.01)
In excess of net realized gain on investments -- (0.01) -- --
--------- ----- ------- -----------
Total distributions declared to shareholders $(0.25) $(0.26) $(0.04) $(0.01)
--------- ----- ------- -----------
Net asset value - end of period $ 5.53 $ 5.42 $ 5.48 $ 5.95
========= ===== ======= ===========
Total return 6.77% 3.79% (7.22)%+++ 1.25%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 1.67% 1.69% 1.64%+ 2.02%+
Net investment income 4.47% 4.79% 3.92%+ 1.78%+
Portfolio turnover 69% 57% 8% 38%
Net assets at end of period (000 omitted) $4,353 $3,858 $1,701 $ 917
*** For the period from the commencement of offering of Class C shares, January 3, 1994 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++++ For the year ended March 31, 1996, the two months ended March 31, 1994 and the period ended January 31, 1994, the per
share distributions in excess of net investment income were $0.004, $0.001 and $0.003, respectively.
(section) The investment adviser and/or the distributor voluntarily waived a portion of their management fee and/or
distribution fee, respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment
income per share and the ratios would have been:
Net investment income $ 0.24 $ 0.25 $ 0.03 --
Ratios (to average net assets):
Expenses 1.82% 1.84% 1.80%+ 3.53%+
Net investment income 4.32% 4.64% 3.77%+ 0.27%+
</TABLE>
See notes to financial statements
27
<PAGE>
Financial Statements -- continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Florida Fund
------------------------------------------------- ---------------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
------------------------------------------------- ----------- ------- ---------- ----------- ---------
1996 1995 1994 1994 1993*
------------------------------------------------- ----------- ------- ---------- ----------- ---------
Class A
------------------------------------------------- ----------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.60 $ 9.65 $10.63 $ 9.89 $ 9.53
--------- ----- -------- --------- -------
Income from investment operations# -
Net investment income(section) $ 0.52 $ 0.54 $ 0.09 $ 0.57 $ 0.58
Net realized and unrealized gain (loss)
on investments 0.22 0.02 (0.98) 0.86 0.36
--------- ----- -------- --------- -------
Total from investment operations $ 0.74 $ 0.56 $(0.89) $ 1.43 $ 0.94
--------- ----- -------- --------- -------
Less distributions declared to
shareholders -
From net investment income $(0.52) $(0.54) $(0.08) $(0.57) $(0.58)
From net realized gain on investments -- (0.04) -- (0.11) --
In excess of net investment income++++ 0.00 -- (0.01) (0.01) --
In excess of net realized gain on
investments -- (0.03) -- -- --
--------- ----- -------- --------- -------
Total distributions declared to shareholders $(0.52) $(0.61) $(0.09) $(0.69) $(0.58)
--------- ----- -------- --------- -------
Net asset value - end of period $ 9.82 $ 9.60 $ 9.65 $10.63 $ 9.89
========= ===== ======== ========= =======
Total return++ 7.81% 6.07% (8.39)%+++ 14.71% 10.28%+
Ratios (to average net assets)/Supplemental data(section):
Expenses## 0.86% 0.60% 0.77%+ 0.49% 0.05%+
Net investment income 5.26% 5.75% 5.15%+ 5.42% 6.27%+
Portfolio turnover 56% 131% 19% 53% 54%
Net assets at end of period (000 omitted) $87,553 $89,894 $108,579 $124,131 $74,329
* For the period from the commencement of investment operations, February 3, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
++++ For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0015
and $0.0012 for Class A and Class B shares, respectively.
(section) The investment adviser and/or the distributor voluntarily waived a portion of their management fee and/or
distribution fee, respectively, for the periods indicated. If these fees had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.52 $ 0.52 $ 0.08 $ 0.52 $ 0.51
Ratios (to average net assets):
Expenses 0.90% 0.83% 1.12%+ 0.93% 0.81%+
Net investment income 5.22% 5.52% 4.80%+ 4.97% 5.51%+
</TABLE>
<TABLE>
<CAPTION>
Florida Fund
-------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
------------------------------------------------- ----------- ------- ------------ -------------
1996 1995 1994 1994**
------------------------------------------------- ----------- ------- ------------ -------------
Class B
------------------------------------------------- ----------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.60 $ 9.64 $10.62 $10.69
--------- ----- ----------- -----------
Income from investment operations# -
Net investment income(section) $ 0.43 $ 0.43 $ 0.07 $ 0.18
Net realized and unrealized gain (loss)
on investments 0.22 0.04 (0.98) 0.03
--------- ----- ----------- -----------
Total from investment operations $ 0.65 $ 0.47 $(0.91) $ 0.21
--------- ----- ----------- -----------
Less distributions declared to
shareholders -
From net investment income $ (0.43) $ (0.44) $(0.06) $(0.17)
From net realized gain on investments -- (0.04) -- (0.10)
In excess of net investment income++++ 0.00 -- (0.01) (0.01)
In excess of net realized gain on
investments -- (0.03) -- --
--------- ----- ----------- -----------
Total distributions declared to shareholders $ (0.43) $ (0.51) $(0.07) $(0.28)
--------- ----- ----------- -----------
Net asset value - end of period $ 9.82 $ 9.60 $ 9.64 $10.62
========= ===== =========== ===========
Total return++ 6.88% 5.06% (8.55)%+++ 4.87%+
Ratios (to average net assets)/Supplemental data(section):
Expenses## 1.74% 1.68% 1.82%+ 1.64%+
Net investment income 4.36% 4.63% 4.08%+ 3.82%+
Portfolio turnover 56% 131% 19% 53%
Net assets at end of period (000 omitted) $14,448 $12,667 $7,995 $7,244
* For the period from the commencement of investment operations, February 3, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31,
1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
++++ For the year ended March 31, 1996, the per share distributions in excess of net investment income were
$0.0015 and $0.0012 for Class A and Class B shares, respectively.
(section) The investment adviser and/or the distributor voluntarily waived a portion of their management fee
and/or distribution fee, respectively, for the periods indicated. If these fees had been incurred by the
Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.43 $ 0.41 $ 0.06 $ 0.16
Ratios (to average net assets):
Expenses 1.78% 1.91% 2.17%+ 2.09%+
Net investment income 4.33% 4.40% 3.72%+ 3.38%+
</TABLE>
See notes to financial statements
28
<PAGE>
Financial Statements -- continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Louisiana Fund
---------------------------------------------------------- ----------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- -------------
1996 1995 1994 1994
---------------------------------------------------------- ----------- ------- ---------- -------------
Class A
---------------------------------------------------------- ----------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.24 $ 9.22 $ 10.13 $ 9.53
--------- ----- -------- -----------
Income from investment operations# -
Net investment income(section) $ 0.55 $ 0.57 $ 0.09 $ 0.52
Net realized and unrealized gain (loss) on investments 0.12 0.06 (0.91) 0.62
--------- ----- -------- -----------
Total from investment operations $ 0.67 $ 0.63 $ (0.82) $ 1.14
--------- ----- -------- -----------
Less distributions declared to
shareholders -
From net investment income $ (0.56) $ (0.56) $ (0.09) $ (0.52)
From net realized gain on investments -- (0.02) -- (0.02)
In excess of net realized gain on investments -- (0.03) -- --
--------- ----- -------- -----------
Total distributions declared to shareholders $ (0.56) $ (0.61) $ (0.09) $ (0.54)
--------- ----- -------- -----------
Net asset value - end of period $ 9.35 $ 9.24 $ 9.22 $ 10.13
========= ===== ======== ===========
Total return++ 7.38% 7.18% (8.10)%+++ 12.33%
Ratios (to average net assets)/Supplemental data(section):
Expenses## 0.20% 0.02% 0.00%+ 0.00%
Net investment income 5.87% 6.25% 5.64%+ 5.41%
Portfolio turnover 45% 81% 2% 33%
Net assets at end of period (000 omitted) $19,622 $16,837 $13,401 $13,781
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of
average daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were
over/under these limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.46 $ 0.46 $ 0.05 $ 0.32
Ratios (to average net assets):
Expenses 1.12% 1.21% 2.33%+ 2.03%
Net investment income 4.95% 5.06% 3.31%+ 3.38%
</TABLE>
<TABLE>
<CAPTION>
Louisiana Fund
---------------------------------------------------------- ----------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- -------------
1996 1995 1994 1994**
---------------------------------------------------------- ----------- ------- ---------- -------------
Class B
---------------------------------------------------------- ----------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.24 $ 9.23 $10.13 $10.08
--------- ----- -------- -----------
Income from investment operations# -
Net investment income(section) $ 0.47 $ 0.47 $ 0.07 $ 0.18
Net realized and unrealized gain (loss) on investments 0.13 0.06 (0.89) 0.07
--------- ----- -------- -----------
Total from investment operations $ 0.60 $ 0.53 $(0.82) $ 0.25
--------- ----- -------- -----------
Less distributions declared to
shareholders -
From net investment income $(0.49) $(0.47) $(0.08) $(0.18)
From net realized gain on investments -- (0.02) -- (0.02)
In excess of net realized gain on investments -- (0.03) -- --
--------- ----- -------- -----------
Total distributions declared to shareholders $(0.49) $(0.52) $(0.08) $(0.20)
--------- ----- -------- -----------
Net asset value - end of period $ 9.35 $ 9.24 $ 9.23 $10.13
========= ===== ======== ===========
Total return++ 6.48% 6.01% (8.16)%+++ 2.48%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 1.05% 1.02% 1.00%+ 1.00%+
Net investment income 5.00% 5.25% 4.54%+ 4.32%+
Portfolio turnover 45% 81% 2% 33%
Net assets at end of period (000 omitted) $4,796 $2,735 $1,608 $1,263
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of
average daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were
over/under these limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.38 $ 0.36 $ 0.03 $ 0.09
Ratios (to average net assets):
Expenses 2.04% 2.28% 3.40%+ 3.08%+
Net investment income 4.01% 3.99% 2.14%+ 2.24%+
</TABLE>
See notes to financial statements
29
<PAGE>
Financial Statements -- continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Mississippi Fund
---------------------------------------------------------- ---------------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
1996 1995 1994 1994 1993*
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
Class A
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.15 $ 9.19 $ 10.00 $ 9.38 $ 9.53
--------- ----- -------- --------- -------
Income from investment operations# -
Net investment income(section) $ 0.52 $ 0.54 $ 0.09 $ 0.55 $ 0.24
Net realized and unrealized gain (loss) on investments 0.20 (0.01) (0.81) 0.62 (0.15)
--------- ----- -------- --------- -------
Total from investment operations $ 0.72 $ 0.53 $ (0.72) $ 1.17 $ 0.09
--------- ----- -------- --------- -------
Less distributions declared to shareholders -
From net investment income++++ $ (0.52) $ (0.54) $ (0.09) $ (0.55) $ (0.24)
From net realized gain on investments++++++ -- 0.00 -- -- --
In excess of net realized gain on investments -- (0.03) -- -- --
--------- ----- -------- --------- -------
Total distributions declared to shareholders $ (0.52) $ (0.57) $ (0.09) $ (0.55) $ (0.24)
--------- ----- -------- --------- -------
Net asset value - end of period $ 9.35 $ 9.15 $ 9.19 $ 10.00 $ 9.38
========= ===== ======== ========= =======
Total return++ 7.99% 6.08% (7.20)%+++ 12.80% 5.00%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 0.45% 0.22% 0.10%+ 0.03% 0.00%+
Net investment income 5.51% 5.99% 5.69%+ 5.68% 5.59%+
Portfolio turnover 31% 47% 2% 28% 14%
Net assets at end of period (000 omitted) $74,435 $79,033 $79,541 $84,177 $41,212
* For the period from the commencement of investment operations, August 6, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0013 and
$0.0011 for Class A and Class B shares, respectively. For the year ended March 31, 1995, the per share distributions in
excess of net investment income were $0.0035 and $0.0029 for Class A and Class B shares, respectively. For the two months
ended March 31, 1994, the per share distribution in excess of net investment income was $0.002 for Class B shares.
++++++ For the year ended March 31, 1995, the per share distributions from net realized gain on investments were $0.0016 for
Class A and Class B shares.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of average
daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were over/under these
limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.48 $ 0.08 $ 0.45 $ 0.19
Ratios (to average net assets):
Expenses 0.88% 0.93% 0.88%+ 1.01% 1.17%+
Net investment income 5.08% 5.28% 4.91%+ 4.69% 4.42%+
</TABLE>
<TABLE>
<CAPTION>
Mississippi Fund
---------------------------------------------------------- ----------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- -------------
1996 1995 1994 1994**
---------------------------------------------------------- ----------- ------- ---------- -------------
Class B
---------------------------------------------------------- ----------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.16 $ 9.19 $ 9.99 $ 9.94
--------- ----- -------- -----------
Income from investment operations# -
Net investment income(section) $ 0.44 $ 0.45 $ 0.07 $ 0.18
Net realized and unrealized gain (loss) on investments 0.20 -- (0.79) 0.05
--------- ----- -------- -----------
Total from investment operations $ 0.64 $ 0.45 $(0.72) $ 0.23
--------- ----- -------- -----------
Less distributions declared to shareholders -
From net investment income++++ $ (0.44) $(0.45) $(0.08) $(0.18)
From net realized gain on investments++++++ -- 0.00 -- --
In excess of net realized gain on investments -- (0.03) -- --
--------- ----- -------- -----------
Total distributions declared to shareholders $ (0.44) $(0.48) $(0.08) $(0.18)
--------- ----- -------- -----------
Net asset value - end of period $ 9.36 $ 9.16 $ 9.19 $ 9.99
========= ===== ======== ===========
Total return++ 7.11% 5.14% (7.27)%+++ 2.33%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 1.28% 1.23% 1.10%+ 1.06%+
Net investment income 4.67% 4.97% 4.67%+ 4.29%+
Portfolio turnover 31% 47% 2% 28%
Net assets at end of period (000 omitted) $11,475 $9,429 $6,526 $6,268
* For the period from the commencement of investment operations, August 6, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
++++ For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0013
and $0.0011 for Class A and Class B shares, respectively. For the year ended March 31, 1995, the per share
distributions in excess of net investment income were $0.0035 and $0.0029 for Class A and Class B shares,
respectively. For the two months ended March 31, 1994, the per share distribution in excess of net investment
income was $0.002 for Class B shares.
++++++ For the year ended March 31, 1995, the per share distributions from net realized gain on investments were
$0.0016 for Class A and Class B shares.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of
average daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were
over/under these limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.40 $ 0.38 $ 0.06 $ 0.14
Ratios (to average net assets):
Expenses 1.71% 2.01% 1.95%+ 2.12%+
Net investment income 4.24% 4.19% 3.82%+ 3.23%+
</TABLE>
See notes to financial statements
30
<PAGE>
Financial Statements -- continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Texas Fund
---------------------------------------------------------- ---------------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
1996 1995 1994 1994 1993*
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
Class A
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.92 $ 9.88 $ 10.86 $ 10.01 $ 9.53
--------- ----- -------- --------- -------
Income from investment operations# -
Net investment income(section) $ 0.58 $ 0.60 $ 0.10 $ 0.61 $ 0.57
Net realized and unrealized gain (loss) on investments 0.14 0.09 (0.99) 0.86 0.47
--------- ----- -------- --------- -------
Total from investment operations $ 0.72 $ 0.69 $ (0.89) $ 1.47 $ 1.04
--------- ----- -------- --------- -------
Less distributions declared to shareholders -
From net investment income++++ $ (0.58) $ (0.59) $ (0.09) $ (0.61) $(0.56)
From net realized gain on
investments++++++ -- (0.03) -- (0.01) --
In excess of net investment income -- -- 0.00 0.00 --
In excess of net realized gain on investments -- (0.03) -- 0.00 --
--------- ----- -------- --------- -------
Total distributions declared to
shareholders $ (0.58) $ (0.65) $ (0.09) $ (0.62) $(0.56)
--------- ----- -------- --------- -------
Net asset value - end of period $ 10.06 $ 9.92 $ 9.88 $ 10.86 $10.01
========= ===== ======== ========= =======
Total return++ 7.39% 7.42% (8.13)%+++ 15.08% 11.30%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 0.20% 0.02% 0.00%+ 0.00% 0.00%+
Net investment income 5.74% 6.16% 5.71%+ 5.74% 6.03%+
Portfolio turnover 54% 104% 1% 7% 40%
Net assets at end of period (000 omitted) $13,832 $18,318 $17,515 $18,987 $8,485
* For the period from the commencement of investment operations, February 3, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the two months ended March 31, 1994 and the year ended January 31, 1994, the per share distributions in excess of
net investment income were $0.004 and $0.003, respectively, for Class A shares.
++++++ For the year ended January 31, 1994, the per share distributions in excess of net realized gain on investments were
$0.0008 for Class A and Class B shares.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of average
daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were over/under these
limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.49 $ 0.07 $ 0.44 $ 0.32
Ratios (to average net assets):
Expenses 1.17% 1.17% 1.67%+ 1.56% 2.67%+
Net investment income 4.77% 5.01% 4.04%+ 4.18% 3.36%+
</TABLE>
<TABLE>
<CAPTION>
Texas Fund
---------------------------------------------------------- ----------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- -------------
1996 1995 1994 1994**
---------------------------------------------------------- ----------- ------- ---------- -------------
Class B
---------------------------------------------------------- ----------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.93 $ 9.89 $10.86 $10.79
--------- ----- -------- -----------
Income from investment operations# -
Net investment income(section) $ 0.50 $ 0.50 $ 0.08 $ 0.19
Net realized and unrealized gain (loss) on investments 0.13 0.10 (0.96) 0.09
--------- ----- -------- -----------
Total from investment operations $ 0.63 $ 0.60 $(0.88) $ 0.28
--------- ----- -------- -----------
Less distributions declared to shareholders -
From net investment income++++ $(0.50) $(0.50) $(0.08) $(0.19)
From net realized gain on
investments++++++ -- (0.03) -- (0.01)
In excess of net investment income -- -- (0.01) (0.01)
In excess of net realized gain on investments -- (0.03) -- 0.00
--------- ----- -------- -----------
Total distributions declared to
shareholders $(0.50) $(0.56) $(0.09) $(0.21)
--------- ----- -------- -----------
Net asset value - end of period $10.06 $ 9.93 $ 9.89 $10.86
========= ===== ======== ===========
Total return++ 6.38% 6.35% (8.19)%+++ 2.65%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 1.04% 1.02% 1.00%+ 1.00%+
Net investment income 4.87% 5.14% 4.68%+ 4.41%+
Portfolio turnover 54% 104% 1% 7%
Net assets at end of period (000 omitted) $2,974 $2,273 $1,183 $ 956
* For the period from the commencement of investment operations, February 3, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
++++ For the two months ended March 31, 1994 and the year ended January 31, 1994, the per share distributions in
excess of net investment income were $0.004 and $0.003, respectively, for Class A shares.
++++++ For the year ended January 31, 1994, the per share distributions in excess of net realized gain on
investments were $0.0008 for Class A and Class B shares.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of
average daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were
over/under these limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.39 $ 0.38 $ 0.05 $ 0.11
Ratios (to average net assets):
Expenses 2.08% 2.24% 2.74%+ 2.90%+
Net investment income 3.83% 3.92% 2.94%+ 2.51%+
</TABLE>
See notes to financial statements
31
<PAGE>
Financial Statements -- continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Washington Fund
---------------------------------------------------------- ---------------------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
1996 1995 1994 1994 1993*
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
Class A
---------------------------------------------------------- ----------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.59 $ 9.29 $ 10.25 $ 9.54 $ 9.53
--------- ----- -------- --------- -------
Income from investment operations# -
Net investment income(section) $ 0.56 $ 0.57 $ 0.09 $ 0.57 $ 0.22
Net realized and unrealized gain (loss)
on investments 0.32 0.31 (0.96) 0.78 0.01
--------- ----- -------- --------- -------
Total from investment operations $ 0.88 $ 0.88 $ (0.87) $ 1.35 $ 0.23
--------- ----- -------- --------- -------
Less distributions declared to shareholders -
From net investment income++++ $ (0.57) $ (0.57) $ (0.09) $ (0.57) $(0.22)
From net realized gain on investments -- -- -- (0.07) --
In excess of net realized gain on
investments -- (0.01) -- -- --
--------- ----- -------- --------- -------
Total distributions declared to
shareholders $ (0.57) $ (0.58) $ (0.09) $ (0.64) $(0.22)
--------- ----- -------- --------- -------
Net asset value - end of period $ 9.90 $ 9.59 $ 9.29 $ 10.25 $ 9.54
========= ===== ======== ========= =======
Total return++ 9.20% 9.80% (8.47)%+++ 14.55% 2.72%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 0.20% 0.02% 0.00%+ 0.00% 0.00%+
Net investment income 5.64% 6.17% 5.69%+ 5.63% 5.64%+
Portfolio turnover 30% 44% 3% 26% 12%
Net assets at end of period (000 omitted) $14,896 $15,364 $17,993 $19,208 $9,574
* For the period from the commencement of investment operations, August 7, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
++++ For the two months ended March 31, 1994, the per share distributions in excess of net investment income were $0.001 and
$0.004 for Class A and Class B shares, respectively.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of average
daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were over/under these
limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.46 $ 0.45 $ 0.07 $ 0.42 $ 0.12
Ratios (to average net assets):
Expenses 1.16% 1.26% 1.43%+ 1.46% 2.47%+
Net investment income 4.68% 4.92% 4.26%+ 4.17% 3.17%+
</TABLE>
<TABLE>
<CAPTION>
Washington Fund
---------------------------------------------------------- ----------------------------------------------------
Two Months
Year Ended Ended Year Ended
March 31, March 31, January 31,
---------------------------------------------------------- ----------- ------- ---------- -------------
1996 1995 1994 1994**
---------------------------------------------------------- ----------- ------- ---------- -------------
Class B
---------------------------------------------------------- ----------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.59 $ 9.29 $10.24 $10.26
--------- ----- -------- -----------
Income from investment operations# -
Net investment income(section) $ 0.48 $ 0.48 $ 0.07 $ 0.18
Net realized and unrealized gain (loss)
on investments 0.30 0.30 (0.94) 0.05
--------- ----- -------- -----------
Total from investment operations $ 0.78 $ 0.78 $(0.87) $ 0.23
--------- ----- -------- -----------
Less distributions declared to shareholders -
From net investment income++++ $(0.48) $(0.47) $(0.08) $(0.18)
From net realized gain on investments -- -- -- (0.07)
In excess of net realized gain on
investments -- (0.01) -- --
--------- ----- -------- -----------
Total distributions declared to
shareholders $(0.48) $(0.48) $(0.08) $(0.25)
--------- ----- -------- -----------
Net asset value - end of period $ 9.89 $ 9.59 $ 9.29 $10.24
========= ===== ======== ===========
Total return++ 8.24% 8.72% (8.54)%+++ 2.30%+++
Ratios (to average net assets)/Supplemental data(section):
Expenses## 0.99% 1.02% 1.00%+ 1.00%+
Net investment income 4.84% 5.14% 4.56%+ 4.28%+
Portfolio turnover 30% 44% 3% 26%
Net assets at end of period (000 omitted) $3,065 $2,707 $1,913 $1,528
* For the period from the commencement of investment operations, August 7, 1992 to January 31, 1993.
** For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
++++ For the two months ended March 31, 1994, the per share distributions in excess of net investment income were
$0.001 and $0.004 for Class A and Class B shares, respectively.
(section) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% and 1.95% of
average daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were
over/under these limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.38 $ 0.36 $ 0.05 $ 0.10
Ratios (to average net assets):
Expenses 2.02% 2.33% 2.51%+ 2.79%+
Net investment income 3.81% 3.83% 3.05%+ 2.49%+
</TABLE>
See notes to financial statements
32
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Municipal Series 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. The Trust presently
consists of nineteen Funds, as follows: MFS Municipal Income Fund, MFS
Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California
Municipal Bond Fund* (California Fund), MFS Florida Municipal Bond Fund*
(Florida Fund), MFS Georgia Municipal Bond Fund, MFS Louisiana Municipal Bond
Fund* (Louisiana Fund), MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund* (Mississippi Fund),
MFS New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Texas Municipal Bond Fund* (Texas Fund),
MFS Virginia Municipal Bond Fund, MFS Washington Municipal Bond Fund*
(Washington Fund), and MFS West Virginia Municipal Bond Fund. Each Fund,
except MFS Municipal Income Fund, is non-diversified.
The Funds denoted with an asterisk above are included within these financial
statements.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Because each Fund invests primarily in the securities of a single
state and its political subdivisions, each Fund is vulnerable to the effects
of changes in the legal and economic environment of the particular state.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Futures contracts, options and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility
and short-term repurchase rates. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Deferred Organization Expenses - Costs incurred by a Fund in connection with
its organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of operations of the Fund.
Futures Contracts - Each Fund may enter into futures contracts for the
delayed delivery of securities or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, each 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. Each Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
rates or securities prices. Investments in interest rate futures for purposes
other than hedging may be made to modify the duration of the portfolio
without incurring the additional transaction costs involved in buying and
selling the underlying securities. Investments in index contracts, or
contracts on related options, for purposes other than hedging may be made
when a Fund has cash on hand and wishes to participate in anticipated market
appreciation while the cash is being invested. Should interest rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Trust's custodian bank calculates its fee based on
each Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by each
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Trust'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. Each 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 each 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 each Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for
federal income tax purposes because each Fund intends to meet certain
requirements of the Code applicable to regulated investment companies, which
will enable each 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.
33
<PAGE>
Notes to Financial Statements - continued
Each Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains.
During the year ended March 31, 1996, the following amounts were reclassified
from accumulated net realized loss on investments to accumulated
undistributed (distributions in excess of) net investment income due to
differences between book and tax accounting for accrued market discount on
disposal of securities:
Florida Louisiana Mississippi Texas Washington
Fund Fund Fund Fund Fund
=========== ========= ========= ========= ===========
$122,462 $10,595 $12,772 $41,401 $2,925
With respect to the California Fund, $178,192 and $24,082 was reclassified to
accumulated distributions in excess of net investment income and paid-in
capital, respectively, from accumulated undistributed net realized loss on
investments due to differences between book and tax accounting for accrued
market discount on disposal of securities.
At March 31, 1996, the following Funds, for federal income tax purposes, had
capital loss carryforwards which may be applied against any net taxable
realized gains of each succeeding year until the earlier of their utilization
or expiration.
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Expiration Date Fund Fund Fund Fund Fund Fund
================== ========== ========= ========= ========= ========= ==========
<S> <C> <C> <C> <C> <C> <C>
March 31, 2002 $ 277,504 $ -- $ -- $ -- $ -- $ --
March 31, 2003 10,212,078 5,923,777 531,096 940,501 1,019,734 247,673
March 31, 2004 403,290 -- 647,370 3,172,754 404,655 112,157
---------- --------- --------- --------- --------- ----------
Total $10,892,872 $5,923,777 $1,178,466 $4,113,255 $1,424,389 $359,830
========== ========= ========= ========= ========= ==========
</TABLE>
Multiple Classes of Shares of Beneficial Interest - Each Fund offers both
Class A and Class B shares. The California Fund offers Class C shares. The
three classes of shares differ in their respective shareholder servicing
agent, distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on settled shares outstanding, 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.
(3) Transactions with Affiliates
Investment Adviser - The Trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.55%
of each Fund's average daily net assets. The investment adviser voluntarily
waived a portion of its fee with respect to each of the Funds, which is
reflected as a reduction of expenses in the Statement of Operations.
Under a temporary expense reimbursement agreement with MFS, MFS has
voluntarily agreed to pay all of the Louisiana, Texas and Washington Funds'
operating expenses, exclusive of management, distribution and service fees.
The Louisiana, Texas and Washington Funds in turn will pay MFS an expense
reimbursement fee not greater than 0.40% of each Fund's average daily net
assets. To the extent that the expense reimbursement fee exceeds the Fund's
actual expenses, the excess will be applied to amounts paid by MFS in prior
years. At March 31, 1996, the aggregate unreimbursed expenses owed to MFS by
each Fund were as follows:
<TABLE>
<CAPTION>
Louisiana Texas Washington
Fund Fund Fund
=================================================================================================
<S> <C> <C> <C>
Amount relating to the year ended March 31, 1996 $ 38,765 $ 44,197 $ 41,328
Total amount since commencement of reimbursement agreements 226,600 276,371 232,255
</TABLE>
During the year ended March 31, 1996 for the Louisiana, Texas and Washington
Funds, MFS voluntarily waived the reimbursement fees of $204,060, $243,434
and $228,401, respectively.
The Trust pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain of the
officers and Trustees of the Trust are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Trust has
an unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation for the year ended March 31, 1996
is a net periodic pension expense for each Fund, as follows:
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Fund Fund Fund Fund Fund Fund
======= =========== =========== =========== =========== =========== ============
<S> <C> <C> <C> <C> <C> <C>
$9,973 $2,542 $2,292 $2,359 $2,787 $2,359
</TABLE>
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$479,546, $179,736, $119,786, $182,722, $25,944 and $36,619 as its portion of
the sales charge on sales of Class A shares of the California, Florida,
Louisiana, Mississippi, Texas and Washington Funds, respectively, for the
year ended March 31, 1996.
34
<PAGE>
Notes to Financial Statements -- continued
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 each Fund will pay MFD up to
0.35% per annum of its average daily net assets attributable to Class A
shares in order that MFD may pay expenses on behalf of the Fund related to
the distribution and servicing of its shares. These expenses include a
service fee to each securities dealer that enters into a sales agreement with
MFD of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class A shares which are attributable to that securities
dealer, a distribution fee to MFD of up to 0.10% per annum of the Fund's
average daily net assets attributable to Class A shares, commissions to
dealers and payments to MFD wholesalers for sales at or above a certain
dollar level, and other such distribution-related expenses that are approved
by the Fund. Payments under the distribution plan by the Funds will commence
on such date to be determined by the Trustees.
The Class B and Class C distribution plans provide that each Fund will pay
MFD a distribution fee of 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. The service fee is currently suspended on Class B shares held
over one year. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class
B 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. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $746 for
the California Fund for Class C shares. Fees incurred under the distribution
plans during the year ended March 31, 1996 were 0.80%, 0.80%, 0.81%, 0.79%,
0.84% and 0.78% of each of the Funds' average daily net assets attributable
to Class B shares for the California, Florida, Louisiana, Mississippi, Texas
and Washington Funds, respectively on an annualized basis. Fees incurred
under the distribution plans during the year ended March 31, 1996 were 1.00%
of the California Fund's average daily net assets attributable to Class C
shares.
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
shareholder 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 shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended March 31, 1996 on Class
A and Class B shares were as follows:
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
CDSC imposed Fund Fund Fund Fund Fund Fund
==================== ========== ========== ========== ========== ========== ============
<S> <C> <C> <C> <C> <C> <C>
Class A $ 4,819 $ 4 $ -- $17,464 $ -- $ --
---------- ---------- ---------- ---------- ---------- ------------
Class B $96,292 $52,478 $9,864 $24,336 $2,195 $11,540
========== ========== ========== ========== ========== ============
</TABLE>
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
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, were as follows
(000 omitted):
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Fund Fund Fund Fund Fund Fund
==================== ========== ========== ========== ========== ========== ============
<S> <C> <C> <C> <C> <C> <C>
Purchases $188,593 $54,700 $15,669 $20,738 $10,075 $4,754
Sales 203,934 58,870 9,518 27,459 13,818 5,380
</TABLE>
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Funds, as computed on a federal income tax basis,
are as follows (000 omitted):
<TABLE>
<CAPTION>
California Florida Louisiana Mississippi Texas Washington
Fund Fund Fund Fund Fund Fund
==================== ========== ========== ========== ========== ========== ============
<S> <C> <C> <C> <C> <C> <C>
Aggregate cost $282,320 $96,320 $24,709 $81,867 $16,511 $17,174
========== ========== ========== ========== ========== ============
Gross unrealized
appreciation $ 14,485 $ 4,708 $ 754 $ 2,936 $ 1,084 $ 673
Gross unrealized
depreciation (2,122) (588) (51) (448) (55) (163)
---------- ---------- ---------- ---------- ---------- ------------
Net unrealized
appreciation $ 12,363 $ 4,120 $ 703 $ 2,488 $ 1,029 $ 510
========== ========== ========== ========== ========== ============
</TABLE>
(5) Shares of Beneficial Interest
The 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>
<CAPTION>
Class A Shares California Fund Florida Fund Louisiana Fund
------------------------ ------------------------ --------------------------
Year Ended March 31,
1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
==================== ========== ========== ========== ========== ========== ============
<S> <C> <C> <C> <C> <C> <C>
Shares sold 14,785 $ 82,615 4,022 $ 39,659 511 $ 4,872
Shares issued to
shareholders in
reinvestment of
distributions 1,157 6,424 164 1,624 51 480
Shares reacquired (19,147) (106,882) (4,632) (45,774) (287) (2,704)
---------- ---------- ---------- ---------- ---------- ------------
Net increase
(decrease) (3,205) $ (17,843) (446) $ (4,491) 275 $ 2,648
========== ========== ========== ========== ========== ============
</TABLE>
35
<PAGE>
Financial Statements -- continued
<TABLE>
<CAPTION>
Class A Shares - continued California Fund Florida Fund Louisiana Fund
------------------------ ------------------------ --------------------------
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount Shares Amount
======================================= ======== ======== ======== ======== ======== ==========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 10,839 $ 58,024 6,609 $ 61,425 561 $ 5,055
Shares issued to shareholders in
reinvestment of distributions 1,356 7,227 233 2,203 62 561
Shares reacquired (19,244) (102,193) (8,730) (81,517) (253) (2,281)
-------- -------- -------- -------- -------- ----------
Net increase (decrease) $
(7,049) (36,942) (1,888) $(17,889) 370 $ 3,335
======== ======== ======== ======== ======== ==========
Mississippi Fund Texas Fund Washington Fund
---------------------- ---------------------- ------------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
======================================= ======== ======== ======== ======== ======== ==========
Shares sold 877 $ 8,180 176 $ 1,763 98 $ 972
Shares issued to shareholders in
reinvestment of distributions 228 2,141 52 525 51 503
Shares reacquired (1,776) (16,709) (699) (6,980) (246) (2,432)
-------- -------- -------- -------- -------- ----------
Net decrease (671) $ (6,388) (471) $ (4,692) (97) $ (957)
======== ======== ======== ======== ======== ==========
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount
======================================= ======== ======== ======== ========
Shares sold 2,121 $ 19,211 402 $ 3,917
Shares issued to shareholders in
reinvestment of distributions 292 2,636 75 732
Shares reacquired (2,431) (21,719) (403) (3,875)
-------- -------- -------- --------
Net increase (decrease) (18) $ 128 74 $ 774
======== ======== ======== ========
Year Ended March 31, 1995 (000 Omitted) Shares Amount
======================================= ======== ========
Shares sold 183 $ 1,709
Shares issued to shareholders in
reinvestment of distributions 56 517
Shares reacquired (573) (5,314)
-------- --------
Net increase (decrease) (334) $ (3,088)
======== ========
Class B Shares California Fund Florida Fund
---------------------- ----------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount
======================================= ======== ======== ======== ========
Shares sold 1,980 $ 11,011 396 $ 3,905
Shares issued to shareholders in
reinvestment of distributions 130 724 25 249
Shares reacquired (1,194) (6,655) (269) (2,660)
-------- -------- -------- --------
Net increase 916 $ 5,080 152 $ 1,494
======== ======== ======== ========
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount
======================================= ======== ======== ======== ========
Shares sold 2,519 $ 13,408 675 $ 6,350
Shares issued to shareholders in
reinvestment of distributions 109 580 28 262
Shares reacquired (1,141) (6,041) (213) (1,994)
-------- -------- -------- --------
Net increase 1,487 $ 7,947 490 $ 4,618
======== ======== ======== ========
Class B Shares Louisiana Fund
----------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount
======================================= ======== ========
Shares sold 263 $ 2,484
Shares issued to shareholders in
reinvestment of distributions 12 111
Shares reacquired (58) (550)
-------- --------
Net increase 217 $ 2,045
======== ========
Year Ended March 31, 1995 (000 Omitted) Shares Amount
======================================= ======== ========
Shares sold 168 $ 1,525
Shares issued to shareholders in
reinvestment of distributions 8 68
Shares reacquired (54) (474)
-------- --------
Net increase 122 $ 1,119
======== ========
Mississippi Fund Texas Fund
---------------------- ----------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount
======================================= ======== ======== ======== ========
Shares sold 295 $ 2,757 108 $ 1,085
Shares issued to shareholders in
reinvestment of distributions 22 208 5 54
Shares reacquired (120) (1,127) (46) $ (481)
-------- -------- -------- --------
Net increase 197 $ 1,838 67 $ 658
======== ======== ======== ========
Year Ended March 31, 1995 (000 Omitted) Shares Amount Shares Amount
======================================= ======== ======== ======== ========
Shares sold 385 $ 3,480 137 $ 1,349
Shares issued to shareholders in
reinvestment of distributions 19 173 6 60
Shares reacquired (85) (749) (34) (330)
-------- -------- -------- --------
Net increase 319 $ 2,904 109 $ 1,079
======== ======== ======== ========
Washington Fund
----------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount
======================================= ======== ========
Shares sold 57 $ 568
Shares issued to shareholders in
reinvestment of distributions 8 84
Shares reacquired (38) $ (374)
-------- --------
Net increase 27 $ 278
======== ========
Year Ended March 31, 1995 (000 Omitted) Shares Amount
======================================= ======== ========
Shares sold 102 $ 954
Shares issued to shareholders in
reinvestment of distributions 8 73
Shares reacquired (34) (310)
-------- --------
Net increase 76 $ 717
======== ========
</TABLE>
36
<PAGE>
Financial Statements -- continued
<TABLE>
<CAPTION>
Class C Shares California Fund
--------------------------
Year Ended March 31, 1996 (000 Omitted) Shares Amount
===================================================================================================================== ==========
<S> <C> <C>
Shares sold 368 $ 2,042
Shares issued to shareholders in
reinvestment of distributions 14 80
Shares reacquired (307) (1,701)
---------- ------------
Net increase 75 $ 421
========== ============
California Fund
--------------------------
Year Ended March 31, 1995 (000 Omitted) Shares Amount
===================================================================================================================== ==========
Shares sold 1,073 $ 5,680
Shares issued to shareholders in
reinvestment of distributions 15 80
Shares reacquired (686) (3,622)
---------- ------------
Net increase 402 $ 2,138
========== ============
</TABLE>
(6) Line of Credit
The Trust entered into an agreement which enables each of the Funds to
participate with other funds managed by MFS in an unsecured line of credit
with a bank which permits borrowings up to $350 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 each of the Funds for the year ended March 31, 1996 ranged from $228 to
$3,649.
(7) Financial Instruments
The Trust 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. These financial instruments include
futures contracts. The notional or contractual amounts of these instruments
represent the investment a 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.
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Appreciation
Fund Description Expiration Contracts Position (Depreciation)
=================== ================ =========== ========== ========= =================
<S> <C> <C> <C> <C> <C>
California Fund U.S. Treasury June 1996 150 Short $(13,823)
Florida Fund U.S. Treasury June 1996 15 Short $ 60,055
Louisiana Fund U.S. Treasury June 1996 20 Short $ (6,113)
Municipal Index June 1996 13 Short $(20,678)
Mississippi Fund U.S. Treasury June 1996 90 Short $(27,512)
Texas Fund U.S. Treasury June 1996 20 Short $ (6,114)
Municipal Index June 1996 12 Short $(19,074)
Washington Fund Municipal Index June 1996 30 Short $(14,327)
</TABLE>
At March 31, 1996, each Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
The Trust 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
March 31, 1996:
<TABLE>
<CAPTION>
Principal Unrealized
Amount Appreciation
Fund Description Index (000 Omitted) Value (Depreciation)
=============== =========================================== ================== ============= ======= =============
<S> <C> <C> <C> <C> <C>
California Fund Puerto Rico Public Buildings Authority, PSA Municipal Swap
5.91s, 2016 $1,000 $ 929,420 $(70,580)
Louisiana Fund Louisiana Public Facilities Authority, Corp. Swap Rate
FGIC, 5.875s, 2012 Curve $1,060 $1,061,516 $ 1,516
Mississippi Puerto Rico Public Buildings Authority, PSA Municipal Swap
Fund 5.91s, 2016 $1,000 $ 929,420 $(70,580)
</TABLE>
(8) Subsequent Event
The Board of Trustees has approved the dissolution of the Louisiana, Texas
and Washington Funds, effective May 31, 1996.
37
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Municipal Series Trust and Shareholders of the
Portfolios of MFS Municipal Series Trust:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of MFS California Municipal Bond
Fund, MFS Florida Municipal Bond Fund, MFS Louisiana Municipal Bond Fund, MFS
Mississippi Municipal Bond Fund, MFS Texas Municipal Bond Fund, and MFS
Washington Municipal Bond Fund (portfolios of MFS Municipal Series Trust) as
of March 31, 1996, the related statements of operations for the year then
ended, the statements of changes in net assets for the years ended March 31,
1996 and 1995, and the financial highlights for each of the years in the two
year period ended March 31, 1996, the two months ended March 31, 1994, and
each of the years in the nine-year period ended January 31, 1994 (except for
MFS California Municipal Bond Fund which is for the two years ended March 31,
1996, the two months ended March 31, 1994, the eleven months ended January
31, 1994, and for each of the years in the eight-year period ended February
28, 1993). These financial statements and financial highlights are the
responsibility of the Trust'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 March 31, 1996 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 each of the
aforementioned Portfolios of MFS Municipal Series Trust at March 31, 1996,
the results of their operations, the changes in their net assets, and their
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 29, 1996
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.
38
<PAGE>
It's Easy to Contact Us
[phone] MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Market Outlook:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[question mark] MFS Personal Service
Account Service:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Product Information:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
IRA Service:
Call 1-800-637-1255 any business day
from 8 a.m. to 6 p.m. Eastern time.
Service for the Hearing-Impaired:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[envelope] MFS Mailing Addresses
For Personal Accounts:
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For IRA Accounts:
MFS Service Center, Inc.
J.W. McCormack Station
P.O. Box 4501
Boston, MA 02101-9817
39
<PAGE>
MFS Investment Opportunities
Mutual Funds
The MFS Family of Funds(r), shown on the facing page, falls into the eight
general categories below. All offer full-time professional management, a
diversified portfolio, and a wide array of shareholder services.
Stock funds seek growth of capital rather than income
through investments in stocks.
Stock and bond funds seek current income and growth of
capital through investments in both stocks and bonds.
Bond funds seek current income through investments in debt securities.
World funds seek stock, balanced, and bond fund objectives through
investments in U.S. and foreign stocks and bonds.
Limited-maturity funds seek current income and preservation of capital
through investments in debt securities with remaining maturities of five
years or less.
National tax-free bond funds seek current income exempt from federal income
tax through investments in debt securities issued by states and
municipalities.(1)
State tax-free bond funds seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state
and its municipalities.(1)
Money market funds seek preservation of capital and current income through
investments in short-term debt securities.(2)
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information
for literature(3) on MFS products and services: 1-800-637-2929, from 9 a.m.
to 5 p.m. Eastern time any business day (leave a message anytime).
(1) A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
(2) Investments in money market funds are not issued or guaranteed by the
U.S. government and there is no assurance that the fund will be able to
maintain a stable net asset value.
(3) Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
40
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the
types of securities in their portfolios. For free prospectuses containing
more complete information, including the exchange privilege and all charges
and expenses, please contact your financial adviser or call MFS at
1-800-637-2929 any business day from 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime). This material should be read carefully before investing
or sending money.
Stock
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Capital Growth Fund
MFS Emerging Growth Fund
MFS Gold & Natural Resources Fund
MFS Growth Opportunities Fund
MFS Managed Sectors Fund
MFS OTC Fund
MFS Research Fund
MFS Value Fund
Stock and Bond
MFS Total Return Fund
MFS Utilities Fund
Bond
MFS Bond Fund
MFS Government Mortgage Fund
MFS Government Securities Fund
MFS High Income Fund
MFS Intermediate Income Fund
MFS Strategic Income Fund
Limited Maturity Bond
MFS Government Limited Maturity Fund
MFS Limited Maturity Fund
MFS Municipal Limited Maturity Fund
World
MFS/Foreign & Colonial Emerging
Markets Equity Fund
MFS/Foreign & Colonial International
Growth Fund
MFS/Foreign & Colonial International
Growth and Income Fund
MFS World Asset Allocation FundSM
MFS World Equity Fund
MFS World Governments Fund
MFS World Growth Fund
MFS World Total Return Fund
National Tax-Free Bond
MFS Municipal Bond Fund
MFS Municipal High Income Fund
(closed to new investors)
MFS Municipal Income Fund
State Tax-Free Bond
Alabama, Arkansas, California, Florida, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
Money Market
MFS Cash Reserve Fund
MFS Government Money Market Fund
MFS Money Market Fund
<PAGE>
MFS(R) Municipal
Series Trust [DALBAR MFS #1 logo]
500 Boylston Street
Boston, MA 02116
MFS(R) California Municipal Bond Fund
MFS(R) Florida Municipal Bond Fund
MFS(R) Louisiana Municipal Bond Fund
MFS(R) Mississippi Municipal Bond Fund
MFS(R) Texas Municipal Bond Fund
MFS(R) Washington Municipal Bond Fund
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
27/227/327
56/256
49/249
58/258
57/257
MST-2C-5/96-25M 59/259
[logo]
MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
<PAGE>
PROSPECTUS
August 1, 1996
MFS(R) MUNICIPAL Class A Shares of Beneficial Interest
INCOME FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Page
----
1. Expense Summary .................................................. 2
2. The Fund ......................................................... 3
3. Condensed Financial Information .................................. 4
4. Investment Objective and Policies ................................ 5
5. Investment Techniques ............................................ 9
6. Management of the Fund ........................................... 13
7. Information Concerning Shares of the Fund ........................ 14
Purchases ................................................... 14
Exchanges ................................................... 19
Redemptions and Repurchases ................................. 20
Distribution Plans .......................................... 22
Distributions ............................................... 24
Tax Status .................................................. 24
Net Asset Value ............................................. 25
Description of Shares, Voting Rights and Liabilities ........ 25
Performance Information ..................................... 25
8. Shareholder Services ............................................. 26
Appendix A ....................................................... A-1
Appendix B ....................................................... B-1
Appendix C ....................................................... C-1
Appendix D ....................................................... D-1
Appendix E ....................................................... E-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL INCOME FUND 500 Boylston Street, Boston, MA 02116
(617) 954-5000
The investment objective of MFS Municipal Income Fund (the "Fund") is to
provide as high a level of current income exempt from federal income taxes as
is considered consistent with prudent investing while seeking protection of
shareholders' capital. The Fund is a diversified series of MFS Municipal
Series Trust (the "Trust"), an open-end management investment company. THE
FUND MAY INVEST UP TO ONE-THIRD OF ITS NET ASSETS IN LOWER RATED BONDS,
INCLUDING BONDS KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING (see "Investment Objective and
Policies" below). The minimum initial investment generally is $1,000 per
account (see "Purchases" below).
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE.
YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The
Trust, on behalf of the Fund, has filed with the Securities and Exchange
Commission (the "SEC") a Statement of Additional Information, as amended or
supplemented from time to time (the "SAI"), dated August 1, 1996, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 28 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). The SEC maintains an Internet World
Wide Web site that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding
the Fund. This Prospectus is available on the Adviser's Internet World Wide
Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
<TABLE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as a
percentage of offering price) ....................................... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) ............... See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ....................................................... 0.75% 0.75% 0.75%
Rule 12b-1 Fees ....................................................... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ..................................................... 0.30% 0.38% 0.30%
---- ---- ----
Total Operating Expenses .............................................. 1.30% 2.13% 2.05%
- ----------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge (a "CDSC") of 1% will be imposed on such purchases in the
event of certain redemption transactions within 12 months following such
purchases (see "Purchases" below).
(2) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per
annum of the average daily net assets attributable to the Class A shares.
Payment of the 0.10% per annum distribution fee will commence on such date
as the Trustees of the Trust may determine. See "Distribution Plans"
below. Distribution expenses paid under this Plan, together with the
initial sales charge, may cause long-term shareholders to pay more than
the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
(3) The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that the Fund will pay distribution/service fees aggregating up to
(but not necessarily all of) 1.00% per annum of the average daily net
assets attributable to the Class B shares under the Class B Distribution
Plan and the Class C shares under the Class C Distribution Plan (see
"Distribution Plans" below). Distribution expenses paid under these Plans,
together with any CDSC payable upon redemption of Class B shares and Class
C shares, may cause long-term shareholders to pay more than the maximum
sales charge that would have been permissible if imposed entirely as an
initial sales charge.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
<PAGE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
</TABLE>
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------ ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ............................... $ 60 $ 62 $ 22 $ 31 $ 21
3 years .............................. 87 97 67 64 64
5 years .............................. 115 134 114 110 110
10 years .............................. 197 225(2) 225(2) 238 238
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund
will bear directly or indirectly. More complete descriptions of the following
Fund expenses are set forth in the following sections of the Prospectus: (i)
varying sales charges on share purchases -- "Purchases"; (ii) varying CDSCs --
"Purchases"; (iii) management fees -- "Management of the Fund -- Investment
Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan) fees -- "Distribution
Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of
The Commonwealth of Massachusetts in 1984. The Trust presently consists of 16
series of shares, each of which represents a portfolio with separate
investment policies. Shares of the Fund are continuously sold to the public
and the Fund buys securities for its portfolio. Three classes of shares of the
Fund currently are offered to the general public. Class A shares are offered
at net asset value plus an initial sales charge up to maximum of 4.75% of the
offering price (or a CDSC of 1% upon redemption during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans) and subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an
annual distribution fee and service fee up to a maximum of 1.00% per annum;
Class B shares will convert to Class A shares approximately eight years after
purchase. Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC of 1.00% upon redemption during the
first year and an annual distribution fee and service fee of 1.00% per annum.
Class A and Class C shares do not convert to any other class of shares of the
Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. A majority of the Trustees are not affiliated with the Adviser. The
Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. The selection of investments and the way they are
managed depend on the conditions and trends in the economy and the financial
marketplaces. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors given upon their authority, as experts in accounting and auditing.
The Fund's current independent auditors are Deloitte & Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<CAPTION>
YEAR ENDED MARCH 31, YEAR ENDED YEAR ENDED MARCH 31,
-------------------------------------- NOVEMBER 30, ---------------------------------------------------
1996 1995 1994+++ 1993** 1996 1995 1994+++ 1993
---- ---- ------- ------ ---- ---- ------- ----
CLASS A CLASS B
---------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of
period ........... $ 8.56 $ 8.56 $ 8.99 $ 9.15 $ 8.57 $ 8.56 $ 8.99 $ 8.73
----- ----- ----- ----- ----- ----- ----- -----
Income from investment operations# --
Net investment
income(S) ...... $ 0.51 $ 0.50 $ 0.15 $ 0.12 $ 0.43 $ 0.44 $ 0.14 $ 0.42
Net realized and
unrealized gain
(loss) on
investments .... 0.05 0.02 (0.51) (0.16) 0.06 -- (0.51) 0.42
----- ----- ----- ----- ----- ----- ----- -----
Total from
investment
operations ... $ 0.56 $ 0.52 $ (0.36) $ (0.04) $ 0.49 $ 0.44 $ (0.37) $ 0.84
----- ----- ----- ----- ----- ----- ----- -----
Less distributions
declared to
shareholders --
From net
investment
income II ..... $ (0.50) $ (0.52) $ (0.02) $ (0.11) $ (0.43) $ (0.43) $ (0.01) $ (0.45)
In excess of net
investment
income ......... -- -- -- -- -- -- -- (0.03)
From net realized
gain on
investments .... -- -- (0.01) -- -- -- (0.01) (0.10)
In excess of net
realized gain on
investments .... -- -- ++ (0.04) (0.01) -- -- (0.04) --
----- ----- ----- ----- ----- ----- ----- -----
Total
distributions
declared to
shareholders . $ (0.50) $ (0.52) $ (0.07) $ (0.12) $ (0.43) $ (0.43) $ (0.06) $ (0.58)
----- ----- ----- ----- ----- ----- ----- -----
Net asset value --
end of period .... $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 8.63 $ 8.57 $ 8.56 $ 8.99
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(+) .... 6.81% 6.33% (7.90)%+ (1.80)%+ 5.87% 5.32% (8.97)%+ 9.95%
RATIOS (TO AVERAGE
NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ....... 1.28% 1.13% 1.07%+ 0.76%+ 2.13% 2.16% 2.24%+ 2.11%
Net investment
income ......... 5.75% 6.20% 5.31%+ 4.94%+ 4.90% 5.15% 4.74%+ 4.92%
PORTFOLIO TURNOVER . 23% 25% 9% 30% 23% 25% 9% 30%
NET ASSETS AT END OF
PERIOD
(000 OMITTED) .... $121,903 $25,270 $5,595 $ 461 $306,889 $412,965 $479,478 $518,179
** For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
+ Annualized.
++ Distributions in excess of net realized gains were less than $0.01 per share for Class A shares for the year ended
March 31, 1995.
+++ For the four-month period ended March 31, 1994.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
## For fiscal periods ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
II Includes distributions in excess of net investment income of $0.0003 per share for Class A, Class B and Class C shares
for the year ended March 31, 1996.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<CAPTION>
YEAR ENDED NOVEMBER 30, YEAR ENDED MARCH 31,
------------------------------------------------------------------- -----------------------------
1992 1991 1990 1989 1988 1987* 1996 1995 1994**
---- ---- ---- ---- ---- ----- ---- ---- ------
CLASS B CLASS C
------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .. $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income ........... $ 0.47 $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38 $ 0.43 $ 0.44 $ 0.09
Net realized and
unrealized gain
(loss) on
investments .... 0.26 0.25 (0.15) 0.30 0.43 (0.83) 0.07 0.01 (0.59)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment operations $ 0.73 $ 0.74 $ 0.34 $ 0.81 $ 0.93 $ (0.45) $ 0.50 $ 0.45 $ (0.50)
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income II ........ $(0.48) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35) $(0.43) $(0.44) $(0.01)
From paid-in capital $(0.02) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders ... $(0.50) $(0.49) $(0.50) $(0.51) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period .......... $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return ......... 8.82% 9.21% 4.18% 10.24% 12.53% (5.79)%+ 5.94% 5.39% (19.42)%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Expenses## ......... 2.03% 2.04% 2.05% 2.07% 2.09% 2.03%+ 2.05% 2.09% 2.18%+
Net investment
income ........... 5.50% 5.82% 5.99% 6.09% 6.38% 6.00%+ 4.95% 5.23% 4.62%+
PORTFOLIO TURNOVER ... 52% 73% 91% 127% 171% 138% 23% 25% 9%
NET ASSETS AT END OF
PERIOD
(000 OMITTED) ........ $449,949 $409,084 $379,239 $343,887 $244,825 $183,935 $16,504 $10,936 $6,393
* For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1994.
+ Annualized.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
## For fiscal periods ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
II Includes distributions in excess of net investment income of $0.0003 per share for Class A, Class B and Class C shares
for the year ended March 31, 1996.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The 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. As a matter of fundamental policy, the
Fund seeks to achieve its investment objective by investing primarily (i.e.,
at least 80% of its assets under normal circumstances) in debt securities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds" or "tax-exempt securities"). The interest income on certain
of these obligations may be subject to an alternative minimum tax, which is
considered to be tax-exempt for purposes of the 80% test described above.
Under normal market conditions, substantially all of the Fund's assets will be
invested in:
(i) tax-exempt securities which are rated AAA, AA or A by Standard &
Poor's Ratings Services ("S&P"), or by Fitch Investors Service, Inc.
("Fitch") or are rated Aaa, Aa or A by Moody's Investors Service, Inc.
("Moody's");
(ii) notes of issuers having an issue of outstanding Municipal Bonds
rated AAA, AA or A by S&P or by Fitch or Aaa, Aa or A by Moody's or which
are guaranteed by the U.S. Government;
(iii) obligations issued or guaranteed by the U.S. Government or its
agencies, authorities or instrumentalities;
(iv) commercial paper, obligations of banks (including certificates of
deposit, bankers' acceptances and repurchase agreements) with $1 billion
or more of assets, and cash; and/or
(v) tax-exempt securities which are not rated or which are rated lower
than the three highest grades of S&P, Fitch or Moody's, provided that not
more than one-third of the net assets of the Fund will be invested in such
securities.
Interest income from the investments described in paragraphs (iii) and (iv)
above may be taxable to shareholders as ordinary income. For a description of
ratings of S&P, Fitch and Moody's of Municipal Bonds, see Appendix B to this
Prospectus. See Appendix C for a description of U.S. Government obligations
and short-term investments. For a comparison of yields on Municipal Bonds and
taxable securities, see the Taxable Equivalent Yield Table in Appendix D to
this Prospectus. For a chart indicating the composition of the bond portion of
the Fund's portfolio for its fiscal year ended March 31, 1996, with the debt
securities separated into rating categories, see Appendix E to this Prospectus
(see "Investment Objective and Policies -- Risk Factors of Lower Rated
Securities" below for a description of the risks involved in investing in
these lower rated fixed income securities).
Although higher quality tax-exempt securities held by the Fund may produce
lower yields, they are generally more marketable.
The securities in which the Fund may invest also include zero coupon bonds
(see "Investment Techniques -- Zero Coupon Bonds" below) and securities
purchased on a "when-issued" or on a "forward delivery" basis (see "Investment
Techniques -- When Issued Securities" below). The Fund may also invest in
variable and floating rate obligations and inverse floating rate obligations
(see "Investment Techniques -- Variable and Floating Rate Obligations" and "--
Inverse Floating Rate Obligations" below). In addition, the Fund may write
covered call and put options and purchase call and put options, including
warrants, on fixed income securities, primarily for hedging purposes and also
in an effort to increase current income (see "Investment Techniques --
Options" below). The Fund may also purchase and sell interest rate futures
contracts on fixed income securities and indexes of such securities and may
write and purchase options thereon for hedging purposes and for non-hedging
purposes, subject to applicable law (see "Investment Techniques -- Futures
Contracts and Options on Futures Contracts" below). Gains recognized from
options and futures transactions engaged in by the Fund are taxable income to
shareholders.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds (see "Tax Status" below for the effect of current
federal tax law on this exemption).
There is no formula as to the percentage of assets that may be invested in any
one type of security. Cash, short-term obligations, repurchase agreements or
other forms of debt securities are held to provide a reserve for future
purchases of securities. Subject to tax requirements, portfolio changes are
made without regard to the length of time a security has been held, or whether
a sale would result in a profit or loss.
ADDITIONAL INFORMATION AS TO INVESTMENT OBJECTIVE AND POLICIES
FIXED INCOME SECURITIES -- When and if available, the Fund may purchase fixed
income securities at a discount from face value. However, the Fund does not
intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on these securities remain
attractive.
CHARACTERISTICS OF MUNICIPAL BONDS -- The Fund may invest its assets in a
relatively high percentage of Municipal Bonds issued by entities having
similar characteristics. The issuers may pay their interest obligations from
revenue of similar projects such as multi-family housing, nursing homes,
electric utility systems, hospitals or life care facilities. This may make the
Fund more susceptible to similar economic, political or regulatory
occurrences. As the similarity in issuers increases, the potential for
fluctuation of the net asset value of the Fund's shares also increases. The
Fund will only invest in securities of issuers which it believes will make
timely payments of interest and principal.
The Fund may invest more than 25% of its assets in industrial revenue bonds
(referred to under current tax law as private activity bonds), and also may
invest more than 25% of its assets in revenue bonds issued for housing,
including multi-family housing, health care facilities or electric utilities,
at times when the relative value of issues of such a type is considered, in
the judgment of the Adviser, to be more favorable than that of other available
types of issues, taking into consideration the particular restrictions on
investment flexibility arising from the investment objective of the Fund of
providing current income exempt from federal income taxes. Therefore,
investors should also be aware of the risks which these investments may
entail. Industrial revenue bonds are issued by various state and local
agencies to finance various projects.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local housing
authority and are secured only by the revenues of mortgages originated by the
authority using the proceeds of the bond issue. Because of the impossibility
of precisely predicting demand for mortgages from the proceeds of such an
issue, there is a risk that the proceeds of the issue will be in excess of
demand, which would result in early retirement of the bonds by the issuer.
Moreover, such housing revenue bonds depend for their repayment upon the cash
flow from the underlying mortgages, which cannot be precisely predicted when
the bonds are issued. Any difference in the actual cash flow from such
mortgages from the assumed cash flow could have an adverse impact upon the
ability of the issuer to make scheduled payments of principal and interest on
the bonds, or could result in early retirement of the bonds. Additionally,
such bonds depend in part for scheduled payments of principal and interest
upon reserve funds established from the proceeds of the bonds, assuming
certain rates of return on investment of such reserve funds. If the assumed
rates of return are not realized because of changes in interest rate levels or
for other reasons, the actual cash flow for scheduled payments of principal
and interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including satisfactory
completion of construction within cost constraints, the achievement and
maintainance of a sufficient level of occupancy, sound management of the
developments, timely and adequate increases in rents to cover increases in
operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and
economic trends.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the form of a lease or installment
purchase which is issued by state and local governments to acquire equipment
and facilities. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds. Leases and installment
purchase or conditional sale contracts (which normally provide for title to
the leased asset to pass eventually to the governmental issuer) have evolved
as a means for governmental issuers to acquire property and equipment without
meeting the constitutional and statutory requirements for the issuance of
debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by
the appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In light of these concerns, the Fund
has adopted and follows procedures for determining whether municipal lease
securities purchased by the Fund are liquid and thus not subject to the Fund's
limitation on investing not more than 15% of its net assets in illiquid
investments, or liquid and thus not subject to such limitation. The procedures
require that a number of factors be used in evaluating the liquidity of a
municipal lease security, including the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, the willingness of dealers to
undertake to make a market in the security, the nature of the marketplace in
which the security trades, the credit quality of the security and other
factors which the Adviser may deem relevant. There are, of course, variations
in the security of municipal lease securities, both within a particular
classification and between classifications, depending on numerous factors.
Electric utilities face problems in financing large construction programs in
inflationary periods, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty
in obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory
problems, the effect of energy conservation and difficulty of the capital
market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs
importantly in this process. The facilities may also be affected by regulatory
cost restrictions applied to health care delivery in general, particularly
state regulations or changes in Medicare and Medicaid payments or
qualifications, or restrictions imposed by medical insurance companies. They
may also face competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are often
based on feasibility studies which contain projections of expenses, revenues
and occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability
of the hospital to provide the services required, management capabilities,
economic developments in the service area, efforts by insurers and government
agencies to limit rates and expenses, confidence in the hospital, service area
economic developments, competition, availability and expense of malpractice
insurance, Medicaid and Medicare funding, and possible federal legislation
limiting the rates of increase of hospital charges.
The Fund may also invest in bonds for industrial and other projects, such as
sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components, there
are risks associated with their production, handling and disposal.
RESTRICTED SECURITIES -- The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a
continuing review of the trading markets for a specific Rule 144A security,
whether such security is liquid and thus not subject to the Fund's limitations
on investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to MFS the daily
function of determining and monitoring the liquidity of Rule 144A securities.
The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations. The Board will carefully monitor the
Fund's investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of decreasing the
level of liquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's 15% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that
may not be sold under Rule 144A, which presents certain risks. As a result,
the Fund might not be able to sell these securities when the Adviser wishes to
do so, or might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
RISK FACTORS REGARDING LOWER RATED SECURITIES -- The Fund may invest to a
limited extent in lower rated fixed income securities or comparable unrated
securities. Investments in fixed income securities offering the high current
income sought by the Fund, while generally providing greater income and
opportunity for gain than investments in higher rated securities, usually
entail greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities), and involve greater
volatility of price (especially during periods of economic uncertainty or
change) than investments in higher rated securities and because yields may
vary over time, no specified level of income can ever be assured. In
particular, securities rated lower than Baa by Moody's or BBB by S&P or Fitch
or comparable unrated securities (commonly known as "junk bonds") are
considered speculative. These lower rated high yielding fixed income
securities generally tend to reflect economic changes (and the outlook for
economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which
react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities are also affected by
changes in interest rates). In the past, economic downturns or an increase in
interest rates have under certain circumstances caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. During certain periods,
the higher yields on the Fund's lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, the Fund may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Fund's yield despite the
actual loss of principal. The prices for these securities may be affected by
legislative and regulatory developments. Changes in the value of securities
subsequent to their acquisition will not affect cash income or yield to
maturity to the Fund but will be reflected in the net asset value of shares of
the Fund. The market for these lower rated fixed income securities may be less
liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these
lower rated securities at their fair value to meet redemption requests or to
respond to changes in the market. No minimum rating standard is required by
the Fund. To the extent the Fund invests in these lower rated fixed income
securities, the achievement of its investment objective may be more dependent
on the Adviser's own credit analysis than in the case of a fund investing in
higher quality bonds. While the Adviser may refer to ratings issued by
established credit rating agencies, it is not a policy of the Fund to rely
exclusively on ratings issued by these agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality.
The Fund may also invest in fixed income securities rated Baa by Moody's or
BBB by S&P or Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
ADDITIONAL RISK FACTORS -- The net asset value of the shares of an open-end
investment company which may invest in fixed income securities changes as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a fixed income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can be expected to
decline.
Although changes in the value of securities subsequent to their acquisition
are reflected in the net asset value of shares of the Fund, such changes will
not affect the income received by the Fund from such securities. However, the
dividends paid by the Fund, if any, will increase or decrease in relation to
the income received by the Fund from its investments, which would in any case
be reduced by the Fund's expenses before it is distributed to shareholders.
In addition, the use of options, futures contracts and options on futures
contracts (see "Investment Techniques" below) may result in the loss of
principal, particularly where such instruments are traded for other than
hedging purposes (e.g., to enhance current yield).
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of
unusual market conditions when the Adviser believes that investing for
temporary defensive purposes is appropriate, or in order to meet anticipated
redemption requests, up to 50% of the assets of the Fund may be invested in
cash or cash equivalents including, but not limited to, obligations of banks
(including certificates of deposit, bankers' acceptances and repurchase
agreements) with 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.
U.S. Government securities also include interests in trusts or other entities
representing interests in obligations that are issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities. See Appendix
C to this Prospectus for a description of U.S. Government obligations and
certain short-term investments.
5. INVESTMENT TECHNIQUES
LENDING OF SECURITIES: The 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 thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would continue to collect the
equivalent of the interest on the securities loaned and would also receive
either interest (through investment of cash collateral) or a fee (if the
collateral is U S. Government securities or a letter of credit). For
additional information, see the SAI.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement the Fund acquires securities subject to the seller's
agreement to repurchase them at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, the Fund has adopted certain
procedures which are intended to minimize risk.
WHEN-ISSUED SECURITIES: In order to help ensure the availability of suitable
securities for its portfolio, the Fund may purchase securities on a "when-
issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. It is expected that, under normal circumstances, the Fund
will take delivery of such securities. In general, the Fund does not pay for
the securities until received and does not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such bases, the Fund will establish a segregated
account consisting of cash, short-term money market instruments or high
quality debt securities equal to the amount of the commitments to purchase
"when-issued" securities. For additional information, see the SAI.
ZERO COUPON BONDS: The Fund may invest in zero coupon bonds. Zero coupon bonds
are debt obligations which are issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Zero coupon bonds do not require the
periodic payment of interest. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due
to changes in interest rates than debt obligations which make regular payments
of interest. The Fund will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in variable and
floating rate obligations. The interest rates payable on certain securities in
which the Fund may invest are not fixed and may fluctuate based upon changes
in market rates. Variable rate obligations have an interest rate which is
adjusted at predesignated periods and interest on floating rate obligations is
adjusted whenever there is a change in the market rate of interest on which
the interest rate payable is based. For additional information concerning
variable and floating rate obligations, see the SAI.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds, or other obligations
or certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in
the opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a
rate which is a multiple (typically two) of the rate at which fixed-rate long-
term tax-exempt securities increase or decrease in response to such changes.
As a result, such obligations have the effect of providing investment leverage
and may be more volatile than long-term fixed-rate tax-exempt obligations. For
additional information, see the SAI.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short-term to intermediate-
term fixed-income securities whose values at maturity (i.e., principal value)
or interest rates rise or fall according to the change in one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself.
TRANSACTIONS IN OPTIONS AND FUTURES: The Fund may enter into transactions in
options and futures on a variety of instruments and indexes, in order to
protect against declines in the value of portfolio securities or increases in
the cost of securities or other assets to be acquired and, subject to
applicable law, to increase the Fund's gross income. The types of instruments
to be purchased and sold by the Fund are described in the SAI, which should be
read in conjunction with the following section. In addition, the SAI contains
a further discussion of the nature of the transactions which may be entered
into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call and put
options and purchase call and put options on fixed income securities. The Fund
will write options on such securities for the purpose of increasing its return
on such securities and/or protect the values of its portfolio. In particular,
where 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 increase its gross income and will offset in part the reduced value of
the portfolio security underlying the option, or the increased cost of
portfolio securities to be acquired. In contrast, however, if the price of the
underlying security moves adversely to the Fund's position, the option may be
exercised and the Fund will be required to purchase or sell the underlying
security at a disadvantageous price, which may only be partially offset by the
amount of the premium. The Fund may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has
written call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. In the
event that the expected market fluctuations occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the options purchased. The premium paid for a put or call option plus
any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value
to the Fund.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to
the holder of the warrant the right, but not the obligation, to purchase a
fixed income security of a specific description from the issuer on a certain
date or dates (the exercise date) at a fixed exercise price.
In certain instances, the Fund may 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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into interest rate futures contracts
on fixed income securities and indexes of such securities. (Unless otherwise
specified, such futures contracts are referred to as "Futures Contracts.") The
Fund will utilize Futures Contracts for hedging and non-hedging purposes,
subject to applicable law. Purchases or sales of Futures Contracts for hedging
purposes are used to hedge against the effects of interest rate changes on the
Fund's current or intended investment in fixed income securities. 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 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 part, by gains on Futures Contracts purchased by the Fund. The Fund
will incur brokerage fees when it purchases and sells Futures Contracts, and
it will be required to make and maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and write options on
Futures Contracts. (Unless otherwise specified, options on Futures Contracts
are referred to as "Options on Futures Contracts.") Such investment strategies
will be used for hedging and non-hedging purposes, subject to applicable law.
Put and call Options on Futures Contracts may be traded by the Fund in order
to protect against declines in the values of portfolio securities or against
increases in the cost of securities to be acquired. Purchases of Options on
Futures Contracts may present less risk in hedging the portfolio of the Fund
than the purchase or sale of the underlying Futures Contracts since the
potential loss is limited to the amount of the premium plus related
transaction costs. The writing of such options, however, does not present less
risk than the trading of Futures Contracts and will constitute only a partial
hedge, up to the amount of the premium received. In addition, if an option is
exercised, the Fund may suffer a loss on the transaction.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND
OPTIONS: Although the Fund may enter into certain transactions in Futures
Contracts, Options on Futures Contracts and options for hedging purposes, such
transactions do involve certain risks. For example, a lack of correlation
between the instrument underlying an option or Futures Contract and the assets
being hedged, or unexpected adverse price movements, could render the Fund's
hedging strategy unsuccessful and could result in losses. "Cross hedging"
transactions may involve greater correlation risks. In addition, there can be
no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Fund may be required to maintain a position until
exercise or expiration, which could result in losses. As noted, the Fund may
also enter into Futures Contracts, Options on Futures Contracts and options
for other than hedging purposes (subject to applicable law), including
speculative transactions, which involve greater risk. In particular, in
entering into such transactions, the Fund may experience losses which are not
offset by gains on other portfolio positions, thereby reducing its gross
income. In addition, the markets for such instruments may be extremely
volatile from time to time, as discussed in the SAI, which could increase the
risks incurred by the Fund in entering into such transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC and in the over-the-counter market. Futures Contracts and Options on
Futures Contracts may be entered into on U.S. exchanges regulated by the
Commodity Futures Trading Commission (the "CFTC"). The risks related to
transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into by the Fund are set forth in greater detail in
the SAI, which should be reviewed in conjunction with the foregoing
discussion.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling securities to
help attain its investment objective. This may result in increases or
decreases in the Fund's current income available for distribution to the
Fund's shareholders and in the holding by the Fund of debt securities which
sell at moderate to substantial premiums or discounts from face value. The
Fund will engage in portfolio trading if it believes a transaction, net of
costs (including custodian charges), will help in attaining its investment
objective (see "Portfolio Transactions and Brokerage Commissions" in the SAI).
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions. From time to time, the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to
pay a portion of the Fund's operating expenses (e.g., fees charged by the
custodian of the Fund's assets). For a further discussion of portfolio
trading, see the SAI.
----------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Geoffrey L. Schechter, a Vice
President of the Adviser, has been employed as a portfolio manager by the
Adviser since 1993 and has been the Fund's portfolio manager since February 1,
1996. Prior to joining MFS, Mr. Schechter was a Senior Investment Analyst at
Liberty Mutual Insurance Company. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For its
services and facilities, the Adviser receives a management fee, computed and
paid monthly, in an amount equal to 0.30% of the Fund's average daily net
assets plus 6.43% of its gross income for its then-current fiscal year.
For the year ended March 31, 1996, the investment advisory fees received under
the Advisory Agreement were $3,495,983 (of which $1,397,610 was based on
average daily net assets and $2,098,373 on gross income), equal to, on an
annualized basis, 0.75% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Variable Insurance Trust, MFS Union Standard
Trust, MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and
seven variable accounts each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $47.2 billion on behalf of approximately 2.1 million investor
accounts as of June 28, 1996. As of such date, the MFS organization managed
approximately $23.6 billion of assets invested in equity securities and
approximately $19.5 billion of assets invested in fixed income securities.
Approximately $3.9 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of
U.S. issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn
is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold
D. Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the Chairman, Mr.
Shames is the President and Mr. Scott is the Secretary and a Senior Executive
Vice President of MFS. Messrs. McNeil and Gardner are the Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life insurance
company, is one of the largest international life insurance companies and has
been operating in the United States since 1895, establishing a headquarters
office here in 1973. The executive officers of MFS report to the Chairman of
Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. Cynthia M. Brown, Robert A. Dennis, David R. King,
Daniel E. McManus, Geoffrey L. Schechter, David B. Smith, W. Thomas London,
Stephen E. Cavan, James R. Bordewick, Jr. and James O. Yost, all of whom are
officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypothekenund Weschsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial share their views on a variety of investment related issues, such as
the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS has access to the
extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial has access to the extensive U.S. equity investment
expertise of MFS. Certain MFS investment analysts are working for an extended
period with Foreign & Colonial's portfolio managers and investment analysts at
their offices in London. In return, one or more Foreign & Colonial employees
are working in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institution ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
The Fund offers three classes of shares (Class A, Class B and Class C shares)
which bear sales charges and distribution fees in different forms and amounts,
as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
------------------------------------------ DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
------------------ -------------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000 .................................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ..................... 4.00 4.17 3.20
$250,000 but less than $500,000 ..................... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ................... 2.20 2.25 1.70
$1,000,000 or more .................................. None** None** See Below**
- -----------------------------------------------------------------------------------------------------------------------------
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge, but subject to a CDSC equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend
and capital gain distributions) or the total cost of such shares, in the event
of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization has demonstrated to the satisfaction of MFD
that either (i) the employer has at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds will be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds will be in an
aggregate amount of at least $500,000 within a reasonable period of
time, as determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. The
retirement plan will qualify under this category only if the plan or
its sponsoring organization informs the Shareholder Servicing Agent
prior to the purchases that the plan has a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds.
The Shareholder Servicing Agent has no obligation independently to
determine whether such a plan qualifies under this category.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchases).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of the Shareholder Servicing Agent that the retirement plan
has, at the time of certification or will have pursuant to a purchase
order placed with the certification, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds and aggregate
assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ..................................................... 4%
Second .................................................... 4%
Third ..................................................... 3%
Fourth .................................................... 3%
Fifth ..................................................... 2%
Sixth ..................................................... 1%
Seventh and following ..................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's Class B
Distribution Plan (see "Distribution Plans" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above, only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to
such purchases, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable under
the Class B Distribution Plan. As discussed above, such retirement plans are
eligible to purchase Class A shares of the Fund at net asset value without an
initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class
or classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING
ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS
ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A
PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organizatiion subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change
to the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the same Fund. Shares purchased through the reinvestment of distributions paid
in respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. (see "Distribution Plans" below). However, for
purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC of 1.00% upon redemption during
the first year. Class C shares do not convert to any other class of shares of
the Fund. The maximum investment in Class C shares that may be made is up to
$1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar recordkeeping program made available by the
Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject any specific purchase order or to restrict purchases by a
particular purchaser (or group of related purchasers). The Fund or MFD may
reject or restrict any purchases by a particular purchaser or group, for
example, when such purchase is contrary to the best interests of the Fund's
other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are
effected in a timed account in the same calendar quarter or (ii) a purchase
would result in shares being held in timed accounts by market timers
representing more than (x) one percent of the Fund's net assets or (y)
specified dollar amounts in the case of certain MFS Funds which may include
the Fund and which may change from time to time. The Fund and MFD each reserve
the right to request market timers to redeem their shares at net asset value,
less any applicable CDSC, if either of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from
time to time, MFD may pay dealers 100% of the applicable sales charge on sales
of Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives, payment for
travel expenses, including lodging, incurred by registered representatives for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds at net asset value (if Shares of one class may not be
exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS):
No initial sales charges or CDSC will be imposed in connection with an
exchange from shares of an MFS Fund to shares of any other MFS Fund, except
with respect to exchanges from an MFS money market fund to another MFS Fund
which is not an MFS money market fund (discussed below). With respect to an
exchange involving shares subject to a CDSC, the CDSC will be unaffected by
the exchange and the holding period for purposes of calculating the CDSC will
carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received
for an established account by the Shareholder Servicing Agent in proper form
(i.e., if in writing -- signed by the record owner(s) exactly as the shares
are registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record) and each exchange must involve either
shares having an aggregate value of at least $1,000 ($50 in the case of
retirement plan participants whose sponsoring organizations subscribe to the
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by the Shareholder Servicing Agent) or all the shares in the
account. If an Exchange Request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the New York
Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the
exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions and
Repurchases -- Redemptions by Telephone." The exchange privilege (or any
aspect of it) may be changed or discontinued and is subject to certain
limitations, including certain restrictions on purchases by market timers.
Special procedures, privileges and restrictions with respect to exchanges may
apply to market timers who enter into an agreement with MFD, as set forth in
such agreement. See "Purchases -- General -- Right to Reject Purchase Orders/
Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists. See "Tax Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800) 225-
2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge, if the redemption proceeds do not exceed $1,000, and
are wired in federal funds to the designated account if the redemption
proceeds exceed $1,000. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of
the Fund on that day. Subject to the conditions described in this section,
proceeds of a redemption are normally mailed or wired on the next business day
following the date of receipt of the order for redemption. The Shareholder
Servicing Agent may be liable for any losses resulting from unauthorized
telephone transactions if it does not follow reasonable procedures designed to
verify the identity of the caller. The Shareholder Servicing Agent will
request personal or other information from the caller, and will normally also
record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A and Class C shares may be redeemed by check.
A shareholder owning Class A or Class C shares of the Fund may elect to have a
special account with State Street Bank and Trust Company (the "Bank") for the
purpose of redeeming Class A or Class C shares from his or her account by
check. The Bank will provide each Class A or Class C shareholder, upon
request, with forms of checks drawn on the Bank. Only shareholders having
accounts in which no share certificates have been issued will be permitted to
redeem shares by check. Checks may be made payable in any amount not less than
$500. Shareholders wishing to avail themselves of this redemption by check
privilege should so request on their Account Application, must execute
signature cards (for additional information, see the Account Application) with
signature guaranteed in the manner set forth under the caption "Signature
Guarantee" below, and must return any Class A or Class C share certificates
issued to them. Additional documentation will be required from corporations,
partnerships, fiduciaries or other such institutional investors. All checks
must be signed by the shareholder(s) of record exactly as the account is
registered before the Bank will honor them. The shareholders of joint accounts
may authorize each shareholder to redeem by check. The check may not draw on
monthly dividends which have been declared but not distributed. SHAREHOLDERS
WHO PURCHASE CLASS A AND CLASS C SHARES BY CHECK (INCLUDING CERTIFIED CHECKS
OR CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY
HAVE BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO
THE BANK FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL
BE REDEEMED TO COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE
AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK,
PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE
WITHHELD IS GREATER THAN THE VALUE OF CLASS A OR CLASS C SHARES HELD IN THE
SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID, AND THE SHAREHOLDER
MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF CHECKS DUE TO
FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL
OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND
ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE
EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS. There is
presently no charge to the shareholder for the maintenance of this special
account or for the clearance of any checks, but the Fund and the Bank reserve
the right to impose such charges or to modify or terminate the redemption by
check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i)
with respect to Class A and Class C shares, 12 months (however, the CDSC on
Class A shares is only imposed with respect to purchases of $1 million or more
of Class A shares or purchases by certain retirement plans of Class A shares);
or (ii) with respect to Class B shares, six years. Purchases of Class A shares
made during a calendar month, regardless of when during the month the
investment occurred, will age one month on the last day of the month and each
subsequent month. Class C shares and Class B shares purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For
Class B shares of the Fund purchased prior to January 1, 1993, transactions
will be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year. Prior to April 1, 1996, Class C shares of the MFS Funds were
not subject to a CDSC upon redemption. In no event will Class C shares of the
MFS Funds purchased prior to this date be subject to a CDSC. For the purpose
of calculating the CDSC upon redemption of shares acquired in an exchange on
or after April 1, 1996, the purchase of shares acquired in one or more
exchanges is deemed to have occurred at the time of the original purchase of
the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore,
at the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the then-
current value of Reinvested Shares is not subject to the CDSC, but (iii) any
amount of the redemption in excess of the aggregate of the then-current value
of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will
first be applied against the amount of Direct Purchases which will result in
any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will
be imposed upon redemption. Such purchases under the Reinstatement Privilege
are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS: Subject to compliance with applicable regulations,
the Fund has reserved the right to pay the redemption or repurchase price of
shares of the Fund, either totally or partially, by a distribution in-kind of
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS: Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and
its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a certain
date. Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate net
asset value at or above a certain dollar level. Dealers may from time to time
be required to meet certain criteria in order to receive service fees. MFD or
its affiliates are entitled to retain all service fees payable under each
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the separate Distribution Plans. While the amount
of compensation received by MFD in the form of distribution fees during any
year may be more or less than the expense incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant
to an initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). See "Purchases -- Class A Shares" above. In addition to the initial
sales charge, the dealer also generally receives the ongoing 0.25% per annum
service fee, as discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution
fee to cover distribution-related expenses incurred by it under its
distribution agreement with the Fund, including commissions to dealers and
payments to wholesalers employed by MFD (e.g., MFD pays commission to dealers
with respect to purchases of $1 million or more and purchases by certain
retirement plans of Class A shares which are sold at net asset value but which
are subject to a 1% CDSC for one year after purchase). See "Purchases -- Class
A Shares" above. In addition, to the extent that the aggregate service and
distribution fees paid under the Class A Distribution Plan do not exceed 0.35%
per annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay such distribution-related expenses or
other distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefor, MFD may retain the service fee paid by the Fund
with respect to such shares for the first year after purchase. Dealers will
become eligible to receive the ongoing 0.25% per annum service fee with
respect to such shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may be
used by MFD to cover its distribution-related expenses under its distribution
agreement with the Fund (including the 3.75% commission it pays to dealers
upon purchase of Class B shares, as described under "Purchases -- Class B
Shares" above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class
C shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund
with respect to such shares for the first year after purchase, and dealers
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Class C Distribution Plan (which MFD in turn pays to dealers),
as discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Class C Distribution Plan equal, on an annual
basis, to 0.75% of the Fund's average daily net assets attributable to Class C
shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class
B and Class C distribution and service fees for its current fiscal year are
0.25%, 1.00% and 1.00% per annum of the Fund's net assets, respectively.
Payment of the 0.10% per annum Class A distribution fee will commence on such
date as the Trustees of the Trust may determine.
DISTRIBUTIONS
The Fund intends to declare daily and pay to its shareholders substantially
all of its net investment income as dividends on a monthly basis. Dividends
generally are distributed on the first business day of the following month.
The Fund may make one or more distributions during the calendar year to its
shareholders from long-term capital gains and may also make one or more
distributions during the calendar year to its shareholders from short-term
capital gains. Shareholders may elect to receive dividends and capital gain
distributions in either cash or additional shares of the same class with
respect to which a distribution is paid. See "Tax Status" and "Shareholder
Services -- Distribution Options" below. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares
of the same class with respect to which a distribution is made. Distributions
paid by the Fund with respect to Class A shares generally will be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares generally will be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes.
The Fund expects that the dividends paid to shareholders from interest on
Municipal Obligations will be exempt from federal income tax because the Fund
intends to satisfy certain requirements of the Code. One such requirement is
that at the close of each quarter of its taxable year, at least 50% of the
value of the Fund's total assets consist of obligations whose interest is
exempt from federal income tax. Distributions of income from capital gains,
from investments in taxable securities, and from certain other transactions
(including options and futures transactions) will be taxable to the
shareholders, whether distributed in cash or in additional shares. Also,
certain Fund distributions may be subject to state and local income taxes,
depending on the nature of the distribution and the residence of the
shareholder. Residents of certain states may be subject to an intangibles tax
or a personal property tax on all or a portion of the value of their Fund
shares. Investors should consult with their tax advisers in this regard.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Certain distributions of exempt-interest dividends may also be a
tax preference item for purposes of the federal individual and corporate
alternative minimum tax. All exempt-interest dividends may increase a
corporate shareholder's alternative minimum tax liability. Entities or persons
who are "substantial users" (or persons related to "substantial users") of the
facilities financed by certain private activity bonds should consult their tax
advisers before purchasing shares of the Fund.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that calendar year, including the portion, if any, taxable
as ordinary income, the portion, if any, taxable as long-term capital gain,
the portion, if any, representing a return of capital (which is free of
current taxes but results in a basis reduction), the portion exempt from
federal income taxes as "exempt-interest dividends," the portion, if any, that
is a tax preference item under the federal alternative minimum tax, and the
amount, if any, of federal income tax withheld.
Fund distributions of net capital gains and net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares
shortly before the Fund makes a distribution of net capital gains or net
short-term capital gains may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
taxable dividends and certain other payments that are subject to such
withholding and that are made to persons who are neither citizens nor
residents of the U.S., regardless of whether a lower rate may be permitted
under an applicable treaty. The Fund is also required in certain circumstances
to apply backup withholding at a rate of 31% on taxable dividends and
redemption proceeds paid to any shareholder (including a shareholder who is
neither a citizen nor a resident of the U.S.) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. However, backup withholding will not be applied to payments which
have been subject to 30% withholding. Prospective shareholders should read the
Account Application for information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax
consequences of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is
determined each day during which the Exchange is open for trading. This
determination is made once each such day as of the close of regular trading on
the Exchange by deducting the amount of the liabilities attributable to the
class from the value of the Fund's assets attributable to the class and
dividing the difference by the number of shares of the class outstanding.
Assets in the Fund's portfolio are valued on the basis of their current values
or otherwise at their fair values, as described in the SAI. The net asset
value of each class of shares is effective for orders received by the dealer
prior to its calculation and received by MFD prior to the close of that
business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund has three classes of shares, entitled Class A, Class B and Class C
Shares of Beneficial Interest (without par value). The Trust presently has 16
series of shares and has reserved the right to create and issue additional
classes and series of shares, in which case each class of shares of a series
would participate equally in the earnings, dividends and assets attributable
to that class of shares of that particular series. Shareholders are entitled
to one vote for each share held and shares of each series would be entitled to
vote separately to approve investment advisory agreements or changes in
investment restrictions, but shares of all series would vote together in the
election of Trustees and selection of accountants. Additionally, each class of
shares of a series will vote separately on any material increases in the fees
under its Distribution Plan or on any other matter that affects solely its
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances (see "Description of Shares,
Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in that Fund with each other class share, subject to the liabilities of that
class. Shares have no pre-emptive or conversion rights (except as set forth
above in "Purchases -- Conversion of Class B Shares"). Shares are fully paid
and non-assessable. Should the Fund be liquidated, shareholders of each class
are entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and errors and omissions
insurance) existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, tax-equivalent yield, current
distribution rate and total rate of return quotations for each class of shares
and may also quote fund rankings in the relevant fund category from various
sources, such as the Lipper Analytical Services, Inc. and Wiesenberger
Investment Companies Service. Any yield and tax-equivalent yield quotations
are based on the annualized net investment income per share of each class over
a 30-day period stated as a percent of the maximum public offering price on
the last day of that period. The yield calculation for Class B and Class C
shares assumes no CDSC is paid. The current distribution rate for each class
is generally based upon the total amount of dividends per share paid by the
Fund to shareholders of that class during the past 12 months and is computed
by dividing the amount of such dividends by the maximum public offering price
of that class at the end of such period. Current distribution rate
calculations for Class B and Class C shares assume no CDSC is paid. The
current distribution rate differs from the yield calculation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing, short-term capital
gains, and return of invested capital, and is calculated over a different
period of time. Total rate of return quotations reflect the average annual
percentage change over stated periods in the value of an investment in a class
of shares of the Fund made at the maximum public offering price of the shares
of that class with all distributions reinvested and which will give effect to
the imposition of any applicable CDSC assessed upon redemptions of the Fund's
Class B and Class C shares. Such total rate of return quotations may be
accompanied by quotations which do not reflect the reduction in value of the
initial investment (and reinvested dividends for periods prior to October 1,
1989) due to the sales charge or the deduction of a CDSC, and which will thus
be higher. All performance quotations are based on historical performance and
are not intended to indicate future performance. Yield and tax-equivalent
yield reflect only net portfolio income allocable to a class as of a stated
time and current distribution rate reflects only the rate of distributions
paid by the Fund over a stated period of time, while total rate of return
reflects all components of investment return over a stated period of time. The
Fund's quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. For a discussion of the
manner in which the Fund will calculate its yield, tax-equivalent yield,
current distribution rate and total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended March 31,
1996, please see the Fund's Annual Report. A copy of the Annual Report may be
obtained by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of
all or a portion of its holdings available to investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year, each shareholder will receive information
regarding the tax status of reportable dividends and distributions for that
year (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be
changed as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares (this option will be assigned if no other option is specified);
-- Dividends in cash; capital gain distributions reinvested in additional
shares; or
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the last business day of the month. Dividends and
capital gain distributions in amounts less than $10 will automatically be
reinvested in additional shares of the Fund. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash, and the postal or
other delivery service is unable to deliver checks to the shareholder's
address of record or the shareholder does not respond to mailings from the
Shareholder Servicing Agent with regard to uncashed distribution checks, such
shareholder's distribution option will automatically be converted to having
all dividends and other distributions reinvested in additional shares. Any
request to change a distribution option must be received by the Shareholder
Servicing Agent in a sufficient amount of time before the payment date for a
dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders,
the Fund makes available the following programs designed to enable
shareholders to add to their investment in an account with the Fund or
withdraw from it with a minimum of paper work. The programs involve no extra
charge to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with Class B or Class C shares of the Fund
or any of the classes of other MFS Funds or MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period for purchases of
$1 million or more), the shareholder may obtain such shares at the same reduced
sales charge as though the total quantity were invested in one lump sum, subject
to escrow agreements and the appointment of an attorney for redemptions from the
escrow amount if the intended purchases are not completed, by completing the
Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any classes of shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a ``SWP'') must be at least $100 except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP will not be subject to a CDSC and are generally limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds (and, in the case of Class C shares, for shares of MFS Money
Market Fund) under the Automatic Exchange Plan. The Automatic Exchange Plan
provides for automatic exchanges of funds from the shareholder's account in an
MFS Fund for investment in the same class of shares of other MFS Funds selected
by the shareholder. Under the Automatic Exchange Plan, exchanges of at least $50
each may be made to up to four different funds. A shareholder should consider
the objectives and policies of a fund and review its prospectus before electing
to exchange money into such fund through the Automatic Exchange Plan. No
transaction fee is imposed in connection with exchange transactions under the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. For federal and (generally)
state income tax purposes, an exchange is treated as a sale of the shares
exchanged and, therefore, could result in a capital gain or loss to the
shareholder making the exchange. See the SAI for further information concerning
the Automatic Exchange Plan. Investors should consult their tax advisers for
information regarding the potential capital gain and loss consequences of
transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases--Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax advisers before establishing any of the tax-deferred retirement
plans described above.
--------------------
The Fund's SAI contains more detailed information about the Trust and the
Fund, including information related to (i) investment policies and
restrictions, including the purchase and sale of options, Futures Contracts
and Options on Futures Contracts, (ii) the Trustees, officers and investment
adviser, (iii) portfolio trading, (iv) the Fund's shares, including rights
and liabilities of shareholders, (v) tax status of dividends and
distributions, (vi) the Class A, Class B and Class C Distribution Plans, (vii)
the method used to calculate performance quotations and (viii) various
services and privileges provided by the Fund for the benefit of its
shareholders, including additional information with respect to the exchange
privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the CDSC
for Class A shares are waived (Section II), and the CDSC for Class B and Class
C shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on redemptions of certain
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant to
the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life or any of their subsidiary
companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other
financial institutions ("dealers") which have a sales agreement with
MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
* Institutional Clients of MFS or MFS Asset Management, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account (see "Redemptions and Repurchases -- General
-- Involuntary Redemptions/Small Accounts" in the Prospectus).
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of 401(a) or ESP Plan participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such 401(a)
or ESP Plan first invests its assets in one or more of the MFS
Funds. The sales charges will be waived in the case of a redemption
of all of the 401(a) or ESP Plan's shares in all MFS Funds (i.e.,
all the assets of the 401(a) or ESP Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the 401(a) or ESP Plan in shares of the
MFS Funds (excluding the reinvestment of distributions) during the
prior four years equals 50% or more of the total value of the 401(a)
or ESP Plan's assets in the MFS Funds, in which case the sales
charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on redemptions of certain Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have
the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or their may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeble
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+ .
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/ or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be lowered. FitchAlert is relatively short-term, and should be resolved within
12 months.
<PAGE>
APPENDIX C
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT AND ITS AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the U.S. Treasury and include
bills, certificates of indebtedness, notes and bonds. Agencies and
instrumentalities of the U.S. Government are established under the authority
of an act of Congress and include, but are not limited to, the Tennessee
Valley Authority, the Bank for Cooperatives, the Farmers Home Administration,
Federal Home Loan Banks, Federal Intermediate Credit Banks and Federal Land
Banks, as well as those listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds
issued by a cooperatively owned nationwide system of banks and associations
supervised by the Farm Credit Administration. These bonds are not guaranteed
by the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration
of the U.S. Government and are fully and unconditionally guaranteed by the
U.S. Government.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA") CERTIFICATES -- are
mortgage-backed securities, with timely payment guaranteed by the full faith
and credit of the U.S. Government, which represent a partial ownership
interest in a pool of mortgage loans issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations. Each mortgage
loan included in the pool is also insured or guaranteed by the Federal Housing
Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued and
guaranteed by the Federal Home Loan Mortgage Corporation and are not
guaranteed by the U.S. Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S.Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation and are not guaranteed by the U.S.
Government.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association ("FNMA") and are not guaranteed
by the U.S. Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued
and guaranteed by the Resolution Funding Corporation and are not guaranteed by
the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures backed by the
Student Loan Marketing Association ("SLMA") and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-
through certificates, are supported by the full faith and credit of the U.S.
Government; others, such as securities of FNMA, by the right of the issuer to
borrow from the U.S. Treasury; still others, such as bonds issued by SLMA, are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government will provide financial support to instrumentalities
sponsored by the U.S. Government as it is not obligated by law, in certain
instances, to do so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the
Fund intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in
a bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in
order to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
DESCRIPTION OF S&P AND MOODY'S HIGHEST COMMERCIAL PAPER RATINGS:
The rating "A" is the highest commercial paper rating assigned by S&P, and
issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structure with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets
and assured sources of alternate liquidity.
<PAGE>
APPENDIX D
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1996)
The table below shows the approximate taxable bond yields which are equivalent
to tax-exempt bond yields from 3% to 8% under federal income tax laws that
apply to 1996. (Such yields may differ under the laws applicable to subsequent
years.) Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns.
While it is expected that a substantial portion of the interest income
distributed to the Fund's shareholders will be exempt from federal income
taxes, portions of such distributions from time to time may be subject to
federal income taxes or a federal alternative minimum tax.
<TABLE>
<CAPTION>
TAXABLE INCOME*
- -------------------------------------------------- INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX ------------------------------------------------------
1996 1996 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
------ ----- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24,000 $ 0 - 40,100 15.0% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,000 - 58,150 $ 40,100 - 96,900 28.0% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 58,150 - 121,300 $ 96,900 - 147,700 31.0% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$121,300 - 263,750 $147,700 - 263,750 36.0% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
$263,750 & Over $263,750 & Over 39.6% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25%
*Net amount subject to Federal personal income tax after deductions and
exemptions.
**Effective Federal Tax Bracket.
</TABLE>
<PAGE>
APPENDIX E
MFS MUNICIPAL INCOME FUND
PORTFOLIO COMPOSITION CHART
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
The table below shows the percentages of the Fund's assets at March 31, 1996,
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P) and Fitch (provided only for bonds
not rated by S&P or Moody's) and Duff & Phelps (provided only for bonds not
rated by S&P, Moody's or Fitch) and in unrated bonds determined by MFS to be
of comparable quality. For split rated bonds, the higher of S&P or Moody's is
used. When neither an S&P or Moody's rating is available, secondary sources
are selected in the following order: Fitch and Duff & Phelps.
UNRATED
BONDS OF
RATED COMPARABLE
RATING BONDS QUALITY TOTAL
------ ----- ---------- -----
AAA/Aaa 36.46% 1.32% 37.78%
AA/Aa 14.23 0.00 14.23
A/A 15.40 0.00 15.40
BBB/Baa 20.86 1.09 21.95
BB/Ba 0.92 3.91 4.83
B/B 0.49 4.93 5.42
CCC/Caa 0.00 0.39 0.39
CC/Ca 0.00 0.00 0.00
C/C 0.00 0.00 0.00
Default 0.00 0.00 0.00
---- ---- -----
Total 88.36% 11.64% 100.00%
The chart does not necessarily indicate what the composition the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment
objective, policies and restrictions indicate the extent to which the Fund may
purchase securities in the various categories.
<PAGE>
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000 MFS Municipal Income Fund
Distributor Prospectus
MFS Fund Distributors, Inc. August 1, 1996
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02116
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS Municipal Income Fund
500 Boylston Street
Boston, MA 02116
MMI-1-8/96/50M 02/202/302
<PAGE>
{LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) MUNICIPAL STATEMENT OF
INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) August 1, 1996
- --------------------------------------------------------------------------------
Page
----
1. Definitions .......................................................... 2
2. Investment Techniques ................................................ 2
3. Investment Restrictions .............................................. 8
4. Management of the Fund ............................................... 9
Trustees .......................................................... 9
Officers .......................................................... 10
Investment Adviser ................................................ 10
Custodian ......................................................... 11
Shareholder Servicing Agent ....................................... 11
Distributor ....................................................... 12
5. Portfolio Transactions and Brokerage Commissions ..................... 12
6. Shareholder Services ................................................. 13
Investment and Withdrawal Programs ................................ 13
Exchange Privilege ................................................ 15
Tax-Deferred Retirement Plans ..................................... 16
7. Tax Status ........................................................... 16
8. Determination of Net Asset Value; Performance Information ............ 17
9. Distribution Plans ................................................... 20
10. Description of Shares, Voting Rights and Liabilities ................. 20
11. Independent Auditors and Financial Statements ........................ 21
Appendix A ........................................................... 22
MFS MUNICIPAL INCOME FUND
A Series of MFS Municipal Series Trust
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus,
dated August 1, 1996. This SAI should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by contacting the
Shareholder Servicing Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" MFS(R) Municipal Income Fund, a series of MFS
Municipal Series Trust (the "Trust"), a
Massachusetts business trust. The Trust was
previously known as "MFS Multi-State Municipal
Bond Trust" until its name was changed to MFS
Municipal Series Trust on August 27, 1993. On
August 3, 1992, the Trust changed its name from
"MFS Managed Multi- State Municipal Bond Trust."
The Trust was known as "MFS Managed Multi-State
Tax- Exempt Trust" until its name was changed
effective August 12, 1988. The MFS Municipal
Income Fund is the successor to MFS Lifetime
Municipal Bond Fund, which was reorganized as a
series of the Trust on September 7, 1993.
"MFS" or the "Adviser" Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" The Prospectus of the Fund, dated August 1, 1996,
as amended or supplemented from time to time.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment policies are described in greater
detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will usually not exceed five days). During the existence of a
loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation based on investment of cash collateral or a fee. The Fund would
not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of
an important vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration
which could be earned currently from securities loans of this type justifies
the attendant risk. If the Adviser determines to make securities loans, it is
not intended that the value of the securities loaned would exceed 20% of the
value of the Fund's total assets.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. However, although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
SEC policies, purchases of securities on such bases may involve more risk than
other types of purchases. For example, the Fund may have to sell assets which
have been set aside in order to meet redemptions. Also, if the Fund determines
it is necessary to sell the "when-issued" or "forward delivery" securities
before delivery, it may incur a loss because of market fluctuations since the
time the commitment to purchase such securities was made. When the time comes
to pay for "when-issued" or "forward delivery" securities, the Fund will meet
its obligations from the then-available cash flow on the sale of securities,
or, although it would not normally expect to do so, from the sale of the
"when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Fund's payment obligation).
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of the Exchange,
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Fund purchases and holds
through its agent are U.S. Government securities, the values, including
accrued interest, of which are equal to or greater than the repurchase price
agreed to be paid by the seller. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a standard rate due to the
Fund together with the repurchase price on repurchase. In either case, the
income to the Fund is unrelated to the interest rate on the U.S. Government
securities.
The repurchase agreement provides that in the event the seller fails to pay
the price agreed upon on the agreed upon delivery date or upon demand, as the
case may be, the Fund will have the right to liquidate the securities. If at
the time the Fund is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy
laws or its assets are otherwise subject to a stay order, the Fund's exercise
of its right to liquidate the securities may be delayed and result in certain
losses and costs to the Fund. The Fund has adopted and follows procedures
which are intended to minimize the risks of repurchase agreements. For
example, the Fund only enters into repurchase agreements after the Adviser has
determined that the seller is creditworthy, and the Adviser monitors the
seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value, including accrued interest, of the securities (which
are marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any time
if the value of the securities falls below the agreed upon margin.
VARIABLE AND FLOATING RATE OBLIGATIONS
Investments in floating or variable rate securities normally will involve
industrial development or revenue bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate, such as
rates on Treasury Bonds or Bills or the prime rate at a major commercial bank,
and that a bondholder can demand payment of the obligations on short notice at
par plus accrued interest, which amount may be more or less than the amount
the bondholder paid for them. While there is usually no established secondary
market for issues of this type of security, the dealer that sells an issue of
such securities frequently will also offer to repurchase such securities at
any time, at a repurchase price which varies and may be more or less than the
amount the bondholder paid for them.
The maturity of floating or variable rate obligations (including participation
interests therein) is deemed to be the longer of (i) the notice period
required before the Fund is entitled to receive payment of the obligation upon
demand or (ii) the period remaining until the obligation's next interest rate
adjustment. If not redeemed by the Fund through the demand feature, the
obligations mature on a specified date which may range up to 30 years from the
date of issuance.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so called "inverse floating rate obligations" or
"residual interest" bonds or certificates structured to have similar features.
In creating such an obligation, a municipality issues a certain amount of debt
and pays a fixed interest rate. A portion of the debt is issued as variable
rate short-term obligations, the interest rate of which is reset at short
intervals, typically ranging from 35 days to one year. The other half of the
debt is issued as inverse floating rate obligations, the interest rate of
which is calculated based on the difference between the entire amount of
interest paid by the issuer on all of the debt and the interest paid on the
short-term obligation. Under usual circumstances, the holder of the inverse
floating rate obligation can generally purchase an equal principal amount of
the short-term obligation and link the two obligations in order to create
long-term fixed-rate bonds. Because the interest rate on the inverse floating
rate obligation is determined by subtracting the short-term rate from a fixed
amount, the interest rate will decrease as the short-term rate increases and
will increase as the short-term rate decreases. The magnitude of increases and
decreases in the market value of inverse floating rate obligations may be
approximately twice as large (or more if the inverse instrument is issued in
principal amount greater than the principal amount of the short-term piece) as
the comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and have
similar credit quality, redemption and maturity provisions.
INDEXED SECURITIES
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity (i.e.,
principal value) or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically
provide for a maturity value that depends on the price of gold, resulting in a
security whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determind by reference
to the values of one or more specified foreign currencies, and may offer
higher yields than U.S. dollar-denominated securities of equivalent issuers.
Currency-indexed securities may be positively or negatively indexed; that is,
their maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are similar to a
put on the underlying currency. Currency-indexed securities may also have
prices that depend on the values of a number of different foreign currencies
relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may write
covered call and put options and purchase call and put options on fixed income
securities. Call and put options written by the Fund may be covered in the
manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains cash, short-term
money market instruments or high quality debt securities with a value equal to
the exercise price in a segregated account with its custodian, or else holds a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
is less than the exercise price of the put written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. Put and
call options written by the Fund may also be covered in such other manner as
may be in accordance with the requirements of the exchange on which, or the
counter party with which, the option is traded, and applicable laws and
regulations. If the writer's obligation is not so covered, it is subject to
the risk of the full change in value of the underlying security from the time
the option is written until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash,
short-term money market instruments or high quality debt securities. Such
transactions permit the Fund to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments of the Fund, provided
that another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction in connection with the option
prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the premium paid
in connection with the closing of an option written by the Fund is less than
the premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than
the premium paid for the original purchase. Conversely, the Fund will suffer a
loss if the premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid in
establishing the option position. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option
previously written by the Fund is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of
the underlying security will decline moderately during the option period. Buy-
and-write transactions using out-of-the-money call options may be used when it
is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, the
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price, less related transaction costs.
If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by
the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium received
from the put option minus the amount by which the market price of the security
is below the exercise price, which could result in a loss. Out-of-the-money,
at-the-money and in-the-money put options may be used by the Fund in the same
market environments that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs,
the call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security remains stable and
neither the call nor the put is exercised. In those instances where one of the
options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, the Fund assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a capital loss unless the
security subsequently appreciates in value. The writing of options on
securities will not be undertaken by the Fund solely for hedging purposes, and
could involve certain risks which are not present in the case of hedging
transactions. Moreover, even where options are written for hedging purposes,
such transactions constitute only a partial hedge against declines in the
value of portfolio securities or against increases in the value of securities
to be acquired, up to the amount of the premium.
The Fund may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of
the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
In certain instances, the Fund may enter into options on Treasury securities
which provide for periodic adjustment of the strike price and may also provide
for the periodic adjustment of the premium during the term of each such
option. Like other types of options, these transactions, which may be referred
to as "reset" options or "adjustable strike" options, grant the purchaser the
right to purchase (in the case of a "call") or sell (in the case of a "put") a
specified type and series of U.S. Treasury security at any time up to a stated
expiration date (or, in certain instances, on such date). In contrast to other
types of options, however, the price at which the underlying security may be
purchased or sold under a "reset" option is determined at various intervals
during the term of the option, and such price fluctuates from interval to
interval based on changes in the market value of the underlying security. As a
result, the strike price of a "reset" option, at the time of exercise, may be
less advantageous to the Fund than if the strike price had been fixed at the
initiation of the option. In addition, the premium paid for the purchase of
the option may be determined at the termination, rather than the initiation,
of the option. If the premium is paid at termination, the Fund assumes the
risk that (i) the premium may be less than the premium which would otherwise
have been received at the initiation of the option because of such factors as
the volatility in yield of the underlying Treasury security over the term of
the option and adjustments made to the strike price of the option, and (ii)
the option purchaser may default on its obligation to pay the premium at the
termination of the option.
The Fund may also purchase warrants on fixed income securities. A warrant on a
fixed income security is a long-term call option that provides the holder with
the right, but not the obligation, to purchase from the seller of the warrant
a fixed income security with a specified par value, coupon and maturity at a
fixed exercise price on a specified date or between specified dates.
Typically, the fixed income securities that are deliverable pursuant to the
warrant will be noncallable securities. Warrants may be issued as entirely
separate securities or they may be attached to, but subsequently detachable
from, a fixed income security of the same issuer.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may enter into
interest rate futures contracts on fixed income securities and indexes on such
securities. (Unless otherwise specified, interest rate futures contracts are
referred to as "Futures Contracts.") Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument, or for the
making and acceptance of a cash settlement, at a stated time in the future for
a fixed price. By its terms, a Futures Contract in the majority of cases
provides for a specified settlement date on which, in the case of interest
rate futures contracts, the difference between the price at which the contract
was entered into and the contract's closing value is settled between the
purchaser and seller in cash. Futures Contracts differ from options in that
they are bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for settlement
only on the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or sale
of a security or the purchase of an option in that no purchase price is paid
or received. Instead, an amount of cash or cash equivalents, which varies but
may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the
broker, referred to as "variation margin," are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable -- a process
known as "marking to the market."
Interest rate futures contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on the Fund's current or intended
investments in fixed income securities. For example, if the Fund owned long-
term bonds and interest rates were expected to increase, the Fund might enter
into interest rate futures contracts for the sale of debt securities. Such a
sale would have much the same effect as selling some of the long-term bonds in
the Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's
interest rate futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds,
the Fund could protect itself against the effects of the anticipated rise in
the value of long-term bonds without actually buying them until the necessary
cash became available or the market had stabilized. At that time, the interest
rate futures contracts could be liquidated and the Fund's cash reserves could
then be used to buy long-term bonds on the cash market. The Fund could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash market, the use
of interest rate futures contracts as a hedging technique allows the Fund to
hedge its interest rate risk without having to sell its portfolio securities.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
purchase and write options to buy or sell futures contracts in which it may
invest ("Options on Futures Contracts"). Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract, in the case of a
call option, or a "short" position in the underlying Futures Contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short position for the writer of the option, in the case of a call option, or
a corresponding long position in the case of a put option. In the event that
an option is exercised, the parties will be subject to all the risks
associated with the trading of Futures Contracts, such as payment of initial
and variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodity Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument underlying the Futures Contract, or (c) through the holding of
a call on the same Futures Contract and in the same principal amount as the
call written where the exercise price of the call held (i) is equal to or less
than the exercise price of the call written or (ii) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash or securities in a segregated account with its custodian. The Fund may
cover the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of cash, short-term money
market instruments or high quality debt securities in an amount equal to the
value of the security underlying the Futures Contract, or (c) through the
holding of a put on the same Futures Contract and in the same principal amount
as the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written or where the exercise price
of the put held is less than the exercise price of the put written if the
difference is maintained by the Fund in cash, short-term money market
instruments or high quality debt securities in a segregated account with its
custodian. Put and call Options on Futures Contracts may also be covered in
such other manner as may be in accordance with the rules of the exchange on
which the option is traded and applicable laws and regulations. Upon the
exercise of a call Option on a Futures Contract written by the Fund, the Fund
will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve
to liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to
purchase the underlying Futures Contract which, if the Fund has covered its
obligation through the sale of such Contract, will close out its futures
position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO. The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts and Options on
Futures Contracts depends on the degree to which price movements in the
underlying instrument correlate with price movements in the relevant portion
of the Fund's portfolio. In the case of futures and options based on fixed
income securities, the portfolio securities which are being hedged may not be
the same type of obligation underlying such contract. As a result, the
correlation probably will not be exact. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying obligation. It is possible that
there may be a negative correlation between the obligation underlying an
option or Futures Contract in which the Fund has a position and the portfolio
securities the Fund is attempting to hedge, which could result in a loss on
both the portfolio and the hedging instrument.
The trading of Futures Contracts and options for hedging purposes entails the
additional risk of imperfect correlation between movements in the futures or
option price and the price of the underlying obligation. The anticipated
spread between the prices may be distorted due to the differences in the
nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the options
and futures. In this regard, trading by speculators in options and futures has
in the past occasionally resulted in market distortions, which may be
difficult or impossible to predict, particularly near the expiration of such
contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities and Options on Futures
Contracts, the Fund is subject to the risk of market movements between the
time that the option is exercised and the time of performance thereunder. This
could increase the extent of any loss suffered by the Fund in connection with
such transactions.
In writing a covered call option on a security or Futures Contract, the Fund
also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying instrument. For example, where the Fund covers a call
option written on a Futures Contract through segregation of securities, such
securities may not match the instrument underlying the Futures Contract, and
the Fund may not be fully covered. As a result, the Fund could be subject to
risk of loss in the event of adverse market movements.
The writing of options on securities or Options on Futures Contracts
constitutes only a partial hedge against fluctuations in the value of the
Fund's portfolio. When the Fund writes an option, it will receive premium
income in return for the holder's purchase of the right to acquire or dispose
of the underlying obligation. In the event that the price of such obligation
does not rise sufficiently above the exercise price of the option, in the case
of a call, or fall below the exercise price, in the case of a put, the option
will not be exercised and the Fund will retain the amount of the premium, less
related transaction costs, which will constitute a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings or any
increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of
the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forgo the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other assets
or a decline in the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions.
It should also be noted that the Fund may enter transactions in Futures
Contracts and Options on Futures Contracts not only for hedging purposes, but
also for non-hedging purposes intended 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 or declines in the cost of securities to be acquired. The Fund will
only write covered options, such that cash or securities necessary to satisfy
an option exercise will be segregated at all times, unless the option is
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations.
Nevertheless, the method of covering an option employed by the Fund may not
fully protect it against risk of loss and, in any event, the Fund could suffer
losses on the option position which might not be offset by corresponding
portfolio gains.
With respect to the writing of straddles on securities, the Fund incurs the
risk that the price of the underlying security will not remain stable, that
one of the options written will be exercised and that the resulting loss will
not be offset by the amount of the premiums received. Such transactions,
therefore, create an opportunity for increased return by providing the Fund
with two simultaneous premiums on the same security, but involve additional
risk, since the Fund may have an option exercised against it regardless of
whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Fund will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by the Fund, and the Fund could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Fund
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Fund's ability
effectively to hedge its portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon
may be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund enters
into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular
futures or option contract. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolio of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES. Unlike transactions
entered into by the Fund in Futures Contracts and exchange-traded options,
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer could lose amounts substantially in excess of
their initial investments, due to the margin and collateral requirements
associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund.
Where no such counterparty is available, it will not be possible to enter into
a desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and the Fund could be required to
retain options purchased or written until exercise, expiration or maturity.
This in turn could limit the Fund's ability to profit from open positions or
to reduce losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes
of the Commodity Exchange Act, regulations of the CFTC require that the Fund
enter into transactions in Futures Contracts and Options on Futures Contracts
only (i) for bona fide hedging purposes (as defined in CFTC regulations), or
(ii) for non-hedging purposes, provided that the aggregate initial margin and
premiums on such non-hedging positions does not exceed 5% of the liquidation
value of the Fund's assets. In addition, the Fund must comply with the
requirements of various state securities laws in connection with such
transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the
value of the Fund's total assets. Moreover, the Fund will not purchase put and
call options if as a result more than 5% of its total assets would be invested
in such options.
When the Fund purchases a Futures Contract, an amount of cash or securities
will be deposited in a segregated account with the Fund's custodian so that
the amount so segregated will at all times equal the value of the Futures
Contract, thereby insuring that the leveraging effect of such futures is
minimized.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Fund intends to write over-the-
counter options only with primary U.S. Government securities dealers
recognized as such by the Federal Reserve Bank of New York. Also, the
contracts the Fund has in place with such primary dealers provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
generally is based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula as illiquid for
purposes of the SEC illiquidity ceiling test imposed by the SEC staff. The
Fund may also write over-the-counter options with non-primary dealers,
including foreign dealers (where applicable), and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares (which,
as used in this SAI, means the lesser of (i) more than 50% of the outstanding
shares of the Trust or a series or class, as applicable, or (ii) 67% or more
of the outstanding shares of the Trust or a series or class, as applicable,
present at a meeting if holders of more than 50% of the outstanding shares of
the Trust or a series or class, as applicable, are represented in person or by
proxy). Except for Investment Restriction (1), these investment restrictions
and policies are adhered to at the time of purchase or utilization of assets;
a subsequent change in circumstances will not be considered to result in a
violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets,
and then only as a temporary measure for extraordinary or emergency
purposes, or pledge, mortgage or hypothecate an amount of its assets (taken
at market value) in excess of 15% of its total assets, in each case taken at
the lower of cost or market value. For the purpose of this restriction,
collateral arrangements with respect to options, Futures Contracts, Options
on Futures Contracts, Forward Contracts and options on foreign currencies,
and payments of initial and variation margin in connection therewith are not
considered a pledge of assets.
(2) Underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security.
(3) Invest more than 25% of its total assets (taken at market value) in
any one 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.
(4) Purchase or retain real estate (including limited partnership
interests but excluding securities of companies, such as real estate
investment trusts, which deal in real estate or interests therein and
securities secured by real estate), or mineral leases, commodities or
commodity contracts (except contracts for the future or forward delivery of
securities or foreign currencies and related options, and except Futures
Contracts and Options on Futures Contracts) in the ordinary course of its
business. The Fund reserves the freedom of action to hold and to sell real
estate or mineral leases, commodities or commodity contracts acquired as a
result of the ownership of securities.
(5) Make loans to other persons except by the purchase of obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market
value). Not more than 10% of the Fund's total assets (taken at market value)
will be subject to repurchase agreements maturing in more than seven days.
For these purposes the purchase of all or a portion of an issue of debt
securities shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market
value) to be invested in the securities of such issuer, other than
securities issued or guaranteed by the United States, any state or political
subdivision thereof, or any political subdivision of any such state, or any
agency or instrumentality of the United States, any state or political
subdivision thereof, or any political subdivision of any such state.
(7) Purchase securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) if
such purchase, at the time thereof, would cause the Fund to hold more than
10% of any class of securities of such issuer. For this purpose, all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(8) Invest in companies for the purpose of exercising control or
management.
(9) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Fund, or is a member, partner, officer or Director
of the Adviser, if after the purchase of the securities of such issuer by
the Fund one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value.
(10) 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 of purchases and sales of securities and the Fund may make
margin deposits in connection with Futures Contracts, Options on Futures
Contracts, options, Forward Contracts or options on foreign currencies.
(11) Sell any security which the Fund does not own unless by virtue of
its ownership of other securities it has at the time of sale a right to
obtain securities without payment of further consideration equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon equivalent conditions.
(12) 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 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.
(13) 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 foreign currencies 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.
(14) Issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "1940 Act")), if such issuance is specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder. For the purpose of this restriction, 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.
As a non-fundamental policy, the Fund will not 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 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 net
assets (taken at market value) would be so invested.
For the purposes of the Fund's investment restrictions, the issuer of a tax-
exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
OTHER OPERATING POLICY
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities
if the percentage of securities so pledged, mortgaged or hypothecated would
exceed 33 1/3%.
This operating policy is not fundamental and may be changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser manages the portfolio of the Fund from day to day in
accordance with the Fund's investment objective and policies. The officers of
the Trust are responsible for the operations of the Fund. The Trustees and
officers of the Trust are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.) Asterisks indicate those Trustees and officers who are
"interested persons" (as defined in the 1940 Act) of the Adviser. Unless
otherwise indicated below, the address of each Trustee and officer is 500
Boylston Street, Boston, Massachusetts 02116.
TRUSTEES
A. KEITH BRODKIN*, Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (financial consultants), President and Treasurer;
Benchmark Consulting Group, Inc. (office services), President; Landmark
Funds (mutual fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
CYNTHIA M. BROWN*, Vice President
Massachusetts Financial Services Company, Senior Vice President
ROBERT A. DENNIS*, Vice President
Massachusetts Financial Services Company, Senior Vice President
DAVID R. KING*, Vice President
Massachusetts Financial Services Company, Vice President
GEOFFREY L. SHECHTER*, Vice President
Massachusetts Financial Services Company, Vice President (since June 1993);
Liberty Mutual Insurance Company, Senior Investment Analyst (prior to June
1993)
DAVID B. SMITH*, Vice President
Massachusetts Financial Services Company, Vice President
DANIEL E. McMANUS*, Assistant Vice President
Massachusetts Financial Services Company, Assistant Vice President
W. THOMAS LONDON*, Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN*, Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES O. YOST*, Assistant Treasurer
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.*, Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
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*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and per
committee meeting attended, together with such Trustee's out-of-pocket
expenses) and has adopted a retirement plan for non-interested Trustees and
Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 75 and if
the Trustee has completed at least five years of service, he would be entitled
to annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 75
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current years service and amortize
past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of July 1, 1996, the Trustees and officers, as a group, owned less than 1%
of the outstanding shares of the Fund. As of July 1, 1996, Merrill Lynch
Pierce Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL owned 12.85%,
5.51% and 11.18% of the outstanding Class A, Class B and Class C shares of the
Fund, respectively. Also as of July 1, 1996, Smith Barney, Inc., 388 Greenwich
Street, New York, New York, owned 6.38% of the outstanding Class C shares of
the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will
not be provided unless it has been determined pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS, together with its predecessor organizations, has a history of money
management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.)
which in turn is a wholly owned subsidiary of Sun Life Assurance Company of
Canada.
MFS manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory
and administrative services, as well as general office facilities. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For these services and facilities, the Adviser
receives an annual management fee, computed and paid monthly, in an amount
equal to the sum of 0.30% of the Fund's average daily net assets plus 6.43% of
its gross income.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such
expenses exceed the most restrictive of such state expense limitations. The
Adviser will make appropriate adjustments to such reductions and
reimbursements in response to any amendment or rescission of the various state
requirements.
For the Fund's fiscal year ended March 31, 1996, MFS received $3,495,983 (of
which $1,397,610 was based on average daily net assets and $2,098,373 on gross
income) under the Advisory Agreement.
For the Fund's fiscal year ended March 31, 1995, MFS received $3,545,246 (of
which $1,390,697 was based on average daily net assets and $2,154,549 on gross
income) under the Advisory Agreement.
For the four months ended March 31, 1994, MFS received $1,301,038 (of which
$527,310 was based on average daily net assets and $773,728 on gross income)
under the Advisory Agreement.
The Fund pays all of its expenses (other than those assumed by the Adviser or
MFD) including: Trustees fees discussed above; governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable
to the Fund; fees and expenses of independent auditors, of legal counsel, and
of any transfer agent, registrar or dividend disbursing agent of the Fund;
expenses of repurchasing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing share certificates,
periodic reports, notices and proxy statements to shareholders and to
governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security
transactions; insurance premiums; fees and expenses of State Street Bank and
Trust Company, the Fund's Custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund;
and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses are borne by the Fund except that the
Fund's Distribution Agreement with MFD requires MFD to pay for prospectuses
that are to be used for sales purposes. Expenses of the Trust which are not
attributable to a specific series are allocated among the series in a manner
believed by management of the Trust to be fair and equitable. Payment by the
Fund of brokerage commissions for brokerage and research services of value to
the Adviser in serving its clients is discussed under the caption "Portfolio
Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its
portfolio transactions and, in general, administering its affairs (with the
exception of the services, facilities and personnel provided by the
Shareholder Servicing Agent or the Custodian, see below).
The Advisory Agreement with the Fund will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by vote of
a majority of the Fund's outstanding voting securities (as defined under
"Investment Restrictions") and, in either case, by a majority of the Trustees
who are not parties to the Advisory Agreement or interested persons of any
such party. The Advisory Agreement terminates automatically if it is assigned
and may be terminated without penalty by vote of a majority of the Fund's
outstanding voting securities or by either party on not more than 60 days' nor
less than 30 days' written notice. The Advisory Agreement provides that if MFS
ceases to serve as the Adviser to the Fund, the Fund will change its name so
as to delete the term "MFS" and that MFS may render services to others and may
permit other fund clients to use the term "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management
of the Fund, except for willful misfeasance, bad faith or gross negligence in
the performance of its or their duties or by reason of reckless disregard of
its or their obligations and duties under the Advisory Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily
net asset value and public offering price of each class of shares of the Fund.
The Custodian does not determine the investment policies of the Fund or decide
which securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Custodian also serves as the dividend and
distribution disbursing agent of the Fund. The Custodian has contracted with
the Adviser for the Adviser to perform certain accounting functions related to
options transactions for which the Adviser receives remuneration on a cost
basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated August 1, 1985, as
amended (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the
Fund. For these services, the Shareholder Servicing Agent will receive a fee
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. In
addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent for the Fund, has contracted with the Shareholder Servicing
Agent to administer and perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement
dated as of January 1, 1995 (the "Distribution Agreement"). Prior to January
1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary
of MFS, was the Fund's distributor. Where this SAI refers to MFD in relation
to the receipt or payment of money with respect to a period or periods prior
to January 1, 1995, such reference shall be deemed to include FSI, as
predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of the Class A shares of the Fund is their
net asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A
share of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the sales
charge percentage of offering price applicable to the purchase (see
"Purchases" in the Prospectus). The sales charge scale set forth in the
Prospectus applies to purchases of Class A shares of the Fund alone or in
combination with shares of all classes of certain other funds in the MFS
Family of Funds (the "MFS Funds") and other funds (as noted under Right of
Accumulation) by any person, including members of a family unit (e.g.,
husband, wife and minor children) and bona fide trustees, and also applies to
purchases made under the Right of Accumulation or a Letter of Intent (see
"Investment and Withdrawal Programs" in this SAI). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain circumstances as described in the Prospectus. Such
sales are made without a sales charge to promote good will with employees and
others with whom MFS, MFD and/or the Fund have business relationships, and
because the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of offering price or as a percentage of the net
amount invested as listed in the Prospectus. In the case of the maximum sales
charge the dealer retains 4% and MFD retains approximately 3/4 of 1% of the
public offering price. In addition, MFD pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described
in the Prospectus.
CLASS B SHARES AND CLASS C SHARES: As the distributor of the Fund, MFD acts as
agent in selling Class B and Class C shares of the Fund to dealers. The public
offering price of Class B and Class C shares is their net asset value next
computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay the placement of
orders to benefit themselves by a price change. On occasion, MFD may obtain
brokers loans from various banks, including the custodian banks for the MFS
Funds, to facilitate the settlement of sales of shares of the Fund to dealers.
MFD may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
For the fiscal year ended March 31, 1996, MFD and dealers and certain other
financial institutions received sales charges of $23,697 and $140,257,
respectively (as their concession on gross sales charges of $163,954), for
selling Class A shares of the Fund. The Fund received $10,611,648 representing
the aggregate net asset value of such shares.
For the fiscal year ended March 31, 1995, MFD and dealers and certain other
financial institutions received sales charges of $9,957 and $73,783,
respectively (as their concession on gross sales charges of $83,740), for
selling Class A shares of the Fund. The Fund received $2,259,669 representing
the aggregate net asset value of such shares.
During the period December 1, 1993 through March 31, 1994, MFD and dealers and
certain other financial institutions received sales charges of $5,248 and
$54,106, respectively (as their concession on gross sales charges of $59,354),
for selling Class A shares of the Fund. The Fund received $4,946,545
representing the aggregate net asset value of such shares.
During the fiscal years ended March 31, 1996, and March 31, 1995, and the
period December 1, 1993 through March 31, 1994, the contingent deferred sales
charge ("CDSC") imposed on redemption of Class B shares was $634,226,
$708,357, and $318,928, respectively, and no CDSC was imposed on the
redemption of Class A shares.
The Distribution Agreement will remain in effect until August 1, 1997 and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the Trust's shares (as defined in "Investment Restrictions") and, in either
case, by a majority of the Trustees who are not parties to such Distribution
Agreement or interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser
or any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting broker-
dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the
value and quality of their brokerage services, and the level of their
brokerage commissions. In the case of securities, such as government
securities, which are principally traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Adviser normally seeks to deal directly with the primary market
makers, unless in its opinion, better prices are available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. Securities
firms or futures commission merchants may receive brokerage commissions on
transactions involving options, Futures Contracts and Options on Futures
Contracts and the purchase and sale of underlying securities upon exercise of
options. The brokerage commissions associated with buying and selling options
may be proportionately higher than those associated with general securities
transactions. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender
or exchange offers. Such soliciting dealer fees are in effect recaptured for
the Fund by the Adviser. At present no other recapture arrangements are in
effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the Adviser an
amount of commission for effecting a securities transaction for the Fund in
excess of the amount other broker-dealers would have charged for the
transaction if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or the Adviser's overall responsibilities to
the Fund or to its other clients. Not all of such services are useful or of
value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts; and effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to
the availability of purchasers or sellers of securities and services in
effecting securities transactions and performing functions incidental thereto
such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless
otherwise directed by the Fund, a commission higher than one charged elsewhere
will not be paid to such a firm solely because it provided Research to the
Adviser. The Trustees (together with the Trustees of the other MFS Funds) have
directed the Adviser to allocate a total of $23,100 of commission business
from the MFS Funds to the Pershing Division of Donaldson, Lufkin & Jenrette as
consideration for the annual renewal of the Lipper Directors' Analytical Data
Service (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality
of Research provided by brokers. Results of this effort are sometimes used by
the Adviser as a consideration in the selection of brokers to execute
portfolio transactions. However, the Adviser is unable to quantify the amount
of commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their
execution capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To
the extent the Fund's portfolio transactions are used to obtain such services,
the brokerage commissions paid by the Fund will exceed those that might
otherwise be paid, by an amount which cannot be presently determined. Such
services would be useful and of value to the Adviser in serving both the Fund
and other clients and, conversely, such services obtained by the placement of
brokerage business of other clients would be useful to the Adviser in carrying
out its obligations to the Fund. While such services are not expected to
reduce the expenses of the Adviser, the Adviser would, through use of the
services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
For the Fund's fiscal years ended March 31, 1996, and March 31, 1995, and
fiscal period December 1, 1993 through March 31, 1994, no brokerage
commissions were paid.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or MFS or any subsidiary of MFS. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, it is
believed that the Fund's ability to participate in volume transactions will
produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or
withdraw from it with a minimum of paper work. These programs are described
below and, in certain cases, in the Prospectus. The programs involve no extra
charge to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with all classes of other MFS Funds or MFS Fixed Fund
(a bank collective investment fund) within a 13-month period (or 36-month
period in the case of purchases of $1 million or more), the shareholder may
obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Fund's Account Application or filing a separate Letter
of Intent application (available from the Shareholder Servicing Agent) within
90 days of the commencement of purchases. Subject to acceptance by MFD and the
conditions mentioned below, each purchase will be made at a public offering
price applicable to a single transaction of the dollar amount specified in the
Letter of Intent application. The shareholder or his dealer must inform MFD
that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months, in the case of purchases of $1
million or more) plus the value of shares credited toward completion of the
Letter of Intent do not total the sum specified, he will pay the increased
amount of the sales charge as described below. Instructions for issuance of
shares in the name of a person other than the person signing the Letter of
Intent application must be accompanied by a written statement from the dealer
stating that the shares were paid for by the person signing such Letter.
Neither income dividends nor capital gain distributions taken in additional
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released
by the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of all classes of shares of that shareholder in the MFS Funds or MFS Fixed
Fund reaches a discount level (see "Purchases" in the Prospectus for the sales
charges on quantity purchases). For example, if a shareholder owns shares with
a current offering price of $75,000 and purchases an additional $25,000 of
Class A shares of the Fund, the sales charge for the $25,000 purchase would be
at the rate of 4% (the rate applicable to single transactions of $100,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in the same class of shares of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge and not subject to any CDSC).
Distributions will be invested at the close of business on the payable date
for the distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and consider
the differences in objectives and policies before making any investment. For
federal income tax purposes, distributions invested under the Distribution
Investment Program will be treated as if received by the shareholder in cash
and then used to purchase the applicable fund shares.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP
generally are limited to 10% of the value of the account (at the time of the
establishment of the SWP). SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in
the following order: (i) any "Free Amount"; (ii) to the extent necessary, any
"Reinvested Shares"; and (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B and Class C shares pursuant to a SWP, but will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC. To the extent that redemptions for such periodic withdrawals exceed
dividend income reinvested in the account, such redemptions will reduce and
may eventually exhaust the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
reinvested in full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. WIth respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee
or change the amount of each payment. The Shareholder Servicing Agent may
charge the account for services rendered and expenses incurred beyond those
normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted
by the Shareholder Servicing Agent on 60 days' notice in writing to the
shareholder in the event that the Fund ceases to assume the cost of these
services. The Fund may terminate any SWP for an account if the value of the
account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another
MFS Fund. Any SWP may be terminated at any time by either the shareholder or
the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be made
at any time either by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or broker-
dealer, or clients of an investment adviser or other similar groups; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of other MFS Funds (if available for sale) under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchange of funds from the
shareholder's account in that MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to four
different funds effective on the seventh day of each month or of every third
month, depending on whether monthly or quarterly exchange are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from
a shareholder's account in any MFS Fund as long as the balance of the account
is sufficient to complete the exchange. Additional payments made to a
shareholder's account in such MFS Fund will extend the period that exchanges
will continue to be made under the Automatic Exchange Plan. However, if
additional payments are added to an account subject to the Automatic Exchange
Plan shortly before an exchange is scheduled, such funds may not be available
for exchange until the following month; therefore, care should be used to
avoid inadvertently terminating the Automatic Exchange Plan through exhaustion
of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions
in writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of
record). Each Exchange Change Request (other than termination of participation
in the program) must involve at least $50. Generally, if an Exchange Change
Request is received by telephone or in writing before the close of business on
the last business day of the month, the Exchange Change Request will be
effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds,
to make exchanges of shares from one MFS Fund to another and to withdraw from
an MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except holders of shares of MFS Money Market Fund, MFS
Government Money Market Fund and Class A shares of MFS Cash Reserve Fund, in
the case where such shares are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest
the redemption proceeds in the same class of shares of any of the MFS Funds
(if shares of the fund are available for sale) at net asset value (without a
sales charge) and, if applicable, with credit for any CDSC paid. In the case
of proceeds reinvested in shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund, the shareholder
has the right to exchange the acquired shares for shares of another MFS Fund
at net asset value pursuant to the exchange privilege described below. Such a
reinvestment must be made within 90 days of the redemption and is limited to
the amount of the redemption proceeds. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the case of
Class B shares or within 12 months of the initial purchase of Class C shares
and certain Class A shares, a CDSC will be imposed upon redemption. Although
redemptions and repurchases of shares are taxable events, a reinvestment
within a certain period of time in the same Fund may be considered a "wash
sale" and may result in the inability to recognize currently all or a portion
of any loss realized on the original redemption for federal income tax
purposes. Please see your tax advisor for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class
of any other MFS Fund (if available for sale) at net asset value. Exchanges
will be made after instructions in writing or by telephone (an "Exchange
Request") are received for an established account by the Shareholder Servicing
Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of
record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants
whose sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or
another similar 401(k) recordkeeping system made available by MFS Service
Center, Inc.) or all the shares in the account. Each exchange involves the
redemption of the shares of the Fund to be exchanged and the purchase at net
asset value (i.e., without a sales charge) of shares of the same class of the
other MFS Fund. Any gain or loss on the redemption of the shares exchanged is
reportable on the shareholder's federal income tax return, unless both the
shares received and the shares surrendered in the exchange are held in a tax-
deferred retirement plan or other tax-exempt account. No more than five
exchanges may be made in any one Exchange Request by telephone. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day
prior to the close of regular trading on the Exchange, the exchange usually
will occur on that day if all of the requirements and restrictions set forth
above have been complied with at that time. However, payment of the redemption
proceeds by the Fund, and thus the purchase of shares of the other MFS Fund,
may be delayed for up to seven days if the Fund determines that such a delay
would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by the Shareholder Servicing Agent
may also communicate a shareholder's Exchange Request to MFD by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for
the CDSC is carried forward to the exchanged shares. For purposes of
calculating the CDSC upon redemption of shares acquired in an exchange, the
purchase of shares acquired in one or more exchanges is deemed to have
occurred at the time of the original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other MFS Fund before making any
exchange. Shareholders of the other MFS Funds (except holders of shares of MFS
Money Market Fund, MFS Government Money Market Fund and Class A shares of MFS
Cash Reserve Fund acquired through direct purchase and dividends reinvested
prior to June 1, 1992) have the right to exchange their shares for shares of
the Fund, subject to the conditions, if any, set forth in their respective
prospectuses. In addition, unitholders of the MFS Fixed Fund have the right to
exchange their units (except units acquired through direct purchases) for
shares of the Fund, subject to the conditions, if any, imposed upon such
unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents of
such states. Investors should consult with their own tax advisers to be sure
this is an appropriate investment based on their residency and each state's
income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued
and is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes
available through investment dealers plans and/or custody agreements for the
following:
Individual Retirement Accounts (IRAs) (for individuals and their non-
employed spouses who desire to make limited contributions to a tax-
deferred retirement program and, if eligible, to receive a federal income
tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. Third party administrative services, available for some
corporate plans, may limit or delay the processing of transactions. For
further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see
the specific documents for that plan. Plan documents other than those provided
by MFD may be used to establish any of the plans described above. An investor
should consult with his tax adviser before establishing any of the tax-
deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) if the
retirement plan and/or the sponsoring organization subscribe to the MFS
FUNDamental 401(k) Plan or another similar 401(a) or 403(b) recordkeeping
program made available by MFS Service Center, Inc.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions (as a percentage of the Fund's
overall income and of its tax-exempt income), and the composition and holding
period of the Fund's portfolio assets. Because the Fund intends to distribute
all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that the Fund will be required to pay any federal income or
excise taxes. If the Fund should fail to qualify as a "regulated investment
company" in any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable
as ordinary dividend income to shareholders.
The portion of the Fund's distribution of net investment income that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of shareholders so long as at
least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under the
federal alternative minimum tax, and all exempt-interest dividends may
increase a corporate shareholder's alternative minimum tax. The percentage of
income designated as tax-exempt will be applied uniformly to all distributions
by the Fund of net investment income made during each fiscal year and may
differ from the percentage of distributions actually attributable to tax-
exempt interest for any particular month. Shareholders are required to report
exempt-interest dividends received from the Fund on their federal income tax
returns.
The Fund may also recognize some net investment income that is not tax-exempt,
as well as capital gains and losses as a result of the disposition of
securities and from certain options and futures transactions. Shareholders of
the Fund will have to pay federal income taxes and any state or local taxes on
the non-exempt interest dividends and capital gain distributions they receive
from the Fund, whether paid in cash or additional shares. Because the Fund
expects to earn primarily tax-exempt interest income, it is expected that no
Fund dividends will qualify for the dividends received deduction for
corporations. Distributions of net capital gains (i.e., the excess of the net
long-term capital gains over net short-term capital losses), whether paid in
cash or additional shares, are taxable to the Fund's shareholders as long-term
capital gains for federal income tax purposes regardless of how long they have
owned shares in the Fund. Fund dividends declared in October, November, or
December payable to shareholders of record in such a month and paid the
following January will be taxable to shareholders as if received on December
31 of the year in which they are declared. The Fund will notify shareholders
regarding the federal tax status of its distributions after the end of each
calendar year.
Any dividend or distribution of net capital gains or net short-term capital
gains will have the effect of reducing the per share net asset value of shares
in the Fund by the amount of the dividend or distribution. Shareholders
purchasing shares in the Fund shortly before the record date of any such
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by certain private
activity bonds should consult their tax advisers before purchasing shares of
the Fund.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for
six months or less will be disallowed to the extent of any exempt-interest
dividends received with respect to those shares. If not disallowed, any such
loss will be treated as long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their
purchase followed by any purchase without payment of an additional sales
charge (including purchases by exchange or by reinvestment) of Class A shares
of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in zero coupon bonds and certain securities purchased at a
market discount will cause it to realize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially
resulting in additional taxable gain or loss to the Fund.
The Fund's transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing and character of Fund
income and distributions to shareholders. For example, certain positions held
by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on such day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40% short-
term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles" and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods
of Fund securities, and conversion of short-term into long-term capital
losses. Certain tax elections exist for straddles that may alter the effects
of these rules. The Fund will limit its activities in options and Futures
Contracts to the extent necessary to meet the requirements of Subchapter M of
the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on any taxable
dividends and other payments to Non-U.S. Persons that are subject to such
withholding regardless of whether a lower treaty rate may be permitted. Any
amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims. The Fund is also required in certain circumstances
to apply backup withholding at a rate of 31% on taxable dividends and
redemption proceeds paid to any shareholder who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding. Distributions received from the Fund by
Non-U.S. Persons may also be subject to tax under the laws of their own
jurisdiction.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes in certain states. The
Fund intends to advise shareholders of the extent, if any, to which its
distributions consist of such interest. Shareholders are urged to consult
their tax advisers regarding the possible exclusion of such portion of their
dividends for state and local income tax purposes as well as regarding the tax
consequences of an investment in the Fund.
The exemption of exempt-interest dividends for federal income tax purposes
does not necessarily result in exemption under the tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of the
exempt-interest dividends which represents interest received by a regulated
investment company on its holdings of securities of that state and its
political subdivisions and instrumentalities. Therefore, the Fund will report
annually to its shareholders the percentage of interest income earned by the
Fund during the preceding year on Municipal Bonds and will indicate, on a
state-by-state basis only, the source of such income.
8. DETERMINATION OF NET ASSET VALUE;
PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. (As of the date of this SAI,
the Exchange is open for trading every weekday except for the following
holidays or the days on which they are observed: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.) This determination is made once during each such day as of
the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares
of the class outstanding. All other securities, futures contracts and options
in the Fund's portfolio (other than short-term obligations) for which the
principal market is one or more securities or commodities exchanges will be
valued at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, futures contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available,
be valued at current bid prices, unless such securities are reported on the
NASDAQ system, in which case they are valued at the last sale price or, if no
sales occurred during the day, at the last quoted bid price. Debt securities
(other than short-term obligations) in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both dealer-
supplied valuations and electronic data processing techniques which take into
account appropriate factors such as institutional-sized trading in similar
groups of securities, yields, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities.
Short-term obligations, if any, in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Short-term securities with a remaining maturity in excess of 60 days
will be valued based upon dealer supplied valuations. Portfolio securities and
over-the-counter options for which there are no quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees. A share's net asset value is effective for orders received
by the dealer prior to its calculation and received by MFD, in its capacity as
the Fund's distributor, prior to the close of the business day.
PERFORMANCE INFORMATION
TOTAL RETURN: The Fund will calculate its total rate of return for each class
of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1.00% maximum for Class
C shares purchased after April 1, 1996) and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value
of $1,000, which will result in a higher rate of return with respect to Class
A shares since the value of the initial account will not be reduced by the
sales charge (4.75% maximum) and/or (iii) total rates of return which
represent aggregate performance over a period or year-by-year performance and
which may or may not reflect the effect of the maximum sales charge, other
sales charge or CDSC. The average annual total rate of return for Class A
shares, reflecting the initial sales charge, for the one-year period ended
March 31, 1996 and for the period September 7, 1993 through March 31, 1996 was
1.70% and 1.86%, respectively. The Fund's average annual total rate of return
for Class A shares, not giving effect to the initial sales charge, for the
one-year period ended March 31, 1996 and for the period September 7, 1993
through March 31, 1996 was 6.81% and 3.82%, respectively. The average annual
total rate of return for Class B shares, reflecting the CDSC, for the one-year
and five-year periods ended March 31, 1996 and for the period from December
29, 1986 (the Fund's commencement of investment operations) to March 31, 1996
was 1.87%, 6.42% and 6.09%, respectively. The average annual total rates of
return for Class B shares, not giving effect to the CDSC, for the one-year and
five-year periods ended March 31, 1996 and for the period from December 29,
1986 (the Fund's commencement of investment operations) to March 31, 1996 was
5.87%, 6.73% and 6.09%, respectively. The average annual total rate of return
for Class C shares for the one-year period ended March 31, 1996, and for the
period January 3, 1994 through March 31, 1996, was 5.94% and 2.87%,
respectively.
PERFORMANCE RESULTS --
The performance results below, based on an assumed initial investment of
$10,000 in Class B shares, cover the period from December 29, 1986 through
December 31, 1995. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. Any performance results or
total rate of return quotation provided by the Fund should not be considered
as representative of the performance of the Fund in the future since the net
asset value of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Fund's portfolio, but
also on changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the methods
used to calculate total rates of return should be considered when comparing
the total rate of return of the Fund to total rates of return published for
other investment companies or other investment vehicles. Total rate of return
reflects the performance of both principal and income. Current net asset value
and account balance information may be obtained by calling 1-800-MFS-TALK
(637-8255).
MFS MUNICIPAL INCOME FUND - CLASS B
-----------------------------------
DIRECT CAP GAIN DIVIDEND TOTAL
YEAR ENDED INVESTMENT REINVESTMENT REINVESTMENT VALUE
---------- ---------- ------------ ------------ -----
December 31, 1986* $10,000 $ 0 $ 0 $10,000
December 31, 1987 9,102 0 465 9,567
December 31, 1988 9,657 0 1,145 10,802
December 31, 1989 9,929 0 1,874 11,803
December 31, 1990 9,681 0 2,541 12,222
December 31, 1991 10,153 33 3,430 13,616
December 31, 1992 10,247 204 4,238 14,689
December 31, 1993 10,743 214 5,335 16,292
December 31, 1994 9,681 193 5,554 15,428
December 31, 1995 10,484 209 6,868 17,561
- ----------
*For the period from the commencement of investment operations, December 29,
1986, through December 31, 1986.
EXPLANATORY NOTES: The results shown in the above table take into account the
annual Rule 12b-1 fees but not the CDSC. No adjustment has been made for any
income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class over a 30-day period.
The yield for a class of shares of the Fund is calculated by dividing the net
investment income per share allocated to that class earned during the period
by the public offering price per share of that class on the last day of that
period. The resulting figure is then annualized. Net investment income per
share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expenses for the
period, by (ii) the average number of shares of that class entitled to receive
dividends during the period multiplied by the public offering price per share
on the last day of the period. The Fund's yield calculations for Class A
shares assume a maximum sales charge of 4.75%. The Fund's yield calculations
for Class B and Class C shares assume no CDSC is paid.
The yield calculation for Class A, Class B and Class C shares for the 30-day
period ended March 31, 1996 was 5.47%, 4.91% and 4.97%, respectively.
TAX-EQUIVALENT YIELD: The tax-equivalent yield for the Fund 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. In
calculating tax-equivalent yields the Fund assumes certain federal tax
brackets for shareholders and does not take into account state taxes. The
Fund's tax equivalent yield for Class A, Class B and Class C shares for the
30-day period ended March 31, 1996 was 7.60%, 6.82% and 6.90%, respectively
(assuming a tax-bracket of 28%), and 7.93%, 7.12% and 7.20%, respectively
(assuming a tax bracket of 31%).
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class
are reflected in the quoted "current distribution rate" for that class. The
current distribution rate for a class is computed by dividing the total amount
of dividends per share paid by the Fund to shareholders of that class during
the past 12 months by the maximum public offering price of that class at the
end of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during
the past 12 months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains and return of invested capital, and is calculated
over a different period of time. The Fund's current distribution rate
calculation for Class A shares assumes a maximum sales charge of 4.75%. The
Fund's current distribution rate calculation for Class B and Class C shares
assumes no CDSC is paid. The current distribution rate for Class A, Class B
and Class C shares of the Fund for the 12-month period ended March 31, 1996
was 5.54%, 4.93% and 5.00%, respectively.
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings
or reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to
the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business Daily,
Newsweek, Financial World, Financial Planning, Investment Advisor, USA Today,
Pensions and Investments, SmartMoney, Forbes, Global Finance, Registered
Representative, Institutional Investor, the Investment Company Institute,
Johnson's Charts, Morningstar, Lipper Analytical Services, Inc., CDA
Wiesenberger, Shearson Lehman and Saloman Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals.
From time to time, the Fund also may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons' views
on: the economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks, and
similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding
and tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding: retirement planning; tax management strategies;
estate planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and information
provided through the MFS Heritage Planningsm program, an inter-generational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues
regarding financial and health care management for elderly family members; and
other similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard
against a loss in a declining market, the investor's average cost per share
can be lower than if fixed numbers of shares are purchased at the same
intervals.
MFS FIRSTS: MFS has a long history of innovations.
1924 Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
1924 Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
1932 One of the first internal research departments is established to provide
in-house analytical capability for an investment management firm.
1933 Massachusetts Investors Trust is the first mutual fund to register under
the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
1936 Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
1976 MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
1979 Spectrum becomes the first combination fixed/variable annuity with no
initial sales charge.
1981 MFS(R) World Governments Fund is established as America's first globally
diversified fixed income mutual fund.
1984 MFS(R) Municipal High Income Fund is the first mutual fund to seek high
tax-free income from lower-rated municipal securities.
1986 MFS(R) Managed Sectors Fund becomes the first mutual fund to target and
shift investments among industry sectors for shareholders.
1986 MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
1987 MFS(R) Multimarket Income Trust is the first-closed- end, multimarket
high income fund listed on the New York Stock Exchange.
1989 MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
1990 MFS(R) World Total Return Fund is the first global balanced fund.
1993 MFS(R) World Growth Fund is the first global emerging markets fund to
offer the expertise of two sub- advisers.
1993 MFS becomes money manager of MFS(R) Union Standard Trust, the first
trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders
or experts.
9. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares (the ''Distribution Plans'') pursuant to Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded that
there is a reasonable likelihood that each Distribution Plan would benefit the
Fund and the respective class of shareholders. The Distribution Plans are
designed to promote sales, thereby increasing the net assets of the Fund. Such
an increase may reduce the Fund's expense ratio to the extent that the Fund's
fixed costs are spread over a larger net asset base. Also, an increase in net
assets may lessen the adverse effect that could result were the Fund required
to liquidate portfolio securities to meet redemptions. There is, however, no
assurance that the net assets of the Fund will increase or that the other
benefits referred to above will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time);
or (ii) to any insurance company which has entered into an agreement with the
Fund and MFD that permits such insurance company to purchase Class A shares
from the Fund at their net asset value in connection with annuity agreements
issued in connection with the insurance company's separate accounts. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under any Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR:
During the fiscal year ended March 31, 1996, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
FUND BY MFD BY DEALERS
DISTRIBUTION PLANS ------------- -------------- -------------
Class A Distribution Plan $ 207,501 $ 145,111 $ 62,390
Class B Distribution Plan $3,637,818 $2,799,666 $838,152
Class C Distribution Plan $ 126,300 $ 4,283 $122,017
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall
provide the Trustees, and the Trustees shall review, at least quarterly, a
written report of the amounts expended (and purposes therefor) under such
Plan. Each of the Distribution Plans may be terminated at any time by vote of
a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions"). All agreements relating to any of the
Distribution Plans entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority
of the Distribution Plan Qualified Trustees. Agreements under any of the
Distribution Plans must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the Fund's shares. None
of the Distribution Plans may be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions") or may be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par
value) of one or more separate series and to divide or combine the shares of
any series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Trustees have
currently authorized shares of the Fund and 15 other series. The Declaration
of Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. Pursuant thereto, the Trustees have
authorized the issuance of three classes of shares of the Fund (Class A, Class
B and Class C shares). Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees in accordance with the provisions of Section 16(c) of the 1940 Act.
No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust's shares (as defined in
"Investment Restrictions") or by an instrument in writing without a meeting,
signed by a majority of Trustees and consented to by the holders of not less
than a majority of the shares outstanding and entitled to vote. Shares have no
pre-emptive or conversion rights (except as described in "Purchases --
Conversion of Class B Shares" in the Prospectus). Shares are fully paid and
non-assessable. The Trust may enter into a merger or consolidation, or sell
all or substantially all of its assets (or all or substantially all of the
assets belonging to any series of the Trust), if approved by the vote of the
holders of two-thirds of the Trust's outstanding shares voting as a single
class, or of the affected series of the Trust, as the case may be, except that
if the Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of
the holders of two-thirds of its outstanding shares, or (ii) by the Trustees
by written notice to the shareholders of the Trust or the affected series. If
not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that it shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents covering possible tort or other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
11. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at March 31, 1996, the Statement of Assets and
Liabilities at March 31, 1996, the Statement of Operations for the year ended
March 31, 1996, the Statement of Changes in Net Assets for the years ended
March 31, 1996 and 1995, the Notes to Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to
shareholders of the Fund, are incorporated by reference into this SAI and have
been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF FUND CREDITED YEARS OF FROM FUND AND
TRUSTEE FROM FUND(1) EXPENSE(1) SERVICE(2) FUND COMPLEX(3)
------- ------------ ----------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey .............. $3,725 $ 715 10 $263,815
A. Keith Brodkin ............... 0 0 N/A 0
Marshall N. Cohan .............. 4,175 1,700 14 148,624
Dr. Lawrence Cohn .............. 3,725 361 18 135,874
J. David Gibbons ............... 3,725 1,304 13 135,874
Abby M. O'Neill ................ 3,500 514 10 129,499
Walter E. Robb, III ............ 4,175 1,912 15 148,624
Arnold D. Scott ................ 0 0 N/A 0
Jeffrey L. Shames .............. 0 0 N/A 0
J. Dale Sherratt ............... 4,175 406 20 148,624
Ward Smith ..................... 4,175 626 13 148,624
- ----------
(1) For fiscal year ended March 31, 1996.
(2) Based on normal retirement age of 75.
(3) For calendar year 1995. All Trustees receiving compensation served as
Trustee of 36 funds within the MFS Fund complex (having aggregate net
assets at December 31, 1995, of approximately $12.5 billion) except Mr.
Bailey, who served as Trustee of 73 funds within the MFS Fund complex
(having aggregate net assets at December 31, 1995, of approximately $31.7
billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$3,150 $472 $ 787 $1,102 $1,575
3,438 516 860 1,203 1,719
3,727 559 932 1,304 1,863
4,015 602 1,004 1,405 2,008
4,304 646 1,076 1,506 2,152
4,592 689 1,148 1,607 2,296
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
MUNICIPAL
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS MMI-13-8/96/520 02/202/302
<PAGE>
<PAGE>
ANNUAL REPORT FOR
[logo] YEAR ENDED
THE FIRST NAME IN MUTUAL FUNDS MARCH 31, 1996
MFS(R) MUNICIPAL INCOME FUND
[graphic omitted]
<PAGE>
MFS(RM) MUNICIPAL INCOME FUND
<TABLE>
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor; CUSTODIAN
Former Chairman and Director (until 1991), State Street Bank and Trust Company
Massachusetts Financial Services Company; Director, Cambridge
Bancorp; Director, AUDITORS
Cambridge Trust Company Deloitte & Touche LLP
Marshall N. Cohan - Private Investor INVESTOR INFORMATION
For MFS stock and bond market outlooks,
Lawrence H. Cohn, M.D. - Chief of Cardiac call toll free: 1-800-637-4458 anytime from
Surgery, Brigham and Women's Hospital; a touch-tone telephone.
Professor of Surgery, Harvard Medical School For information on MFS mutual funds,
call your financial adviser or, for an
The Hon. Sir J. David Gibbons, KBE - Chief information kit, call toll free:
Executive Officer, Edmund Gibbons Ltd.; 1-800-637-2929 any business day from
Chairman, Bank of N.T. Butterfield & Son Ltd. 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc. INVESTOR SERVICE
(investment adviser) MFS Service Center, Inc.
P.O. Box 2281
Walter E. Robb, III - President and Treasurer, Boston, MA 02107-9906
Benchmark Advisors, Inc. (corporate financial consultants); For general information, call toll free:
Trustee, Landmark Funds (mutual funds) 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice For service to speech- or hearing-impaired,
President, Director and Secretary, call toll free: 1-800-637-6576 any business
Massachusetts Financial Services Company day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be equipped with a
Jeffrey L. Shames* - President and Director, Massachusetts Telecommunications Device for the Deaf.)
Financial Services Company For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
J. Dale Sherratt - President, Insight Resources, (1-800-637-8255) anytime from a touch-tone telephone.
Inc. (acquisition planning specialists)
Ward Smith - Former Chairman (until 1994), NACCO Industries;
Director, Sundstrand Corporation [Dalbar logo] TOP-RATED SERVICE
For the second year in a row, MFS earned a
INVESTMENT ADVISER #1 ranking in DALBAR, Inc.'s Broker/Dealer Survey, Main Office
Massachusetts Financial Services Company Operations Service Quality category. The firm achieved a 3.49
500 Boylston Street overall score -- on a scale of 1 to 4 -- in the 1995 survey.
Boston, MA 02116-3741 A total of 71 firms responded, offering input on the quality
of service they receive from 36 mutual fund companies
DISTRIBUTOR nationwide. The survey contained questions about service quality
MFS Fund Distributors, Inc. in 17 categories, including "knowledge of phone service
500 Boylston Street contacts," "accuracy of transaction processing," and "overall
Boston, MA 02116-3741 ease of doing business with the firm."
PORTFOLIO MANAGER
Geoffrey L. Schechter*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The past 12 months have been good for the fixed-income markets. Moderation in
the pace of economic growth and a declining inflation rate combined to create a
favorable environment for fixed-income products. During the fiscal year ended
March 31, 1996, Class A shares of the Fund provided a total return of 6.81%,
Class B shares provided a total return of 5.87%, and Class C shares provided a
total return of 5.94% (including the reinvestment of distributions but excluding
the effects of any sales charges). These results underperformed both the 8.38%
return for the Lehman Brothers Municipal Bond Index, an unmanaged index of
national municipal bond investments rated Baa or higher, and the 7.18% return
for the average tax-exempt municipal bond fund as reported by Lipper Analytical
Services. This underperformance is attributable to the Fund's holdings of
primarily premium coupon bonds which provide below-average sensitivity to
declining interest rates. Interest rates on tax-exempt securities, although
experiencing dramatic swings during the fiscal year, declined modestly from
their levels of a year earlier. The changes in interest rates are discussed more
fully in the Municipal Bond Market section of this letter.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to quarter.
Thus, while one quarter may experience an annualized rate of growth in Gross
Domestic Product (GDP) of less than 1%, another quarter may see annualized
growth in excess of 3% -- but, for the year, growth should stay within our
expected range of 2% to 2 1/2%. While some increase in consumer spending has
taken place in the early months of this year, consumers, who represent
two-thirds of the economy, remain in a somewhat weakened position, due in part
to an increase in consumer installment debt in excess of 30% over the past two
years. Meanwhile, growth is also being constrained by ongoing economic doldrums
in Europe and Japan, important markets for U.S. exports. Here again, we are
seeing a few tentative signs, particularly in Japan, of modest recoveries that
could lead to improved prospects for U.S. exporters. Also, the "lag effect" of
increases in short-term interest rates by the Federal Reserve Board in 1994 and
into 1995 is helping to keep growth in check. This lag effect can last up to two
years, and although the Fed did reduce short-term rates late last year and
earlier this year, we expect it to continue its diligent anti-inflationary
policies. Finally, it appears that inflation is likely to remain under control
this year, due in part to continued moderation in wage pressures and the subdued
level of economic growth. At the same time, we believe the current upward
pressure on energy prices bears close scrutiny as energy is an important
component of the inflation outlook.
Municipal Bond Market
Interest rates on municipal bonds experienced dramatic swings during the fiscal
year ended March 31, 1996. Rates declined by approximately 70 basis points
(0.70%) during the first nine months of the fiscal year as a combination of
slowing economic growth and reduced inflationary pressures enabled the Federal
Reserve to begin lowering interest rates. Positive news out of Washington, D.C.
regarding the possibility of a balanced budget provided further impetus for the
rally in fixed-income securities. In the fourth quarter of the fiscal year,
interest rates on municipal securities increased by about 55 basis points
(0.55%) as signs of a reemergence in economic growth and rising commodity prices
raised inflationary concerns. Further driving interest rates higher was the
apparent failure of the federal government to reach an agreement on a balanced
budget.
The overall 15-basis point (0.15%) decline in tax-exempt yields during the
fiscal year ended March 31, 1996 was dwarfed by the approximate 70-basis point
(0.70%) decline in yields on long-term U.S. Treasury securities during the same
period, driving the ratio of 30-year AAA-rated municipal yields to U.S. Treasury
yields from 79% to 86%. The dramatic underperformance by tax-exempt securities
can be attributed to investors' fears concerning major tax reform, more
specifically, the potential of the implementation of a flat tax and the removal
of the special tax status of municipal bonds. While these fears have subsided
somewhat recently as it appears that major tax reform is improbable, tax-exempt
securities are still trading at levels reflective of some modest prospect of tax
reform.
Supply continues to provide a positive foundation for the municipal bond
market. In 1995, new issuance totaled approximately $156 billion, a decline of
5% from the previous year and nearly one-half of 1993's record level. More
importantly, the outstanding supply of municipal bonds declined by approximately
$45 billion during 1995. It is expected that new issuance will again be in the
range of $160 billion barring any sharp decline in interest rates, and that the
outstanding supply will again decline, by approximately $30 billion. Given the
favorable technical outlook for municipal bonds and their current yield ratios
compared to U.S. Treasuries, we believe that tax-exempt securities represent
good value, although principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.
Portfolio Performance and Strategy
During the past 12 months, the Fund has taken advantage of the relatively narrow
yield spreads between higher-rated securities and lower-rated securities to
upgrade its overall credit quality while reducing the impact on the distribution
rate. Sectors to which we reduced exposure include airport/ airline bonds and
lease/appropriation bonds.
While state and local governments are in their strongest fiscal position in
years, the ongoing budget battles in Washington, D.C. could place future strain
on the lower levels of government. The health care sector remains under pressure
from both the advent of managed care and the potential reforms in Medicare. The
electric utility sector is in the midst of a whirlwind of changes arising from
deregulation at the federal level. We will continue to monitor the changes in
these sectors, as well as others, to look for relative value opportunities.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Photo of A. Keith Brodkin, [Photo of Geoffrey L. Schechter,
Chairman and President] Portfolio Manager]
/s/ A. Keith Brodkin /s/ Geoffrey L. Schecter
A. Keith Brodkin Geoffrey L. Schechter
Chairman and President Portfolio Manager
April 12, 1996
PORTFOLIO MANAGER PROFILE
Geoffrey Schechter joined MFS in 1993 as an Investment Officer in the Fixed
Income Department. A graduate of the University of Texas and the Boston
University Graduate School of Business Administration, he was named Assistant
Vice President - Investments in 1994 and Vice President - Investments in 1995
and has managed MFS Municipal Income Fund since February 1996. Mr. Schechter is
a Certified Public Accountant (C.P.A.) and a Chartered Financial Analyst
(C.F.A.).
OBJECTIVE AND POLICIES
The Fund's investment objective 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. Capital gains, if any, are
subject to capital gains tax to the shareholder. A small portion of income may
be subject to federal and/or alternative minimum tax.
The Fund seeks to achieve its investment objective by investing primarily 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. These include tax-exempt securities rated AAA, AA or A by Standard &
Poor's Ratings Group or by Fitch Investors Service, Inc. or Aaa, Aa or A by
Moody's Investors Service, Inc.; notes of issuers having an issue of outstanding
municipal bonds rated as above or guaranteed by the U.S. government; obligations
issued by the U.S. government or large banks; commercial paper; or tax-exempt
securities which are not rated or which are rated lower than the three highest
grades as explained above, provided that not more than one-third of the total
assets of the Fund will be invested in such securities.
TAX FORM SUMMARY
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
EXEMPT-INTEREST DIVIDENDS
For federal income tax purposes, 99.9% of the total dividends paid by the Fund
were from net investment income during the year ended March 31, 1996 and are
designated as exempt interest dividends.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Municipal Income Fund Class B shares in comparison to various market
indicators. Fund results in the graph do not reflect the deduction of any
contingent deferred sales charge (CDSC) since the CDSC is not applicable after a
six-year period. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results reflect the reinvestment
of all dividends and capital gains.
Class A shares were offered effective September 7, 1993. Information on Class A
share performance appears on the next page.
Please note that effective January 3, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to March 31, 1996)
Annual Report thru 3/31/96
Plot Points for MFS Muncipal Income Fund - Class B
- -----------------------------------------------------------------------
$10,000 1/1/87 - 3/31/96
MFS Municipal Income Lehman Brothers
Days Fund - Class B Muncipal Bond Index CPI
---- -------------- ------------------- ------
1/1/87 0 10,000 10,000 10,000
3/31/87 89 10,047 10,243 10,145
3/31/88 455 9,940 10,500 10,540
3/31/89 820 10,891 11,257 11,065
3/31/90 1185 11,812 12,444 11,644
3/31/91 1550 12,484 13,592 12,214
3/31/92 1916 13,649 14,950 12,603
3/31/93 2281 15,236 16,822 12,992
3/31/94 2646 15,507 17,212 13,318
3/31/95 3011 16,332 18,491 13,698
3/31/96 3377 17,291 20,041 14,087
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Life of Class
through
1 Year 3 Years 5 Years 3/31/96
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal Income Fund (Class A)
including 4.75% sales charge +1.70% -- -- +1.86%<F1>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class A)
at net asset value +6.81% -- -- +3.82%<F1>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) with CDSC<F5> +1.87% +3.41% +6.42% +6.09%<F4>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) without CDSC +5.87% +4.31% +6.73% +6.09%<F4>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class C) +5.94% -- -- +2.87%<F6>
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index<F2> +8.38% +6.01% +8.08% +7.81%<F3>
- ------------------------------------------------------------------------------------------------------------
Consumer Price Index<F7><F2> +2.84% +2.73% +2.89% +3.77%<F3>
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1> For the period from the commencement of offering of Class A shares, September 7, 1993 to March 31, 1996.
<F2> Source: Lipper Analytical Services, Inc.
<F3> Benchmark comparisons begin on January 1, 1987.
<F4> For the period from the commencement of offering of Class B shares, December 29, 1986 to March 31, 1996.
<F5> These returns reflect the applicable Class B CDSC of 4%, 3% and 2% for the 1-, 3- and 5-year periods, respectively, and 0%
for the period commencing December 29, 1986.
<F6> For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1996. Class C shares have
no initial sales charge but, along with Class B shares, have higher annual fees and expenses than Class A shares. Class C
share purchases made on or after April 1, 1996, will be subject to a 1% CDSC if redeemed within 12 months of purchase.
<F7> The Consumer Price Index is a popular measure of change in prices.
</TABLE>
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be worth
more or less than their original cost. All Class A share results reflect the
applicable expense subsidy which is explained in the Notes to Financial
Statements. Had the subsidy not been in effect, the results would have been less
favorable. The subsidy may be rescinded at any time.
<PAGE>
PORTFOLIO OF INVESTMENTS - March 31, 1996
Municipal Bonds - 98.5%
- -----------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Student Loan Revenue - 1.3%
AAA Pennsylvania State Higher
Educational Assistance
Agency Rev., AMBAC, 9.492s, 2026* $ 5,500 $ 5,828,020
- -----------------------------------------------------------------------------
General Obligation - 8.2%
NR Arlington, TX, Independent
School Refunding Rev., PSF,
0s, 2007 $ 3,070 $ 1,709,468
A+ Commonwealth of
Massachusetts, 7s, 2007 2,590 2,853,273
NR Coppell, TX, Independent
School District, PSF, 0s, 2025 2,325 394,111
AA Harris County, TX,
Certificates of Obligation
(Astrodome Improvements
Project), 8.1s, 2008 1,385 1,518,943
BBB+ New York, NY, 8.2s, 2003 5,000 5,743,000
BBB+ New York, NY, 7.5s, 2008 1,350 1,462,928
BBB+ New York, NY, 8.25s, 2010 360 416,070
BBB+ New York, NY, 7s, 2016 1,360 1,440,158
BBB+ New York, NY, 8s, 2018 30 34,191
AAA Northwest Texas, Independent
School District, AMBAC, 0s, 2011 3,000 1,246,080
A Puerto Rico Commonwealth,
6.45s, 2017 500 524,945
AAA Rio, CA, School District,
Certificates of
Participation, FSA, 0s, 2028 1,140 636,132
AAA Sherman, TX, Independent
School District, PSF, 0s, 2020 1,100 261,998
AA State of Texas, 7.625s, 2018 14,405 15,654,634
AA State of Wisconsin, 7.6s, 2020 980 1,025,080
AAA Thurston County, WA, Independent
School District FGIC, 0s, 2010 4,000 1,759,720
------------
$ 36,680,731
- -----------------------------------------------------------------------------
State and Local Appropriation - 2.4%
BBB New York Dormitory Authority
Rev. (City
University), 7.5s, 2010 $ 2,500 $ 2,880,475
BBB+ New York Medical Care
Facility Financial Agency
Rev., 8.875s, 2007 770 825,810
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2008 745 833,171
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2020 2,580 2,878,893
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.5s, 2021 540 598,330
AAA Philadelphia, PA, Regional
Port Authority Lease Rev.,
MBIA, MVRIC, 8.24s, 2020* 2,500 2,595,000
------------
$ 10,611,679
- -----------------------------------------------------------------------------
Refunded and Special
Obligation** - 18.9%
AAA Adams County, CO, Single
Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,313,853
NR Chapel Hill, NC, Parking
Facilities Rev. (Rosemary
Street Project), 8.125s, 2000 940 1,092,703
NR Chapel Hill, NC, Parking
Facilities Rev. (Rosemary
Street Project), 8.25s, 2000 1,000 1,167,640
A+ Commonwealth of Massachusetts,
7.5s, 2000 1,990 2,270,670
A+ Commonwealth of Massachusetts,
7.5s, 2000 2,010 2,293,490
NR Illinois Education and
Facilities Authority, 8.75s, 2015 60 61,814
BBB Massachusetts Health & Education
Facilities Authority Rev.
(Suffolk University), 8s, 2000 1,000 1,142,000
NR Massachusetts Industrial
Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2000 2,870 3,417,797
AAA Massachusetts Water Resources
Authority, 7.625s, 2000 3,200 3,615,456
BBB+ New York, NY, Pre-Refunded,
"A", 8s, 2001 2,970 3,487,790
BBB+ New York, NY, Pre-Refunded,
"A", 8.25s, 2001 4,140 4,939,600
AAA New York Local Government
Assistance Corp., 7.25s, 2001 2,750 3,128,923
AAA New York Medical Care
Facility Financial Agency
Rev., 8.875s, 1997 680 739,357
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.75s, 2000 1,030 1,168,782
AAA New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2000 670 772,610
AAA New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2000 3,565 4,110,980
AAA New York Medical Care
Facility Financial Agency
Rev., 7.5s, 2001 1,460 1,672,926
NR New York Urban Development
Corp., 7.75s, 2000 5,000 5,656,900
BBB New York Urban Development
Corp. Rev., 7.5s, 2001 2,500 2,872,175
NR New York Urban Development
Corp. (Correctional
Facilities), Rev., 7.3s, 2002 2,340 2,691,561
A- Pennsylvania Industrial
Development Authority Rev.,
7s, 2001 7,000 7,849,660
AAA Philadelphia, PA, Municipal
Authority Rev., FGIC, 7s, 2001 2,000 2,260,740
NR Texas Turnpike Authority Rev.
(Houston Ship
Channel Bridge), 0s, 2002 3,000 4,298,400
AAA Washington County, PA,
Authority Lease Rev.,
AMBAC, 7.45s, 2000 1,200 1,361,365
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 7.25s, 2000 3,350 3,714,446
AAA Washington Public Power
Supply System Rev., Nuclear
Project #1, 14.375s, 2001 1,000 1,284,010
AAA Washington Public Power
Supply System Rev., Nuclear
Project #2, 7.375s, 2000 5,355 6,020,841
AA Washington Public Power
Supply System Rev., Nuclear
Project #3, 7.25s, 2000 5,000 5,543,950
BBB+ West Virginia Water
Development Authority,
8.625s, 2028 1,000 1,122,330
BBB+ West Virginia Water
Development Authority,
8.125s, 2029 1,000 1,110,260
------------
$ 84,183,029
- -----------------------------------------------------------------------------
Single Family Housing Revenue - 7.7%
AAA Berkeley, Brookes, & Fayette
Counties, WV, MBIA, 0s, 2016 $ 14,000 $ 1,567,580
AAA Chicago, IL, Residential
Mortgage Rev., MBIA, 0s, 2009 5,810 2,251,433
BB Cook County, IL, Single
Family Housing, 0s, 2015 10,440 1,282,032
NR De Kalb, IL, Single Family
Mortgage Rev., GNMA,
7.45s, 2009 255 267,230
NR Delaware Housing Authority
Rev., 9.125s, 2018 870 897,240
BB Harris County, TX, Housing
Finance Corp., 9.625s, 2003 240 240,958
BB Harris County, TX, Housing
Finance Corp., 9.875s, 2014 430 431,711
A+ Illinois Housing Development
Agency, 0s, 2016 8,785 1,057,011
AAA Kentucky Housing Corp.,
Housing Rev., FHA, 7.45s, 2023 5,840 5,935,367
AA+ Minnesota Housing Finance
Agency, 9s, 2018 4,655 4,769,001
NR Mississippi Home Corp.,
Single Family Rev. GNMA,
7.1s, 2023 805 839,019
A+ New Hampshire Housing Finance
Authority, 7.2s, 2010 6,640 6,926,383
A+ New Hampshire Housing Finance
Authority, 8.625s, 2013 755 781,417
AA Utah Housing Finance Agency,
8.625s, 2019 1,445 1,492,064
AA Utah Housing Finance Agency,
9.125s, 2019 135 139,817
AA Utah Housing Finance Agency,
9.25s, 2019 110 117,290
A+ West Virginia Housing Development
Fund, 7.85s, 2014 5,185 5,334,328
------------
$ 34,329,881
- -----------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.4%
NR Colorado Housing Finance
Authority, 8.3s, 2023 $ 2,750 $ 2,872,980
NR Maryland Community
Development Administration,
8.5s, 2028 3,000 3,093,540
NR Pennsylvania Housing Finance
Agency, 7.6s, 2013 1,000 1,068,700
A+ Tennessee State Vets Home
Board Rev. (Humboldt
Project), 6.75s, 2021 1,000 1,027,780
AA- Vermont Housing Finance
Agency, 8.375s, 2020 2,725 2,818,849
A Wisconsin Housing & Economic
Development Authority,
7.2s, 2013 4,000 4,149,800
------------
$ 15,031,649
- -----------------------------------------------------------------------------
Insured Health Care Revenue - 4.0%
AAA Clermont County, OH, Hospital
Facilities Rev. (Mercy
Health Systems), AMBAC,
MVRIC, 9.221s, 2021* $ 1,500 $ 1,720,500
AAA Fredericksburg, VA,
Industrial Development
Authority, Hospital
Facilities Rev., FGIC,
INFLOS, 9.174s, 2023* 1,500 1,651,500
AAA Henrico County, VA,
Industrial Development
Authority Rev., FSA, RIBS,
7.711s, 2027* 5,000 5,065,000
AAA Jefferson County, KY,
Hospital Rev. (Alliant
Health System), INFLOS,
MBIA, 8.583s, 2014* 1,500 1,627,500
AAA Mississippi Hospital
Equipment & Facilities
Authority Rev. (Rush
Medical Foundation),
Connie Lee, 6.7s, 2018 1,000 1,044,630
AAA Rio Grande Valley, TX, Health
Facilities Development
Corp., MBIA, Short Rites,
7.46s, 2015++ 2,800 2,939,048
AAA Tulsa, OK, Industrial
Authority, Hospital Rev.
(St. John's Medical
Center), MBIA, 0s, 2006 6,430 3,605,172
------------
$ 17,653,350
- -----------------------------------------------------------------------------
Health Care Revenue - 4.3%
NR Bell County, TX, Health
Facilities Development
Corp. (Advanced Living
Technology), 10.5s, 2018 $ 1,910 $ 1,661,700
BBB- Bell County, TX, Health
Facilities Development
Corp. (Kings Daughters
Hospital), 9.25s, 2008 1,650 1,810,545
BBB- Cumberland County, PA,
Municipal Refunding (First
Mortgage), 6.8s, 2023 1,000 967,160
NR Fulton County, GA, Residential Care
Facilities, Elderly Authority Rev.
(Lenbrook Square Foundation),
9.75s, 2017 470 478,700
NR Gadsden County, FL,
Industrial Development
Authority (RHA/FLA
Properties), 10.45s, 2018 1,950 2,017,236
NR Louisiana Public Facilities
Authority (Southwest
Medical Center), 11s, 2006 1,568 664,837
A Massachusetts Health &
Education Facilities Rev.
(New England Deaconess
Hospital) 6.875s, 2022 4,000 4,120,040
NR Medical University, SC,
Certificates of
Participation (Harborview
Office Tower Project),
7.5s, 2008 600 641,670
NR Montgomery, PA, Industrial
Development Authority,
Health Facilities Rev.,
8.5s, 2023 300 293,562
BBB+ New York Medical Care
Facilities Agency, Mental
Health Services, 7.75s, 2020 1,025 1,123,503
NR Philadelphia, PA, Industrial
Development Authority,
10.25s, 2018 1,485 1,518,695
NR Philadelphia, PA, Industrial
Development Authority,
10.25s, 2018 1,945 2,014,670
A Torrance, CA, Hospital Rev.,
6.875s, 2015 1,780 1,838,028
------------
$ 19,150,346
- -----------------------------------------------------------------------------
Electric and Gas Utility Revenue - 12.6%
AAA Austin, TX, Utility Systems
Rev., AMBAC, 0s, 2010 $ 7,500 $ 3,265,500
A+ Chelan County, WA, Public
Utility District #1,
Consolidated Rev., 9.3s, 2062 4,450 4,797,233
AAA Georgia Municipal Electric
Authority, MBIA, 6.375s, 2016 2,000 2,136,180
AAA Georgia Municipal Electric
Authority Power Rev., FGIC,
5.7s, 2019 5,000 4,875,000
AAA Georgia Municipal Electric
Authority, Special
Obligation, MBIA, 6.5s, 2020 7,350 8,018,850
AAA Intermountain Power Agency,
UT, MBIA, 6s, 2016# 4,000 4,022,120
A Montana St. Board Investment
Resource, (Yellowstone Energy),
7s, 2019 1,000 958,300
NR Midland MI, Environmental Development
Authority, Pollution Control Rev.
(Midland Cogeneration), 9.5s, 2009 2,000 2,196,880
BBB+ North Carolina Eastern Municipal
Power Agency, 7s, 2007 3,250 3,532,425
BBB+ North Carolina Eastern Municipal
Power Agency, 5.75s, 2019 830 779,802
A- Puerto Rico Electric Power
Authority, 6.125s, 2008 700 726,299
AAA Southern, MN, Municipal Power
Agency, Power Supply Systems
Rev., MBIA, 0s, 2025 6,400 1,132,928
AAA Texas Municipal Power Agency
Rev., AMBAC, 0s, 2011 5,930 2,431,122
AAA Texas Municipal Power Agency
Rev., MBIA, 0s, 2014 10,435 3,538,717
AAA Texas Municipal Power Agency
Rev., MBIA, 0s, 2015 7,000 2,217,320
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 0s, 2003 2,000 1,347,460
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 7s, 2011 4,050 4,277,529
AA Washington Public Power
Supply System Rev., Nuclear
Project #3, 0s, 2004 4,885 3,092,107
AAA Washington Public Power
Supply Systems, Series "A",
BIGI, 0s, 2013 4,000 1,430,920
AAA Washington Public Power
Supply Systems, Series "A",
BIGI, 0s, 2014 3,350 1,129,017
------------
$ 55,905,709
- -----------------------------------------------------------------------------
Water and Sewer Utility Revenue - 2.8%
A Massachusetts Water Resources
Authority, 6.5s, 2019 $ 7,495 $ 8,120,832
AAA Salt Lake County, UT, Water
Conservancy District Rev.,
AMBAC, 0s, 2008 2,100 1,046,766
AAA Salt Lake County, UT, Water
Conservancy District Rev.,
AMBAC, 0s, 2009 3,800 1,763,542
A- Union County, NJ, Utilities
Authority Solid Waste,
7.2s, 2014 1,500 1,547,535
------------
$ 12,478,675
- -----------------------------------------------------------------------------
Turnpike Revenue - 4.7%
NR Arapahoe County, CO, Federal
Highway Rev., 0s, 2026 $ 20,000 $ 2,184,600
NR Arapahoe County, CO, Federal
Highway Rev., 7s, 2026 4,000 4,228,280
BBB- Foothill, CA, Eastern
Transportation Co., 0s, 2012 5,000 3,007,150
BBB- Foothill, CA, Eastern
Transportation Co., 0s, 2013 5,000 3,029,100
AAA New Jersey Turnpike Authority,
Turnpike Rev., MBIA, 6.5s, 2016 1,450 1,612,052
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, 0s, 2004 3,000 1,721,850
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,800 961,758
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s, 2009 6,750 2,675,160
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s, 2014 5,000 1,549,150
------------
$ 20,969,100
- -----------------------------------------------------------------------------
Airport and Port Revenue - 12.9%
BB+ Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(American Airlines), 7.875s, 2025 $ 3,500 $ 3,729,670
BB Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.4s, 2018 1,995 2,164,515
BB Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 2,895 3,240,055
BB Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 6,425 7,190,796
NR Cleveland, OH, Airport
Special Facilities Rev.
(Continental Airlines), 9s, 2019 4,300 4,471,441
AAA Connecticut Airport Rev.,
FGIC, 7.65s, 2012 1,000 1,163,260
BB+ Dallas-Fort Worth, TX,
International Airport
(American Airlines), 7.5s, 2025 5,000 5,320,400
BBB Denver, CO, City & County
Airport Rev., 8.75s, 2023 4,750 5,644,995
AAA Hawaii Airport Systems Rev.,
FGIC, 7.5s, 2020 5,350 5,896,288
B- Hillsborough County, FL,
Aviation Authority Rev. (US
Air), 8.6s, 2022 2,000 2,140,960
BB Kenton County, KY, Airport
Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,061,110
BBB Lake Charles, LA, Harbor &
Terminal District Port
(Occidental Petroleum),
7.2s, 2020 1,000 1,078,840
NR St. Augustine, FL, Airport
Authority (Grumman Repair
Facility), 11s, 2004 500 529,585
BB+ Tulsa, OK, Municipal Airport
Trust Rev. (American
Airlines), 7.375s, 2020 10,000 10,581,100
A+ Virginia Port Authority, 8.2s, 2008 3,000 3,280,290
------------
$ 57,493,305
- -----------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.7%
BBB Inglewood California
Redevelopment Agency, TAB,
6.125s, 2023 $ 600 $ 569,154
AAA Metropolitan Pier &
Exposition Authority, MBIA,
0s, 2016 8,400 2,460,528
------------
$ 3,029,682
- -----------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 8.0%
BBB Brazos River Authority, TX,
Pollution Control Rev.
(Texas Utilities), 9.875s, 2017 $ 8,890 $ 9,596,577
BBB+ Brazos River Authority, TX,
Pollution Control Rev.
(Texas Utilities), 9.25s, 2018 1,000 1,083,000
A+ Burke County, GA, Pollution
Control Rev. (Georgia Power
Co./Vogtle Project),
9.375s, 2017 2,650 2,905,725
NR Burns Harbor, IN, Solid Waste
Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 3,000 3,178,050
A Charleston County, SC,
Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 3,200 3,487,776
AA- Chicago, IL, Gas Supply Rev.
(People's Gas), 8.1s, 2020 2,000 2,223,100
NR Dayton, OH, Special
Facilities Rev. (Emery Air
Freight), "A", 12.5s, 2009 1,000 1,166,760
A- Erie County, PA
(International Paper),
7.875s, 2016 1,200 1,305,360
BBB- Massachusetts Industrial
Finance Agency, Pollution
Control Rev. (Eastern
Edison Co. Project),
5.875s, 2008 980 958,538
NR Massachusetts Industrial
Finance Agency (Berkshire
Retirement), 6.5s, 2009 1,000 983,430
A- Matagorda County, TX,
Pollution Control Rev.
(Central Power & Light),
7.875s, 2016 1,500 1,557,180
NR Northhampton County, PA,
Industrial Development
Authority (Bethlehem
Steel), 7.55s, 2017 1,200 1,230,204
A- Oklahoma City, OK, Industrial
& Cultural Facilities Rev.,
6.4s, 2020 575 563,764
NR Port of New Orleans, LA
(Continental Grain Co.),
7.5s, 2013 1,000 1,039,230
BB- Port of New Orleans, LA
(Avondale Industries),
8.5s, 2014 2,000 2,210,380
BBB West Side Calhoun County, TX,
Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,211,680
------------
$ 35,700,754
- -----------------------------------------------------------------------------
Universities - 0.2%
AAA Massachusetts Health &
Education Facilities
(Harvard University), 6.2s, 2020 $ 1,000 $ 1,077,170
- -----------------------------------------------------------------------------
Miscellaneous Revenue - 6.4%
NR Bristol, CT, Resource
Recovery Facilities
(Ogden Martin), 6.5s, 2014 $ 8,000 $ 8,236,640
NR Crystal City, TX, Lease
Obligations, 10.5s, 2008+ 1,252 1,216,111
BBB- Greater Detroit, MI, Resource
Recovery Authority, 9.25s, 2008 2,130 2,199,225
AAA Illinois State Dedicated Tax,
Civic Center, AMBAC, 0s, 2016 5,000 1,438,000
NR Martha's Vineyard, MA, Land
Bank, 8.125s, 2011 1,800 1,845,540
NR Maryland Energy Financing
Administration (Solid
Waste), 9s, 2016 4,000 4,049,440
NR Massachusetts Health &
Education Facilities
Authority (Learning Center
for Deaf), 9.25s, 2014 1,000 1,067,910
NR Pittsylvania County, VA,
Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,338,160
NR Retama, TX, Special
Facilities Rev. (Retema
Park Racetrack Project),
8.75s, 2018*** 3,869 967,323
A- Rhode Island Depositors
Economic Protection Corp.,
SPL Obligation, 5.75s, 2021 1,400 1,319,794
------------
$ 28,678,143
- -----------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $408,787,874) $438,801,223
Other Assets, Less Liabilities - 1.5% 6,494,940
=============================================================================
Net Assets - 100.0% $445,296,163
- -----------------------------------------------------------------------------
+ Restricted security.
++ Indexed security.
* Inverse floating rate security.
** Dates indicated are refunding dates.
*** Non-income producing security - in default.
# When-issued security. At March 31, 1996, the Fund had sufficient cash and/
or securities at least equal to the value of the when-issued security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
March 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $408,787,874) $438,801,223
Receivable for investments sold 5,240,235
Receivable for Fund shares sold 1,361,148
Interest receivable 8,149,869
Other assets 6,059
------------
Total assets $453,558,534
------------
Liabilities:
Cash overdraft $ 1,526,174
Distributions payable 837,892
Payable for investments purchased 4,954,280
Payable for Fund shares reacquired 412,168
Payable for daily variation margin on open futures
contracts 172,500
Payable to affiliates -
Management fee 27,612
Shareholder servicing agent fee 7,234
Distribution fee 103,074
Accrued expenses and other liabilities 221,437
------------
Total liabilities $ 8,262,371
------------
Net assets $445,296,163
============
Net assets consist of:
Paid-in capital $426,436,805
Unrealized appreciation on investments 29,883,974
Accumulated net realized loss on investments (10,782,036)
Accumulated distributions in excess of net investment
income (242,580)
------------
Total $445,296,163
============
Shares of beneficial interest outstanding 51,591,407
============
Class A shares:
Net asset value and redemption price per share
(net assets of $121,902,857 / 14,133,863 shares of
beneficial interest outstanding) $8.62
=====
Offering price per share (100/95.25) $9.05
=====
Class B shares:
Net asset value and offering price per share
(net assets of $306,888,922 / 35,546,951 shares of
beneficial interest outstanding) $8.63
=====
Class C shares:
Net asset value, offering price, and redemption price per
share
(net assets of $16,504,384 / 1,910,593 shares of
beneficial interest outstanding) $8.64
=====
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
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended March 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $32,603,320
-----------
Expenses -
Management fee $ 3,495,983
Trustees' compensation 43,468
Shareholder servicing agent fee (Class A) 135,241
Shareholder servicing agent fee (Class B) 800,319
Shareholder servicing agent fee (Class C) 18,945
Distribution and service fee (Class A) 289,927
Distribution and service fee (Class B) 3,637,818
Distribution and service fee (Class C) 126,300
Custodian fee 198,885
Printing 83,586
Auditing fees 62,180
Postage 48,150
Legal fees 8,432
Miscellaneous 247,651
-----------
Total expenses $ 9,196,885
Fees paid indirectly (23,932)
Reduction of expenses by distributor (82,426)
-----------
Net expenses $ 9,090,527
-----------
Net investment income $23,512,793
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 201,839
Futures contracts (5,381)
-----------
Net realized gain on investments $ 196,458
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 2,641,593
Futures contracts (129,375)
-----------
Net unrealized gain on investments $ 2,512,218
-----------
Net realized and unrealized gain on investments $ 2,708,676
-----------
Increase in net assets from operations $26,221,469
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------
Year Ended March 31, 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 23,512,793 $ 23,955,748
Net realized gain (loss) on investments and futures
transactions 196,458 (8,796,119)
Net unrealized gain on investments and futures
transactions 2,512,218 8,226,710
------------ ------------
Increase in net assets from operations $ 26,221,469 $ 23,386,339
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (5,156,665) $ (551,579)
From net investment income (Class B) (17,735,118) (22,598,713)
From net investment income (Class C) (621,010) (491,715)
In excess of net investment income (Class A) (3,546) --
In excess of net investment income (Class B) (12,197) --
In excess of net investment income (Class C) (427) --
In excess of net realized gain on investment
transactions (Class A) -- (2,000)
------------ ------------
Total distributions declared to shareholders $(23,528,963) $(23,644,007)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $192,708,458 $ 63,201,308
Net asset value of shares issued in connection with the
acquisition of Advantage Fund 28,956,459 --
Net asset value of shares issued to shareholders in
reinvestment of distributions 12,674,803 12,855,706
Cost of shares reacquired (240,907,535) (118,093,995)
------------ ------------
Decrease in net assets from Fund share transactions $ (6,567,815) $(42,036,981)
------------ ------------
Total decrease in net assets $ (3,875,309) $(42,294,649)
Net assets:
At beginning of period 449,171,472 491,466,121
------------ ------------
At end of period (including accumulated distributions
in excess of net investment income of $242,580 and
$684,169, respectively) $445,296,163 $449,171,472
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ------------------------------------------------------------------------------
Year Ended
Year Ended March 31, November 30,
----------------------------------- ------------
1996 1995 1994+++ 1993**
- ------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------
Income from investment operations# -
Net investment
income(S) $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and
unrealized gain
(loss) on
investments 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------
Total from
investment
operations $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------
Less distributions
declared to shareholders -
From net investment
income(||) $(0.50) $(0.52) $(0.02) $(0.11)
From net realized
gain on investments -- -- (0.01) --
In excess of net
realized gain on
investments -- -- ++ (0.04) (0.01)
------ ------ ------ ------
Total distributions
declared to
shareholders $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------
Net asset value - end
of period $ 8.62 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ======
Total return(++) 6.81% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.28% 1.13% 1.07%+ 0.76%+
Net investment income 5.75% 6.20% 5.31%+ 4.94%+
Portfolio turnover 23% 25% 9% 30%
Net assets at end of
period (000 omitted) $121,903 $25,270 $5,595 $461
** For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
+ Annualized.
++ Distributions in excess of net realized gains were less than $0.01 per
share for Class A shares for the year ended March 31, 1995.
+++ For the four-month period ended March 31, 1994.
# Per share data for the periods subsequent to November 30, 1993 are
based on average shares outstanding.
## For fiscal periods ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(||) Includes distributions in excess of net investment income of $0.0003
per share for Class A, Class B and Class C shares for the year ended
March 31, 1996.
(++) Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
(S) The distributor did not impose the Class A distribution fee for the year
ended March 31, 1996. If this fee had been incurred by the Fund, the
ratios of expenses to average net assets and net investment income to
average net assets would have been 1.38% and 5.66%, respectively.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
Year Ended March 31,
---------------------------------------------
1996 1995 1994+++ 1993
- ------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 8.57 $ 8.56 $ 8.99 $ 8.73
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.44 $ 0.14 $ 0.42
Net realized and unrealized
gain (loss) on investments 0.06 -- (0.51) 0.42
------ ------ ------ ------
Total from investment
operations $ 0.49 $ 0.44 $(0.37) $ 0.84
------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment
income(||) $(0.43) $(0.43) $(0.01) $(0.45)
In excess of net investment
income -- -- -- (0.03)
From net realized gain on
investments -- -- (0.01) (0.10)
In excess of net realized
gain on investments -- -- (0.04) --
------ ------ ------ ------
Total distributions
declared to
shareholders $(0.43) $(0.43) $(0.06) $(0.58)
------ ------ ------ ------
Net asset value - end of
period $ 8.63 $ 8.57 $ 8.56 $ 8.99
====== ====== ====== ======
Total return 5.87% 5.32% (8.97)%+ 9.95%
------ ------ ------ ------
Ratios (to average net assets)/Supplemental data:
Expenses## 2.13% 2.16% 2.24%+ 2.11%
Net investment income 4.90% 5.15% 4.74%+ 4.92%
Portfolio turnover 23% 25% 9% 30%
Net assets at end of period
(000 omitted) $306,889 $412,965 $479,478 $518,179
+ Annualized.
+++ For the four-month period ended March 31, 1994.
# Per share data for the periods subsequent to November 30, 1993 are
based on average shares outstanding.
## For fiscal periods ending after September 1, 1995, the Fund's
expenses are calculated without reduction for fees paid indirectly.
(||) Includes distributions in excess of net investment income of $0.0003
per share for Class A, Class B and Class C shares for the year ended
March 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Ended November 30,
--------------------------------------------------------
1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.50 $ 8.25 $ 8.41 $ 8.11
------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.47 $ 0.49 $ 0.49 $ 0.51
Net realized and unrealized gain (loss)
on investments 0.26 0.25 (0.15) 0.30
------ ------ ------ ------
Total from investment operations $ 0.73 $ 0.74 $ 0.34 $ 0.81
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.48) $(0.49) $(0.50) $(0.51)
In excess of net investment income -- -- -- --
From net realized gain on investments -- -- -- --
From paid-in capital (0.02) -- -- --
------ ------ ------ ------
Total distributions declared to
shareholders $(0.50) $(0.49) $(0.50) $(0.51)
------ ------ ------ ------
Net asset value - end of period $ 8.73 $ 8.50 $ 8.25 $ 8.41
====== ====== ====== ======
Total return 8.82% 9.21% 4.18% 10.24%
Ratios (to average net assets)/Supplemental data:
Expenses 2.03% 2.04% 2.05% 2.07%
Net investment income 5.50% 5.82% 5.99% 6.09%
Portfolio turnover 52% 73% 91% 127%
Net assets at end of period (000 omitted) $449,949 $409,084 $379,239 $343,887
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year Ended
November 30, Year Ended March 31,
-------------------------------- ---------------------------------------------------
1988 1987* 1996 1995 1994**
- ------------------------------------------------------------------------------------------------------------
Class B Class C
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 7.67 $ 8.47 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------ ------
Income from investment operations# -
Net investment
income $ 0.50 $ 0.38 $ 0.43 $ 0.44 $ 0.09
Net realized
and unrealized
gain (loss) on
investments 0.43 (0.83) 0.07 0.01 (0.59)
------ ------ ------ ------ ------
Total from
investment
operations $ 0.93 $(0.45) $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------ ------
Less distributions declared to shareholders
From net investment
income(||) $(0.49) $(0.35) $(0.43) $(0.44) $(0.01)
------ ------ ------ ------ ------
Net asset value -
end of period $ 8.11 $ 7.67 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ====== ======
Total return 12.53% (5.79)%+ 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.09% 2.03%+ 2.05% 2.09% 2.18%+
Net investment
income 6.38% 6.00%+ 4.95% 5.23% 4.62%+
Portfolio turnover 171% 138% 23% 25% 9%
Net assets at end
of period (000
omitted) $244,825 $183,935 $16,504 $10,936 $6,393
<FN>
* For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1994.
+ Annualized.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
## For fiscal periods ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
(||) Includes distributions in excess of net investment income of $0.0003 per share for Class A, Class B and Class C shares for
the year ended March 31, 1996.
</TABLE>
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 - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Investments in equity-indexed contracts, or
contracts on related options, for purposes other than hedging may be made when
the Fund has cash on hand and wishes to participate in anticipated market
appreciation while the cash is being invested. Should interest or exchange rates
or securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund bears 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, 1996, 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 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 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
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 to
shareholders are recorded on the ex-dividend date.
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.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended March 31, 1996, $457,759 was reclassified from
accumulated distributions in excess of net investment income to accumulated net
realized loss on investments, due to differences between book and tax
accounting. This change had no effect on the net assets or net asset value per
share.
At March 31, 1996, the Fund, for federal income tax purposes, had a capital loss
carryforward of $10,162,094, 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 ($1,415,952), March 31, 2003 ($6,517,530) and
March 31, 2004 ($2,228,612).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the 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.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.30% of
average daily net assets and 6.43% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $9,911 for the year ended
March 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$23,697 for the year ended March 31, 1996, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted a separate distribution plan 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 MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $20,036 for the year
ended March 31, 1996. MFD is not imposing the 0.10% distribution fee for an
indefinite period. Fees incurred under the distribution plan during the year
ended March 31, 1996 were 0.23% of average daily net assets attributable to
Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 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. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B 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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $71,303 and $4,283 for Class B and Class C
shares, respectively, for the year ended March 31, 1996. Fees incurred under the
distribution plans during the year ended March 31, 1996, were 1.00% of average
daily net assets attributable to Class B and Class C shares on an annualized
basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended March 31, 1996 were $0 and $634,226 for
Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$103,201,667 and $118,311,540, 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:
<PAGE>
Aggregate cost $408,787,874
============
Gross unrealized appreciation $ 34,439,751
Gross unrealized depreciation (4,426,402)
------------
Net unrealized appreciation $ 30,013,349
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended Year Ended
March 31, 1996 March 31, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 17,027,633 $ 148,288,168 2,767,565 $ 23,341,811
Shares issued
to shareholders
in reinvestment
of distributions 261,154 2,281,429 17,884 151,011
Shares reacquired (6,107,403) (53,310,814) (486,722) (4,100,978)
---------- ------------- ----------- -------------
Net increase 11,181,384 $ 97,258,783 2,298,727 $ 19,391,844
========== ============= =========== =============
Class B Shares
Year Ended Year Ended
March 31, 1996 March 31, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 3,291,894 $ 30,271,749 3,236,637 $ 27,296,462
Shares issued
in connection
with the
acquisition
of Advantage
Fund 3,398,645 28,956,459 -- --
Shares issued
to shareholders
in reinvestment
of distributions 1,143,435 9,961,921 1,465,533 12,377,112
Shares reacquired (20,493,625) (178,612,133) (12,503,667) (105,578,609)
---------- ------------- ----------- -------------
Net decrease (12,659,651) $(109,422,004) (7,801,497) $ (65,905,035)
========== ============= =========== =============
Class C Shares
Year Ended Year Ended
March 31, 1996 March 31, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 1,614,476 $ 14,148,541 1,490,674 $ 12,563,035
Shares issued
to shareholders
in reinvestment
of distributions 49,315 431,453 38,763 327,583
Shares reacquired (1,029,259) (8,984,588) (999,873) (8,414,408)
---------- ------------- ----------- -------------
Net increase 634,532 $ 5,595,406 529,564 $ 4,476,210
========== ============= =========== =============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended March 31,
1996 was $5,521.
(7) Financial Instruments
The Fund 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, forward foreign currency exchange contracts
and futures contracts. 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. The
following is a summary of such securities held at March 31, 1996:
Futures Contracts Unrealized
Description Expiration Contracts Position Depreciation
- ------------------------------------------------------------------------------
UST March 96 June 1996 230 UST Short $(129,375)
=========
At March 31, 1996, 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 foreign
currencies, 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 March
31, 1996:
<TABLE>
<CAPTION>
Principal Amount Unrealized
Description Index (000 Omitted) Value Appreciation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rio Grande Valley, TX, Health Facilities
Development Corp., MBIA, Short Rites,
7.46s, 2015 J. J. Kenny $2,800 $2,939,048 $172,284
========
</TABLE>
(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 March 31, 1996, the
Fund owned the following restricted security (constituting 0.28% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933 (the 1933 Act). The Fund does not have the right to demand that such
security be registered. The value of this security is determined by valuations
supplied by a pricing service or brokers. This security may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Par Amount
Description Acquisition (000 Omitted) Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Crystal City, TX, Lease Obligations, 10.5s, 2008 5/25/88 $1,252 $948,056 $1,216,111
=========
</TABLE>
(9) Acquisitions
At close of business on April 28, 1995, the Fund acquired all of the assets and
liabilities of The National Portfolio, a series of The Advantage Municipal Bond
Fund (The Advantage Fund). The acquisition was accomplished by a tax-free
exchange of 3,398,645 Class B shares of the Fund (valued at $28,956,459) for the
3,122,374 shares of The Advantage Fund. The Advantage Fund's net assets on that
date ($28,956,459), including $1,484,799 of unrealized depreciation, were
combined with those of the Fund. The aggregate net assets for Class B shares
after the acquisition were $473,464,579.
<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 March 31, 1996, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended March 31, 1996 and March 31, 1995, and the financial
highlights for the years ended March 31, 1996 and March 31, 1995, 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 at
March 31, 1996 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, 1996, 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
April 29, 1996
---------------------------------------------
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>
------------------
MFS(R) MUNICIPAL [logo - DALBAR] Bulk Rate
INCOME FUND U.S. Postage
P A I D
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
------------------
[logo]
THE FIRST NAME IN MUTUAL FUNDS
MMI-2 5/96 23M 02/202/302
<PAGE>
PART C
------
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
MFS MUNICIPAL SERIES TRUST (ALL SERIES)
Financial Highlights for a share of beneficial
interest of:
each of the California, Maryland, Massachusetts,
North Carolina, South Carolina, Virginia and
West Virginia Funds of the Registrant
outstanding throughout the ten-year period
ending March 31, 1996;
each of the Georgia and New York Funds throughout
the period from the commencement of investment
operations, June 6, 1988, to March 31, 1996;
the Tennessee Fund throughout the period from the
commencement of investment operations, August 12,
1988, to March 31, 1996;
the Alabama Fund throughout the period from the
commencement of investment operations, February 1,
1990, to March 31, 1996;
each of the Arkansas and Florida Funds throughout
the period from the commencement of investment
operations, February 3, 1992, to March 31, 1996;
the Mississippi Fund throughout the period from the
commencement of investment operations, August 6,
1992, to March 31, 1996;
the Pennsylvania Fund throughout the period from
the commencement of investment operations, February
1, 1993, to March 31, 1996;
the MFS Municipal Income Fund outstanding
throughout the period from the commencement of
investment operations, December 29, 1986, to March
31, 1996.
FINANCIAL STATEMENTS INCLUDED IN PART B:
MFS MUNICIPAL SERIES TRUST (ALL SERIES)
At March 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended March 31, 1996:
Statement of Changes in Net Assets*
For the year ended March 31, 1996:
Statement of Operations*
- ----------------------------
* Incorporated herein by reference to the Funds' Annual Reports to
Shareholders dated March 31, 1996 which were filed with the Securities and
Exchange Commission ("SEC") via EDGAR on June 6, 1996.
<TABLE>
(B) EXHIBITS
<S> <C> <C>
1 a Amended and Restated Declaration of Trust, dated February 3, 1995. (1)
b Amendment dated June 12, 1996, to the Amended
and Restated Declaration of Trust; filed
herewith.
2 Amended and Restated By-Laws, dated December 14, 1994. (1)
3 Not Applicable.
4 Form of Share Certificate for Class A, B and C Shares. (4)
5 (a) Investment Advisory Agreement, dated August 24, 1984 for all series other than
Arkansas, California, Florida, Louisiana*, Mississippi, Pennsylvania, Texas*,
Washington*, and MFS Municipal Income Fund. (4)
(b) Investment Advisory Agreement, dated February 1, 1992, for the MFS Arkansas
Municipal Bond Fund. (4)
(c) Investment Advisory Agreement, dated February 1, 1992, for the MFS Florida
Municipal Bond Fund. (4)
(d) Investment Advisory Agreement, dated February 1, 1992, for the MFS Texas
Municipal Bond Fund*. (4)
(e) Investment Advisory Agreement, dated August 1, 1992, for the MFS Mississippi
Municipal Bond Fund. (4)
(f) Investment Advisory Agreement, dated August 1, 1992, for the MFS Washington
Municipal Bond Fund*. (4)
(g) Investment Advisory Agreement, dated February 1, 1993, for MFS Louisiana
Municipal Bond Fund*. (4)
(h) Investment Advisory Agreement, dated February 1, 1993, for MFS Pennsylvania
Municipal Bond Fund. (4)
(i) Investment Advisory Agreement, dated September 1, 1993, for MFS California
Municipal Bond Fund. (4)
(j) Investment Advisory Agreement, dated September 1, 1993, for the MFS Municipal
Income Fund. (4)
6 (a) Amended and Restated Distribution Agreement for the MFS Municipal Series Trust,
dated January 1, 1995. (1)
(b) Form of Dealer Agreement between MFS Financial Services, Inc. and a dealer,
dated December 28, 1994, and form of Mutual Fund Agreement between MFS Financial
Services, Inc. and a bank or NASD affiliate, dated December 28,
1994. (1)
7 Retirement Plan for Non-Interested Person Trustees, dated January 1, 1991. (4)
8 (a) Custodian Agreement, dated June 15, 1988. (4)
(b) Amendment to Custodian Agreement, dated June 15, 1988. (4)
(c) Amendment to Custodian Agreement, dated August 9, 1989. (4)
(d) Amendment to Custodian Agreement, dated October 1, 1989. (4)
(e) Amendment No. 3 to the Custodian Agreement, dated October 9, 1991. (4)
9 (a) Shareholder Servicing Agent Agreement, dated August 1, 1985. (4)
(b) Amendment to Shareholder Servicing Agreement, dated December 28, 1993. (2)
(c) Exchange Privilege Agreement, dated September 1, 1993. (4)
(d) Loan Agreement by and among The Banks Named Therein, The MFS Funds Named
Therein, and The First National Bank of Boston as Agent, dated February 21,
1995. (3)
(e) Dividend Disbursing Agency Agreement, dated February 1, 1986. (4)
10 24e-2 Opinion of Counsel; filed herewith.
11 Consent of Deloitte & Touche LLP; filed herewith.
12 Not Applicable.
13 Investment Representation Letter. (4)
14 Not Applicable.
15 (a) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Alabama Municipal Bond Fund. (4)
(b) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Arkansas Municipal Bond Fund. (4)
(c) Distribution Plan for Class A shares, Plan of Distribution for Class B shares
and Plan of Distribution for Class C shares for MFS California Municipal Bond
Fund. (4)
(d) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Florida Municipal Bond Fund. (4)
(e) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Georgia Municipal Bond Fund. (4)
(f) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Louisiana Municipal Bond Fund*. (4)
(g) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Maryland Municipal Bond Fund. (4)
(h) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Massachusetts Municipal Bond Fund. (4)
(i) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Mississippi Municipal Bond Fund. (4)
(j) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS New York Municipal Bond Fund. (4)
(k) Amended and Restated Distribution Plan for Class A shares, Plan of Distribution
for Class B shares and Plan of Distribution for Class C shares for MFS North
Carolina Municipal Bond Fund. (4)
(l) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Pennsylvania Municipal Bond Fund. (4)
(m) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS South Carolina Municipal Bond Fund. (4)
(n) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Tennessee Municipal Bond Fund. (4)
(o) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Texas Municipal Bond Fund*. (4)
(p) Amended and Restated Distribution Plan for Class A shares, Plan of Distribution
for Class B shares and Plan of Distribution for Class C shares for MFS Virginia
Municipal Bond Fund. (4)
(q) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS Washington Municipal Bond Fund*. (4)
(r) Amended and Restated Distribution Plan for Class A shares and Plan of
Distribution for Class B shares for MFS West Virginia Municipal Bond Fund. (4)
(s) Distribution Plan for Class A shares, Plan of Distribution for Class B shares
and Plan of Distribution for Class C shares for MFS Municipal Income Fund. (4)
*No longer in existence
16 Schedule of Computation for Performance Quotations - Average Annual Total Rate
of Return, Aggregate Total Rate of Return, Distribution Rate, Tax-Equivalent
Yield and Yield. (1)
17 Financial Data Schedules for each class of shares of each Fund; filed herewith.
18 Not Applicable.
Power of Attorney, dated August 11, 1994. (2)
<FN>
- -----------------------------
(1) Incorporated by reference to Post-Effective Amendment No. 26 to the Registration Statement on Form N-1A
filed with the SEC via EDGAR on February 22, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A
filed with the SEC via EDGAR on May 31, 1995.
(3) Incorporated by reference to Post-Effective Amendment No. 8 to the Registration Statement on Form N-2
for MFS Municipal Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February 28, 1995.
(4) Incorporated by reference to Post-Effective Amendment No. 28 to the Registration Statement on Form N-1A
filed with the SEC via EDGAR on July 28, 1995.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
(As of June 30, 1996)
CLASS A SHARES
--------------
<S> <C> <C>
Shares of Beneficial Interest Alabama Series 1,376
(without par value) Arkansas Series 3,408
California Series 4,118
Florida Series 1,619
Georgia Series 1,616
Maryland Series 3,939
Massachusetts Series 4,678
Mississippi Series 1,891
New York Series 3,238
North Carolina Series 9,306
Pennsylvania Series 673
South Carolina Series 3,469
Tennessee Series 2,345
Virginia Series 9,346
West Virginia Series 3,078
MFS Municipal Income Fund 3,940
<CAPTION>
CLASS B SHARES
--------------
<S> <C> <C>
Shares of Beneficial Interest Alabama Series 149
(without par value) Arkansas Series 205
California Series 708
Florida Series 296
Georgia Series 318
Maryland Series 3,939
Massachusetts Series 4,678
Mississippi Series 1,891
New York Series 3,238
North Carolina Series 9,306
Pennsylvania Series 673
South Carolina Series 3,469
Tennessee Series 2,345
Virginia Series 9,346
West Virginia Series 3,078
MFS Municipal Income Fund 3,940
<CAPTION>
CLASS C SHARES
--------------
<S> <C> <C>
Shares of Beneficial Interest California Series 90
(without par value) North Carolina Series 205
Virginia Series 106
MFS Municipal Income Fund 478
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of Registrant's
Declaration of Trust, filed as an Exhibit to Post-Effective Amendment No. 26 to
its Registration Statement; (b) Section 4 of the Distribution Agreement between
Registrant and MFS Fund Distributors, Inc., filed as an Exhibit to
Post-Effective Amendment No. 26; and (c) the undertaking of the Registrant
regarding indemnification set forth in its Registration Statement as initially
filed.
The Trustees and officers of the Registrant and the personnel
of the Registrant's investment adviser and distributor will be insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS
Special Opportunities Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and
MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series:
MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV
(which has four series: MFS Money Market Fund, MFS Government Money Market Fund,
MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two
series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which
has three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST") (which has two series). The principal business
address of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"),
Money Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account. The principal business address of each is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of the Republic of Ireland and a subsidiary of MFS,
whose principal business address is 41-45 St. Stephen's Green, Dublin 2,
Ireland, serves as investment adviser to and distributor for MFS International
Fund (which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International Funds-Global
Governments Fund, MFS International Funds - U.S. Dollar Reserve Fund and MFS
International Funds-Charter Income Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund and MFS Meridian Research Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., and Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Joseph W.
Dello Russo is a Senior Vice President, Chief Financial Officer and Treasurer,
Robert T. Burns is a Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Assistant
Treasurer.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice
President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel
E. McManus, Assistant Vice President of MFS, is an Assistant Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, and James O. Yost, is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS,
is a Senior Vice President, Stephen E. Cavan is a Director, Senior Vice
President and the Clerk, James R. Bordewick, Jr. is a Director, Vice President
and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello
Russo is the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, Ziad Malek is the President, James E.
Russell is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters
are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is
a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C.
Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold
D. Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
<PAGE>
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
<TABLE>
<S> <C> <C>
A. Keith Brodkin Director, Sun Life Assurance Company of Canada (U.S.),
One Sun Life Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance and Annuity Company of New
York, 67 Broad Street, New York, New York
John R. Gardner President and a Director, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr. Gardner is also an
officer and/or Director of various subsidiaries and
affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto, Ontario, Canada
(Mr. McNeil is also an officer and/or Director of
various subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston Company,
Exchange Place, Boston, Massachusetts (until August,
1994)
</TABLE>
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above.
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant and the following locations:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C> <C>
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
</TABLE>
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a
prospectus of a series of the Registrant is delivered with a copy of that
series' latest annual report to shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 23rd day of July, 1996.
MFS MUNICIPAL SERIES TRUST
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below
by the following persons in the capacities indicated on July 23, 1996.
SIGNATURE TITLE
--------- -----
A. KEITH BRODKIN* Chairman, President (Principal
- ------------------------ Executive Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------ and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- ------------------------
Richard B. Bailey
MARSHALL N. COHAN* Trustee
- ------------------------
Marshall N. Cohan
LAWRENCE H. COHN* Trustee
- ------------------------
Lawrence H. Cohn
SIR J. DAVID GIBBONS* Trustee
- ------------------------
Sir 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
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.,
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to a Power of Attorney dated
August 11, 1994 and filed with the
Securities and Exchange Commission
on May 31, 1995 with Post-Effective
Amendment No. 27.
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
1 b Amendment dated June 12, 1996, to the Amended and Restated
Declaration of Trust.
10 24e-2 Opinion of Counsel.
11 Consent of Deloitte & Touche LLP.
17 Financial Data Schedules for each class of shares of each Fund.
</TABLE>
<PAGE>
EXHIBIT NO. 99.1(b)
MFS MUNICIPAL SERIES TRUST
MFS LOUISIANA MUNICIPAL BOND FUND
MFS WASHINGTON MUNICIPAL BOND FUND
MFS TEXAS MUNICIPAL BOND FUND
Pursuant to Section 9.2(b) of the Amended and Restated Declaration of
Trust, dated February 3, 1996 (the "Declaration"), of MFS Municipal Series Trust
(the "Trust"), the undersigned, constituting a majority of the Trustees of the
Trust, do hereby certify that MFS Louisiana Municipal Bond Fund, MFS Washington
Municipal Bond Fund and MFS Texas Municipal Bond Fund, each a series of the
Trust, have been terminated.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this certificate this
12th day of June, 1996.
A. KEITH BRODKIN WALTER E. ROBB, III
- ----------------------------------- -----------------------------------
A. Keith Brodkin Walter E. Robb, III
76 Farm Road 35 Farm Road
Sherborn, MA 01770 Sherborn, MA 01770
RICHARD B. BAILEY ARNOLD D. SCOTT
- ----------------------------------- -----------------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
MARSHALL N. COHAN
- ----------------------------------- -----------------------------------
Marshall N. Cohan Jeffrey L. Shames
2524 Bedford Mews Drive 60 Brookside Road
Wellington, FL 33414 Needham, MA 02192
LAWRENCE H. COHN J. DALE SHERRATT
- ----------------------------------- -----------------------------------
Lawrence H. Cohn J. Dale Sherratt
45 Singletree Road 86 Farm Road
Chestnut Hill, MA 02167 Sherborn, MA 01770
SIR J. DAVID GIBBONS WARD SMITH
- ----------------------------------- -----------------------------------
Sir J. David Gibbons Ward Smith
"Leeward" 36080 Shaker Blvd
5 Leeside Drive Hunting Valley, OH 44022
"Point Shares"
Pembroke, Bermuda HM 05
- -----------------------------------
Abby M. O'Neill
200 Sunset Road
Oyster Bay, NY 11771
<PAGE>
Exhibit 99.10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street, Boston Massachusetts 02116-3741
(617) 954 5000
July 23, 1996
MFS Municipal Series Trust
500 Boylston Street
Boston, MA 02116
Re: POST-EFFECTIVE AMENDMENT NO. 29 TO REGISTRATION STATEMENT ON
FORM N-1A (FILE NO. 2-92915) (THE "REGISTRATION STATEMENT")
Gentlemen:
I am Vice President and Associate General Counsel of Massachusetts
Financial Services Company, which serves as investment adviser to MFS
Municipal Series Trust (the "Trust") and the Assistant Secretary of the Trust.
I am admitted to practice law in The Commonwealth of Massachusetts. The Trust
was created under a written Declaration of Trust dated August 23, 1984, and
executed and delivered in Boston, Massachusetts, as amended and restated
February 3, 1995, as amended (the "Declaration of Trust"). The beneficial
interest thereunder is represented by transferable shares without par value.
The Trustees have the powers set forth in the Declaration of Trust, subject to
the terms, provisions and conditions therein provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from
time to time to issue shares of the Trust for such amount and type of
consideration, at such time or times and on such terms as the Trustees may
deem best. Under Article VI, Section 6.1, it is provided that the number of
shares of beneficial interest authorized to be issued under the Declaration of
Trust is unlimited.
By vote adopted on February 2, 1995, the Trustees of the Trust
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Trust for cash at a price which will net the Trust
(before taxes) not less than the net asset value thereof, as defined in the
Trust's By-Laws, determined next after the sale is made or at some later time
after such sale.
The Trust is about to register under the Securities Act of 1933, as
amended, 17,160,991 shares of beneficial interest by Post-Effective Amendment
No. 29 to the Trust's Registration Statement. W. Thomas London, Treasurer of
the Trust, has certified that the Trust received cash consideration for the
issuance of each of the Shares of the Trust sold during the Trust's fiscal
year ended March 31, 1996, including the 93,164,308 shares which were sold in
reliance upon Rule 24f-2 of the General Rules and Regulations under the
Investment Company Act of 1940, as amended, at a price which netted the Trust
(before taxes) not less than the net asset value per share, as defined in the
Trust's Declaration of Trust, determined next after the sale was made.
Based on the foregoing, I am of the opinion that all necessary Trust
action precedent to the issue of the shares of the Trust, comprising the
shares covered by Post-Effective Amendment No. 29 to the Registration
Statement has been duly taken, and that all such shares may legally and
validly be issued for cash, and when sold will be fully paid and
nonassessable, except as described below, by the Trust upon receipt by the
Trust or its agent of consideration thereof in accordance with the terms
described in the Registration Statement. I express no opinion as to compliance
with the Securities Act of 1933, the Investment Company Act of 1940 and
applicable state "Blue Sky" or securities laws regulating the sale of
securities.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Declaration of Trust provides for indemnification
out of the Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission as an exhibit to Post-Effective Amendment No. 29 to the
Registration Statement.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
<PAGE>
EXHIBIT NO. 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 29 to Registration Statement No. 2-92915 of MFS Municipal Series
Trust of our reports dated April 29, 1996 appearing in the annual reports to
shareholders for the year ended March 31, 1996, and to the references to us
under the headings "Condensed Financial Information" in the Prospectuses and
"Independent Auditors and Financial Statements" in the Statements of Additional
Information, which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 26, 1996
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<ARTICLE> 6
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<SERIES>
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<SHARES-COMMON-STOCK> 47083897
<SHARES-COMMON-PRIOR> 50289065
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (397322)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (10879049)
<ACCUM-APPREC-OR-DEPREC> 12349625
<NET-ASSETS> 298844439
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18670294
<OTHER-INCOME> 0
<EXPENSES-NET> (2312596)
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